EPA Seeks Comments on Clean Energy Incentive Program

On June 16, 2016, the U.S. Environmental Protection Agency (EPA) proposed details for its Clean Energy Incentive Program (CEIP), an optional part of EPA’s Clean Power Plan (Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units) to provide incentives to early emission reduction projects. Public comments will be due 60 days after the proposed CEIP is published in the Federal Register.

The Clean Power Plan is EPA’s landmark rule to reduce carbon dioxide (CO2) emissions from existing electric generating units. The rule is currently stayed pending judicial review by order of the Supreme Court. By EPA’s own admission, the CEIP cannot be implemented unless the Clean Power Plan itself survives judicial review. Some challenging the Clean Power Plan have argued that any work presently being conducted by EPA on the CEIP, federal or state plans implementing the Clean Power Plan, or any other aspect of the rule violates that stay order. EPA, however, asserts in the preamble to the proposed CEIP that the stay does not bar it from proceeding with either the CEIP or modifying its model emission trading rules, and that the agency intends to continue providing support for states that choose to move forward with state compliance plan development. Time, and further Supreme Court proceedings, will tell whether such work is for naught.

The CEIP was first proposed as part of the Clean Power Plan rulemakings to address stakeholder requests that emission reductions achieved prior to the start of the compliance period in 2022 are recognized by EPA. Under the emissions trading framework of the Clean Power Plan, the CEIP would enable participating states and EPA to provide additional tradable credits to qualifying renewable energy (RE) and energy efficiency (EE) projects that achieve measurable CO2 reductions during calendar years 2020 and 2021.

The main financial incentive of the CEIP is the economic value project developers could gain from selling those bonus credits to electric generating units that will need them to comply with the emission reduction requirements of the Clean Power Plan. States would be authorized to allocate or issue early action credits – alternatively known as early action “allowances” (in states that employ a mass-based emission reduction approach under the Clean Power Plan) or early action emission rate credits (ERCs) (in states that employ a rate-based approach). Those state credits would then be “matched” by EPA’s distribution of additional credits.

EPA established the CEIP framework in the Clean Power Plan rulemaking itself, but left several details open pending further EPA consideration and stakeholder input. The new CEIP proposal adds the following key details and changes to the earlier proposed framework:

• Eligible CEIP projects must be “located in or benefit” a state that has one or more regulated electric generating units and participates in the CEIP. Under the proposal, a project would “benefit” a state to the extent that “electricity is generated or saved by an eligible CEIP project located in the CEIP-participating state…or with the intention to meet or reduce electricity demand in the CEIP-participating state.” Given the interstate and regional nature of electricity markets, allowing out-of-state projects to “count” in a particular state will likely require additional guidance and coordination.
• CEIP bonus crediting would operate as follows:
  • In the case of RE generation projects:
    • In rate-based states, for every two MWhs of eligible generation, a state would provide one early-action ERC, and EPA would provide one matching ERC (i.e., 1-for-1).
    • In mass-based states, for every two MWhs of eligible generation, after converting short tons of CO2 to metric tons a state would provide 0.4 early-action allowances, and EPA would provide 0.4 matching allowances.
  • In the case of demand-side EE projects in low-income communities:
    • In rate-based states, for every two MWhs of verified energy savings, the state would award two early-action ERCs, and EPA would provide two matching ERCs (i.e., 2-for-1).
    • In mass-based states, after conversion of short tons to metric tons, a project provider would be eligible to receive 0.8 early-action allowances from the state and 0.8 matching allowance from the EPA, for a total award of 1.6 allowances per MWh.
• EPA originally intended to only allow solar and wind RE projects to be eligible for bonus crediting. The new proposal expands the list of CEIP-eligible project types to include geothermal and hydropower.
• EE projects were originally limited to energy savings projects benefiting low-income communities. The new proposal clarifies that a distributed solar energy generation project that “serves” a low-income community would also be eligible for bonus crediting as if it were an EE project (i.e., it would be eligible for 2-for-1 crediting).
• The total overall matching pool of tradable CEIP credits will be capped at an amount equivalent to 300 million short tons of CO2 emissions. EPA proposes to apportion the CEIP pool of available credits to participating states pro rata based on the amount of reductions each state is required to achieve under the Clean Power Plan. Based on EPA’s assumption that all states will participate, Texas would receive the highest allocation and Idaho the lowest.
• EPA further constrains the CEIP budget of available credits by requiring each state to divide its apportioned amount into two bonus credit “reserves.” In the aggregate, 50 percent of the matching pool (150 million allowances, or 187.5 million ERCs) is to be made available for RE projects, and 50 percent of the matching pool (150 million allowances, or 187.5 million ERCs) is to be made available for EE projects in low-income communities. States would be prohibited from transferring credits from one reserve account to the other (e.g., credits apportioned for RE projects could not be moved into the EE project reserve account). EPA also seeks comment on setting an apportionment “floor” amount as an alternative.
• Although EPA may have to recalculate how the overall CEIP pool of credits is apportioned among states depending on future events and the number of states that ultimately choose to participate, EPA chose not to propose any sort of predetermined reapportionment plan at this time.
• At the project level, EPA proposes that eligibility for bonus credits be determined by the date a project commences commercial operation. In contrast, the prior EPA proposal limited eligible projects to those that commenced construction after the effective date of the final, approved state plan. EPA therefore now clarifies that eligible RE generation projects may “commence commercial operation” no earlier than January 1, 2020. Eligible EE projects, however, may commence operation no earlier than September 6, 2018.
• EPA is seeking comment on whether to exclude from eligibility those RE projects that take advantage of federal production or investment tax credits. By taking comment on this, EPA may be indicating it is considering some form of threshold “but-for” subsidy test (also known as financial additionality in many carbon offset markets). In other words, it might be suggesting that projects that would have been built even without the bonus CEIP credit incentive should not be eligible for such crediting. EPA does not adequately explain, however, why tax incentives have anything to do with the policy goals of the Clean Power Plan. Moreover, EPA fails to explain how an otherwise eligible RE project provider’s utilization of unrelated federal tax incentives in 2020 or 2021 is determinative of whether the project would have otherwise occurred.
• For states choosing to participate in the CEIP, EPA clarifies their state plans must include requirements for determining CEIP project eligibility and for quantifying and verifying the MWh generation or savings from an eligible project - including evaluation, measurement and verification (EM&V) plans, credit tracking mechanisms, monitoring and verification reporting, and independent project submission verification.