EPA releases final version of Clean Power Plan

EPA issued the Clean Power Plan in its final form today, August 3, 2015. The rule in effect reshapes energy policy nationwide by setting state-by-state carbon emission standards that all states must achieve through a combination of producing energy more efficiently, reducing energy demand, shifting away from coal-fired generation toward natural gas, nuclear power, and renewable energy, and encouraging state and regional policies such as renewable portfolio standards and cap-and-trade programs. The final rule contains significant changes from the version proposed in 2014, including backing down from an initial earlier deadline for compliance, axing energy efficiency as the fourth “building block” for state targets, increasing the targeted GHG reductions to 32% below 2005 levels by 2030 (up from 30%), and using uniform carbon emissions rates for similar types of power plants.[1]  

1. Background
Eight years ago, the United States Supreme Court gave EPA the green light to regulate greenhouse gas emissions in its Massachusetts v. EPA decision.[2] Subsequent developments have brought EPA’s regulatory authority into focus, including EPA’s endangerment finding and related legal challenges.[3] With the Supreme Court’s decision in Utility Air Regulatory Group v. EPA[4] in 2014, EPA may now regulate the emissions of stationary power plants, the country’s largest emitters of greenhouse gases.

2. New Federal Regulations
Following the Utility Air decision and the Obama Administration’s release of its Climate Action Plan, EPA regulation of greenhouse gas emissions by power plants, or “EGUs”[5] is now under way. EPA has created a vast new regulatory scheme that is sweeping and ambitious in its scope and scale. The scheme would cut average nationwide power sector greenhouse emissions by 30% from 2005 levels by 2030. The scheme consists of three primary components:

• Proposed Carbon Pollution Standards for newly constructed power plants set under the authority of Clean Air Act Section § 111(b);
• Proposed Carbon Pollution Standards for modified and reconstructed power plants also set under the authority of Clean Air Act § 111(b);
• EPA’s “Clean Power Plan,” which regulates greenhouse gas emissions from existing power plants under the authority of Clean Air Act § 111(d).

This post focuses on the newly-finalized Clean Power Plan, which is just one part of the Climate Action Plan, with updates to come in a separate post on the newly-finalized carbon pollution standards. Notably, changes to the carbon pollution standards include increasing the amount of allowable carbon emissions for coal-fired plants[6] and allowing a lower capture rate for coal-fired units employing carbon capture and storage (CCS) technology. For detailed background on these standards, see EPA Proposes Strict Greenhouse Gas Emissions Standards on New Electric Utilities.

3. Clean Power Plan Approach and Structure
The Clean Power Plan takes a distinctively state-by-state approach for existing power plants.[7] In the final version of the Plan, EPA set emissions reduction targets for each state based on that state’s power-producing characteristics and emissions profile and based on three building blocks.[8] These targets reflect a novel and expansive agency view of the “best system of emission reduction” (BSER) for existing EGUs. Rather than limiting analysis to process or technological changes, i.e., inside the fence controls, EPA considered actions that can be taken by the entire electric generation and distribution system, such as changes in regional energy dispatch policies, investments in renewable energy, and reducing energy demand. The target for each state is the performance standard that corresponds to that state’s BSER. These targets are based on electricity production rather than electricity consumption, placing a comparatively larger burden on states that export power compared to states that import power.

It is up to each state to figure out how to meet its unique emissions target. The plan provides broad flexibility to states to craft their individual emissions reduction plans. For example, a state may develop its own cap-and-trade program, or participate in a regional program. Each state’s plan will need to be approved by EPA, but there are very few restrictions on what methods states may employ. Each state’s responsibility is to figure out a way to reduce power sector greenhouse gas emissions to meet its unique emissions target rate.

The Clean Power Plan allows states 13 months to submit their plans with a possible two year extension. States that fail to submit approved plans will be subject to a federal plan.[9] Once submitted, it will take additional time for the plan to be approved by EPA.

4. Significant Changes from Draft Rule
Notable changes in the final rule include:

• Increasing targeted carbon reductions to 32% below 2005 levels by 2030, up from the originally planned 30% in reductions.

• Delaying the date for meeting interim emission reduction targets from 2020 to 2022, but retaining the requirement that the final targets be attained by 2030. This “glide path” extension accommodates state and industry concerns regarding the significant costs and potential inability to meet the targets in some cases.

