EPA Issues Historic Carbon Regulations for Fossil Fuel-Fired Power Plants

The U.S. Environmental Protection Agency (EPA) yesterday released a package comprising two highly anticipated final rules and one proposed rule regulating carbon dioxide (CO₂) emissions from the electric power sector. Long touted as a major priority for the Obama Administration, the rules reflect the Administration's ambitious but untested approach to addressing climate change and mitigating CO₂ emissions under section 111 of the Clean Air Act (the "Act").  

EPA's rulemaking package includes:

• A combined, final rule setting performance standards for new, modified and reconstructed emission sources under section 111(b) of the Act;
• A final set of performance standards and emission guidelines to reduce carbon pollution from existing fossil fuel-fired power plants (aka the "Clean Power Plan" or "CPP") promulgated under section 111(d) of the Act; and
• A proposed rule seeking comment on proposed "model state rules," together with a proposed federal implementation plan (FIP) to enforce the requirements of the CPP in accordance with the final emission guidelines if states fail to submit their own approvable plans to EPA.

The centerpiece of the package is the EPA's Clean Power Plan and the accompanying model state rules and FIP.

If the Clean Power Plan and the other final rules survive judicial review without substantial change, they will significantly alter the way states and utilities design, plan, and operate our bulk power electric grid for decades to come. Over the next few days, we will provide more detailed analysis of the legal issues and market implications of these rules, but preliminary highlights are provided below. 

New Source Performance Standards under 111(b)

EPA's final section 111(b) performance standards for new, modified, and reconstructed power plants include significant updates and alterations to the original proposed rule. The technological basis for EPA's final standards generally mirrors what was relied upon in the proposed rule, including requiring application of partial carbon capture and sequestration (CCS) technology at highly efficient supercritical pulverized coal units. However, EPA's final standards and their applicability have changed in several significant ways. Some of the most significant differences between the proposed and final rules include:

• For new coal-fired units, EPA has imposed a final emission rate standard of 1,400 lbs CO₂/MWh-gross—a significant upward adjustment from EPA's previously proposed standard of 1,100 lbs CO₂/MWh-gross. This adjustment assumes a reduced rate of carbon capture at new coal-fired units as compared to the proposed rule, or co-firing without CCS at integrated gasification combined cycle units.
• Standards for modified coal-fired units apply only to sources making modifications that result in at least a 10 percent increase in hourly emissions. The applicable standards for such sources have been ratcheted down slightly.
• EPA has eliminated its previous delineation between small and large natural-gas fired units and has otherwise expanded the applicability of its standards for new and reconstructed natural gas-fired stationary combustion turbines. Specifically, EPA has set an emission limit of 1,000 lbs CO₂/MWh-gross for all new and reconstructed baseload natural gas units, while setting separate standards for non-baseload units and multi-fuel-fired units.
• EPA declined to finalize standards for modified natural gas-fired units at this time, both because it expects that few existing natural gas-fired units will be modified and out of concern for the ability of units that modify to achieve EPA's 1,000 lbs CO₂/MWh standard for new and reconstructed units.       

EPA's Clean Power Plan: Major Changes from the Proposed Rule

Under the proposed CPP, EPA based each state's emission reduction goals on the Agency's forecast of  the state's ability to implement four so-called "Building Blocks": (1) implementing heat rate improvements at individual coal-fired power plants; (2) shifting generation from more carbon-intensive units such as coal-fired Electric Generation Units (EGUs), to lower-emitting natural gas-fired generation; (3) substituting low- and zero-carbon generation (i.e., from under-construction and existing nuclear units, and from renewable resources) for fossil fuel-fired generation; and (4) implementing demand-side energy efficiency measures. States would have been required to submit state plans (or multi-state plans) for achieving required emission reductions by June 2016; interim compliance was required from 2020-2029; and final compliance (i.e., satisfaction of the final rate-based emission goal assigned to each state) was required by 2030.

The final Clean Power Plan maintains much of the original Building Block approach to determining the best system of emission reduction (BSER), but also makes substantial modifications to the proposal. BSER now comprises only the first three original Building Blocks, with some refinements. EPA considers that only the first three Building Blocks (heat rate improvements, shifts to lower-emitting natural gas generation, and substituting renewable resources for fossil fuel-fired generation) are available to all affected electric generating units through direct investment or through operational shifts, or emissions trading (if the state adopts such programs). EPA adjusted the Building Blocks in the final rule to include:

• A range of required heat rate improvements (Building Block 1) that varies by region (from 2.1 to 4.3 percent, instead of the 6 percent EPA had proposed);
• Use of 75 percent of summer capacity (rather than 70 percent of nameplate capacity) as the target capacity factor for existing NGCC units (Building Block 2);
• A modified approach to quantification of the renewable energy component and elimination of the proposed rule's nuclear generation components (Building Block 3); and
• A requirement that the states adopt consistent, regional approaches to quantifying all three Building Blocks.

EPA eliminated Building Block 4, which required emissions reductions through demand-side energy efficiency measures. States are still permitted, however, to use such measures as compliance mechanisms.

EPA also established two alternate approaches for state compliance: (1) source-level emission performance rates for the two source subcategories—fossil fuel-fired electric utility steam generating units (coal units) and stationary combustion turbines (gas units) and (2) state-specific CO₂ goals. If states elect the latter approach, they have discretion to achieve their goals through rate- or mass-based regimes. 

Other important changes include:

• Responding to concerns about the need for a longer ramp-up period for states and regulated facilities, EPA has delayed the interim compliance period by two years. Interim compliance is now required beginning in 2022 rather than in 2020.
  
