United States: EPA Proposes "Thought Piece" GHG Performance Standards For New Power Plants

On March 27, 2012, the Environmental Protection Agency (EPA) released a much-anticipated proposal to set output-based limits on carbon dioxide (CO2) emissions from new fossil fuel-fired power plants. EPA's proposal, titled "Standards of Performance for Greenhouse Gas Emission from New Stationary Sources: Electric Utility Generating Units," is as interesting for what it does not do as for what it does, and in many ways reflects upon the future of carbon capture and sequestration (CCS) and whether there is any long-term U.S. climate policy.

The New Source Performance Standards ("NSPS") program authorizes EPA to establish emissions standards for categories or subcategories of new or modified sources. EPA's proposal would regulate CO2 emissions (but not other greenhouse gases (GHGs) from a new source category essentially consisting of new fossil fuel-fired (coal, oil, pet coke, gas) electric generating units (EGU) (e.g., a steam boiler), combined-cycle combustion turbines and duct burners, and integrated gasification combined cycle (IGCC) units, but not simple-cycle turbines. EPA's new source category therefore combines part of the old gas turbine source category (the combined-cycle part) with the fossil fuel-fired EGU category.

Based on this new source category, EPA set the standard of performance as an annual average of 1,000 pounds of CO2 emissions for every megawatt-hour (MWh) produced by the plant (EPA's NSPS will apply only to CO2 and not other GHGs). EPA states this limit is based on the demonstrated performance of natural gas combined-cycle (NGCC) power plants, but EPA applies it as a "fuel neural" standard, in which all coals, oil and gas have an identical emission standard. Section 111(a)(1) requires EPA to set "standards of performance" based on a determination of what constitutes the best system of emission reductions (BSER) for the source category. Here, EPA specifically set the standard for the whole source category based on what gas-fired combined-cycle units can achieve, and in so doing recognized that the approach "represents a departure from prior agency practice."

To address the ability of coal units to comply with a standard based on the performance of gas-fired combined-cycle units, EPA concluded that coal units could use carbon capture and storage (CCS) under a 30-year averaging plan, and that CCS was "feasible." While EPA declared CCS "feasible" (whatever that means), it specifically declined to conclude that CCS met the BSER standard.

Specially, EPA acknowledges that conventional coal-fired power plants will be unable to meet the 1,000 pounds CO2/MWh baseline BSER limitation without employing CCS technology capable of 50 percent CO2 capture rates. EPA states that while CCS is not yet a cost-effective compliance option, it is "a feasible technology option for new coal-fired power plants because CCS is technically feasible and sufficiently available in light of the limited amount of new coal-fired construction expected in the foreseeable future" (i.e., none). While EPA acknowledges serious cost concerns with CCS, EPA asserts that CCS costs can be expected to go down over the next 10 years, citing to reports and surveys.

In order to address some of the issues with CCS, EPA proposes a compliance scheme where CO2 does not actually have to be captured and stored at a new coal EGU for 10 years because coal and pet coke facilities can "meet" the 1,000-pound CO2/MWh standard over a 30-year averaging period. New facilities that chose this option would have to immediately meet an 1,800-pound CO2/MWh limit (i.e., supercritical coal plant emission rates). Over 30 years, on an annual average basis, that number needs to get back down to 1,000. The built-in assumption in the proposal is that after the 10th year actual emissions would drop down to 600 pounds CO2/MWh due to installation of CCS, which would ultimately meet the 1,000-pound standard at the end of 30 years. EPA's thinking is that because it believes CCS costs will drop in 10 years, after that 10th year any supercritical plant would have to install CCS or come up with some other solution. EPA openly states it is open to hearing other suggestions for calculating a 30-year average alternative performance standard.

With respect to an endangerment finding, EPA has taken the position that it need not make an endangerment finding under Section 111 at all, since the wording of that section, unlike the wording of the motor vehicles section (Section 202), suggests that an endangerment finding only need be made when EPA lists the source category. Since EPA originally listed both parts of the new combined-source category long ago, based on emissions of criteria pollutants, EPA argues no further action is required when it seeks to regulate other pollutants, such as CO2. This approach certainly has its potential vulnerabilities since under EPA's theory it could regulate any pollutant, such as steam, without having to make any environmental or human health impact at all. EPA also asserts an alternative interpretation under which it may base an endangerment finding for CO2 on the motor vehicle endangerment finding, plus the decision to deny petitions for reconsideration of that finding, and that any challenges to that prior endangerment finding based on new information can be brought through petitions to reconsider that finding.

