United States: Confluence Of Emissions Regulations Favor Renewable Energy Investment (Part 1)

GOP Presidential Candidate Donald Trump made several sweeping promises while on the campaign trail vowing to reopen shuttered mines and bring coal back to its dominance of a decade ago. These promises, however, are dated as the coal industry continues to face multiple hurdles: (1) greater availability of affordable natural gas and renewable resources; (2) stricter emissions standards for fossil-fuel fired electricity generating sources; and as a result, (3) reluctance in the investor community to finance new coal projects. What candidates on both sides of the political spectrum could say is that, although the mines will close, the country remains dedicated to training displaced miners to work in a new renewable energy future.

Affordable natural gas is not a new topic, so it won't be discussed here. Instead, this post provides an overview and the status of several major recent regulations by the Environmental Protection Agency (EPA) that target reductions in emissions from the oil, natural gas, and coal industries, and how these regulations will drive increased investment in cleaner and renewable energy. These regulatory actions are being driven, in large part, by increased bilateral and multilateral engagement and cooperation on climate change by the United States. Two recent examples include the Paris Agreement, an international accord addressing greenhouse gases emissions mitigation, adaptation and finance, negotiated in December 2015 at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change (COP21), and the United States-Canada Joint Statement on Climate, Energy, and Arctic Leadership.

The regulations that will be discussed here are EPA's rules regulating emissions from existing and new stationary electricity generating units. Tomorrow, EPA's regulations regarding emissions of mercury and air toxics, and emissions of methane and other volatile organic compounds will be discussed in a separate post.

Clean Power Plan, Existing Stationary Sources

First and most prominent are EPA's final rules addressing Existing Stationary Sources and New Stationary Sources. Both have been challenged in the U.S. Court of Appeals for the District of Columbia Circuit.

EPA's final rule, Existing Sources, Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units (80 Fed. Reg. 64,662), was published in the Federal Register on October 23, 2015 and was challenged the same day. More commonly known as the Clean Power Plan (the CPP), the CPP sets emissions rates goals and mass equivalents for each state. Some of the major points of the CPP are:

  • The emissions goals, which are required to be met by 2022, consider the current energy generation composition of each state and although the CPP sets the standards to be met, it allows the states great flexibility to implement target solutions;
  • Tools are provided to assist states in implementing market-based approaches;
  • The CPP provides incentives for early deployment of renewable energy and energy-efficiency measures that benefit low-income communities;
  • The CPP offers an alternative Federal Implementation Plan (or FIP) if a state chooses not to develop its own implementation strategy; and
  • Execution of the CPP is expected to drive a carbon emissions reduction of 32 percent from 2005 levels by 2030.

In January of this year, a group of 29 states and state agencies filed for an immediate stay of the CPP pending review by the U.S. Court of Appeals for the District of Columbia Circuit. In early February, the U.S. Supreme Court, in a 5-4 decision, overturned the lower court and granted the petition to stay the CPP until a legal challenge against it could proceed on the merits. That legal challenge, brought by several states, state agencies, and industry, is State of West Virginia v. EPA (Consolidated Case No. 15-1363).

The litigation has moved quickly and the briefing period has closed. Oral arguments were set for June 2-3 before a three-judge panel; however, on May 16, the Court of Appeals announced that oral arguments were postponed until September 27 and will now be heard en banc, meaning the arguments will be heard by the full court, not just a three-judge panel. This was an unusual step for the Court to take. The Court usually holds an en banc hearing when it feels that doing so is necessary to secure or maintain uniformity of the Court's decisions or the matter involves a question of exceptional importance. Both of these could be true and may have driven the Court's decision. Chief Judge Merrick Garland, President Obama's Supreme Court nominee, and Judge Cornelia Pillard have recused themselves from this case, so the arguments will be heard by nine judges.

Practically speaking, the postponement speeds up the Court of Appeals' final decision and the timing of a Petition for Writ of Certiorari to the U.S. Supreme Court, which is likely from whichever side does not prevail. This is because after a three-judge panel renders a decision, the parties can request an en banc review. There is no guarantee such a hearing would have been granted, but this latest move eliminates the intermediate three-judge panel step.