• In addition to requiring compliance over a single interim period (2022-2029), EPA has established three interim compliance periods that a state may choose to use as a glidepath (2022-2024, 2025-2027, and 2028-2029), each with distinct and increasingly stringent emission reduction goals. 
  
• EPA has extended the deadlines for submitting state plans. Initial plans are due September 6, 2016, but states submitting plans on that date may apply for, and EPA may grant, up to a two-year extension, until September 6, 2018—provided the initial plan and request for extension is timely submitted to EPA and meets other requirements. States that do not timely submit a plan in September 2016 are likely to be subject to a FIP.
  
• EPA established uniform, source-specific CO₂ emission performance rates: a final rate of 1,305 lb CO₂/MWh for fossil fuel-fired steam generating units (coal plants) and 771 lb/CO₂/MWh for stationary combustion turbines (gas plants).
  
• EPA has issued two variations of mass-based goals that a state may choose to implement as alternatives to complying with a rate-based goal.
  
• The final rule gives states a choice between implementing two types of state plans:
  • Under an emission standards plan, states are expected to adopt "source-specific" requirements to ensure achievement of applicable rate-based or mass-based goals by each affected facility. Affected sources must comply with the emission performance rates by taking actions to reduce their emissions, including heat rate improvements and investments in renewable and other lower-emitting sources.
    
  • Under a state measures plan, states can individually or collectively rely on a broader mix of non-federally enforceable strategies and approaches to achieve an equivalent amount of emission reductions. These strategies can include the use of state-enforceable measures on entities other than affected EGUs in conjunction with any federally enforceable emission standards the state chooses to impose on affected EGUs. States can therefore employ direct obligations (heat rate improvements, emission credit trading schemes) as well as reliance on increased renewable energy portfolio standards and energy efficiency mandates to achieve equivalent reductions from non-affected EGUs. State measures plans must, however, include "a backstop of federally enforceable standards" for individual sources that would apply if the broader mix of state strategies failed to timely achieve required emission reductions. A state that adopts a state measures approach must use its mass CO₂ emission goal as the metric for demonstrating plan performance.
    
• Based on updated Energy Information Administration data, the final rule has an increased emphasis on the potential reductions that can be achieved through clean energy development, but does not significantly increase the projected reductions to be achieved through shifting to natural gas. The proposed rule was expected to result in a substantial increase in the use of natural gas, but the final rule focuses more on renewables and thus is less likely to have a significant effect on natural gas production.
  
• The final rule provides a series of requirements and guidelines that promote renewable energy deployment more than development of new natural gas-fired generating units. The White House has said that the final rule will now require 28 percent of all electricity to come from renewable energy sources, up from 22 percent under the proposed rule.
  
• States now have a greater incentive to promote clean energy development through a new Clean Energy Incentive Program (CEIP). States participating in the CEIP can choose to "count" early actions undertaken prior to the start of the compliance periods, and to receive credit for the associated emission reductions when they occur during the compliance periods. States can thereafter seek matching awards from EPA of additional allowances or emission reduction credits for certain eligible projects, up to a total for all states that represents the equivalent of 300 million short tons of CO₂ emissions. EPA is taking comment on the CEIP in the proposed FIP rule and will address design and implementation details of that program in a subsequent action.
  
• To encourage and support rate- or mass-based trading of emission reduction credits and allowances, the final rule encourages states to devise "trading-ready" plans that will facilitate interstate trading using common metrics and accounting to avoid the need to negotiate a formal interstate agreement. EPA's proposed model state rules further seek to encourage trading by providing states the option to utilize what appears to be an EPA-managed trading infrastructure. 
  
• To address stakeholder concerns about potential electric reliability impacts, EPA has included in the final rule a new "reliability safety valve" provision that might permit reliability-critical generation to operate irrespective of otherwise applicable emission requirements if there are "unanticipated event or other extraordinary circumstances." The final rule also authorizes states to seek state plan revision in the event of "unanticipated or significant reliability challenges." EPA indicates, however, that there should be few circumstances in which this would occur, particularly since state plans are already required to take reliability into account.

Publication of EPA's final power plant rulemakings in the Federal Register will trigger a 60-day period during which persons aggrieved by the rule can file petitions for judicial review in the United States Court of Appeals for the District of Columbia Circuit. Federal Register publication typically takes a month or more, but it is possible the rules could be published sooner because they are a high priority for this Administration. Numerous legal challenges are anticipated along with motions asking the court to stay the rules pending review.

EPA's Proposed Model State Rule (Federal Plan) and Model Trading Rules

Concurrently with the release of EPA's final Clean Power Plan, EPA proposed alternative federal trading programs that would be imposed on states that either decline to submit a state plan, or whose proposed state plans do not secure EPA approval: (1) a rate-based emission trading program, and (2) a mass-based emission trading program. EPA believes that either approach would achieve the same level of emissions reductions as that required of an individual state plan and has solicited comment on whether a single approach should be adopted.

EPA will finalize a federal plan for any state that: does not submit an approvable plan to EPA by September 6, 2016; fails to make an initial submittal of an approvable plan to EPA by September 6, 2016, along with a request for an extension for final plan submittal no later than September 6, 2018; or fails to submit an adequate plan, even if timely submitted.

In addition, EPA proposed model trading rules that states may choose to follow in developing their own plans. EPA has proposed and is seeking comment on a rate-based model trading rule and a mass-based model trading rule for potential use by any state. These would allow for the crediting of a broader set of clean energy resources than is being proposed in the federal plan.  Some portions of the model trading rules, such as the evaluation, measurement, and verification procedures, would be acceptable to EPA even if a state adopted an approach that differs from the federal plan. EPA intends to finalize the rate-based and mass-based model trading rules in summer 2016. 

Comments on the proposal will be due 90 daysafter publication in the Federal Register.