Notably, the proposed rule does not affect existing power plants (which are expected to be subject to a performance standard under Section 111(d) at some point in the future). The proposal also excludes "major modifications" undertaken by plants to comply with other regulatory obligations. Transitional plants (plants that have pre-construction permits and will commence construction within 12 months of this proposal) are also excluded, thereby allowing several new coal plants that have already been permitted to proceed if market conditions warrant. Finally, the proposal has no immediate affect on biomass-fired boilers that co-fire with less than 250 MMBtu/hr of any fossil fuel.

On the one hand, EPA has proposed a standard under Section 111(a) of the Clean Air Act that effectively precludes compliance for new conventional coal-fired power plants, even highly efficient supercritical boilers. On the other hand, EPA asserts in the proposed rule that this new standard will not have any impact whatsoever on coal units, on a cost basis or otherwise, because no one will be building a new conventional coal-fired power plant in the next 10 years due to low natural gas prices and other utility dynamics. In fact, under its base case analysis for the proposed rule, EPA does not project any conventional coal-fired power plants to be built through 2030. So EPA has, in effect, prohibited the construction of coal-fired units that it expects will not be constructed anyway. And, in the event such a plant were to be constructed, EPA asserts that unit could comply by installing CCS after 10 years of operation, even though CCS has not been determined to be BSER, presumably because of its wholly untenable economics.

EPA also gives short shrift to potential trading or market-based compliance alternatives such as emissions averaging (a new site with two combined-cycle units and one coal-fired unit) or credit for use of biogenic fuels or for offsets. Out of a 257-page proposal, only two sentences are dedicated to market-based trading programs, and both make clear that EPA is not considering such options or seeking comment on them. EPA states "[u]nder this proposal, no averaging or emissions trading among affected sources would be allowed." Since this proposed NSPS deals with new rather than existing sources, there was little expectation that EPA would pursue any flexible market-based compliance option alternatives; however there was some expectation that EPA would at least seek comment on such options if for no other reason than to build crosswalks to an existing source standard.

So Where Does This Leave Us?

EPA is proposing a rule that (1) creates a new source category, (2) sets a performance standard that part of that new source category (coal) cannot realistically comply with, but concludes that this (3) doesn't matter because everyone apparently agrees new coal sources will not be built anytime in the foreseeable future and, even if they do, (4) CCS is sufficiently available, although wholly uneconomic, so it can be employed by anyone who wants to build a coal unit. The chilling effect of the NSPS on new coal unit development probably cannot be understated because even if U.S. power companies wanted to begin to develop CCS technologies and new coal units, and were willing or able to shoulder the economic risks, the NSPS now places absolute regulatory compliance risk on that project, such that the new technologies must actually perform without exception. Unlike economic risk, civil liability risk is not one that can be readily shared or spread.

EPA's approach calls into serious question the Obama administration's approach to climate change issues, and whether technologies to address CO2 emissions can in fact be developed. The conventional wisdom has long held that any power sector emissions cap in the U.S. would spur a wholesale switch to gas, but that the lower levels of such a cap after 2020 would require more reductions than gas units can supply, thereby necessitating (presumably) supercritical coal units with CCS. If, however, climate change policy in fact requires deployment of supercritical coal in 2020 or beyond, the U.S. power industry will have no experience with either of those technologies on new units. In this regard, for example, the Obama administration ignores the possibility of an interim NSPS based on supercritical units alone. It is often said that performance-based standards are inferior to market-based approaches because they pick winners and losers. In this case, if the conventional wisdom regarding climate change compliance comes to pass, the winners will be all those countries that allow for some development of supercritical coal and CCS to "learn by doing," and the losers will be the U.S. power and coal industries.

In contrast, other countries are doubling down on support for CCS. The United Kingdom, for example, recently announced that it was restarting a $1.6 billion competition to develop commercially-viable CCS. British Energy Minister Charles Hendry said of the reanimated UK effort, "CCS could be an absolute global game-changer. We think this could be a hundred thousand jobs in the U.K. in the 2020s," and that by becoming a leader in CCS technology exports, the UK could add $10 billion a year to its economy within the next 20 years.

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