Much will be learned from oral arguments in September regarding the positions of the judges. Many legal professionals believed that the Court of Appeals' original three-judge panel was a favorable bench for EPA and the CPP. This has obviously changed with the announcement of a hearing en banc. It is difficult today to predict how each judge will vote, but it is instructive to note that of the nine judges that will hear the case, five were appointed by Democratic Presidents.

Given the three-month delay, the decision will most likely not be handed down until after the November election. No matter how the Court of Appeals rules, the decision will certainly be appealed to the U.S. Supreme Court.

Under the current eight-justice Supreme Court composition, a 4-4 decision would be likely, which has the affect of affirming the decision of the lower court. Although an EPA victory in the Court of Appeals and a subsequent 4-4 decisions at the U.S. Supreme Court would be seen as a win for the agency, such an outcome wouldn't create the kind of national precedent in support of greenhouse gas regulations that the agency wants. That said, with a hearing from the full panel of judges, the decision would carry more weight.

The postponement, however, also means that the case most likely won't be heard by the U.S. Supreme Court until 2017, when conceivably a justice has been appointed to fill the seat left vacant by the death of Justice Antonin Scalia. The current Obama Administration nominee, Chief Judge Merrick Garland, is widely viewed as voting for EPA and the CPP, but his appointment is being held up by the Republican-majority Senate.

Future posts on the Energy Finance Report will provide updates as to the status of the Existing Stationary Sources final rule, so please check back.

Carbon Pollution Standards for New, Modified, and Reconstructed Power Plants

On the same day the Existing Stationary Sources final rule was published, October 23, 2015, EPA's final rule, Standards of Performance for Greenhouse Gases From New, Modified, and Reconstructed Stationary Sources: Electric Utility Generating Units (80 Fed. Reg. 64,510), was also published in the Federal Register.

This New Stationary Sources rule has not received the same level of attention as the Existing Stationary Source rule because very few new coal plants are in the construction pipeline due to the abovementioned availability of affordable natural gas and reluctance in the investor community to finance new coal projects. In general, the New Stationary Source rule provides that:

  • If any new coal plants are constructed, emissions are limited to 1,400 pounds of carbon dioxide per MWh of electricity produced, which would require the use of carbon capture and storage technology; and
  • The hundreds of new natural gas power plants in the pipeline would be required to meet the emissions standard of no more than 1,000 pounds of carbon dioxide per MWh. According to the rule, plants can achieve these emissions reductions through efficient generation technology like combine cycle combustion turbines.

Similar to the CPP, the New Stationary Sources rule has been challenged. The litigation, State of North Dakota v. EPA (Consolidated Case No. 15-1381), has not moved as quickly, but final briefing has been scheduled to conclude in November 2016. Oral argument will be set thereafter.

In the administrative process, EPA denied several petitions for reconsideration of the New Stationary Sources rule on April 29. These petitions, filed by energy companies, trade and advocacy groups, and the State of Wisconsin, were filed, in part, to exhaust administrative remedies and to gain an additional avenue for appeal. In general, the petitioners challenged the rule on the basis that carbon capture and sequestration technology, which EPA relied on as a foundation to issue the rule, has not been adequately demonstrated on a commercial scale. Further, the petitioners argued that the agency had not responded appropriately to comments in the rulemaking process and used incorrect or inaccurate information in setting the standards.

The denial was formally published in the Federal Register and triggered a 60-day period for filing a petition for judicial review with the U.S. Court of Appeals for the District of Columbia Circuit. It is very likely that any appeals of the agency's denial of the petitions for reconsideration will be consolidated with the existing litigation, State of North Dakota v. EPA.

Future posts on the Energy Finance Report will provide updates as to the status of the New Stationary Sources final rule, so please check back.

Conclusion

With the time left in office for the Obama Administration, EPA is moving toward finalizing additional climate change and air pollution rules that reduce emissions from power plants, refineries, and the transportation sector. Operating, maintenance, and financing costs will undoubtedly increase for the oil, natural gas, and oil industries as companies come into compliance with these new emissions-reductions rules and regulations. There is a significant opportunity for zero-emission sources such as wind, hydro, and solar to step in and fill the gap left when the utility energy sector retires existing fossil-fuel sources and begins planning for future energy needs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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