• Adjusting specific state emission reduction targets that some states believed reflected unfair assumptions made by EPA regarding each state’s access to renewable energy sources, ability to switch to natural gas fired power plants, and the carbon-intensity of historic energy mixes.

• Applying a uniform carbon emissions rates for similar types of power plants to bring state goals closer together. [10]

• Removing efficiency standards, which assumed that states across the country had the capacity to improve their demand-side efficiency by 1.5 percent per year after 2020. The rule as originally proposed assigned all states reduction responsibilities based on that assumption, though it gave some states more time than others to make the cuts. Due to the legal problems that would have added to the rule’s vulnerability upon challenge, this building block is now not explicitly part of the Clean Power Plan, though many stakeholders believe it will still play a significant role as a compliance option.

• Adopting a mass-based standard, allowing states to convert their rate-based goals (the rate of carbon emissions from fossil fuel-fired EGUs per MWh of electricity generated) to mass-based goals to better facilitate cap-and-trade programs.

• Incentivizing early action to build renewable energy.

• Giving states credit for nuclear plants under construction and increases in existing nuclear generation, but no longer counting them toward state targets.

• Incorporating grid reliability assurances, including measures such as longer compliance periods, phased-in reduction requirements, and a flexible design that allows for state-specific approaches to reaching environmental goals. The final plan also provides mechanisms for states to seek plan revisions where “unanticipated and significant” reliability challenges arise, and includes a reliability “safety valve” for individual sources facing “extraordinary” and “unanticipated” reliability events. States must demonstrate in their final plans that they have considered reliability issues in developing their plans. The Department of Energy and Federal Energy Regulatory Commission (FERC) will monitor the rule’s implementation to ensure that grid reliability is maintained.

5. Who is Affected?
Everyone involved in the generation or use of electricity will be affected in some way by the Clean Power Plan. The coal industry will experience the most profound effect, as the Plan seeks to reduce the amount of coal-fired power in the United States. The transportation sector may also see a change; rail and vessel transport will likely face changes in the supply chain and destinations for coal. Some states face large reduction requirements, forcing them to fundamentally reexamine their energy policies. Electric rates are likely to increase, particularly in those areas that predominantly rely on coal-fired generation.

On the other hand, renewable power producers are expected to benefit from the Plan, as it incentivizes further investment in wind, solar and hydropower. The rule may spur capital expenditures in electric transmission projects, particularly those that may be needed to interconnect with renewable power. It also promotes demand-side management technology and endorses the continued development of nuclear power, including delaying retirement of existing nuclear generation.

6. What are the Next Steps for the Clean Power Plan?
With the final Clean Power Plan now issued and soon to be published in the Federal Register, we now expect a surge of activity, including legal and political action. Significant legal and practical issues that will rise to the top of the challenges include:

• Whether the Plan exceeds the scope of what EPA is authorized to regulate under § 111(d), which sets “standards of performance” for “existing sources” meeting certain criteria—here, power generation facilities. Rather than limiting standards only to specific sources, EPA is prescribing a set of GHG emission reduction targets that look beyond the emissions of specific sources and instead requires changing the mix of electric generation and the way state and regional electric grids are powered. These arguments, raised in Murray Energy Corp.v. EPA[11] but deemed premature prior to the finalization of the rule, will certainly be raised again and thoroughly litigated.

• Determining the details of how the Plan will work within deregulated electric grid markets, where states and FERC have embraced the concept of economic dispatch of electricity. The Plan envisions the concept of “environmental dispatch,”[12] but stakeholders have expressed concerns about how this could be effectively implemented within a market-based energy generation and distribution structure.

Action has already begun. Even before the ink was dry on the EPA rule, the Senate Environment and Public Works Committee’s Clean Air and Nuclear Safety Subcommittee announced that it will consider a bill to roll back EPA’s carbon rules by extending compliance deadlines pending judicial review and allowing governors to not comply if it would hurt the economy or electricity reliability. In addition, the American Coalition for Clean Coal Electricity filed a request yesterday with EPA to stay the rule while the courts weigh in, and it plans to ask the courts for a judicial stay in the event its request is denied.

States have taken widely varying positions on the Clean Power Plan. Executive and legislative leaders in some states have expressed antipathy to the Clean Power Plan, suggesting that their states would not move forward to develop implementation plans, which would ultimately leave to EPA the task of developing and enforcing federal implementation plans. Other states, with administrations that are more supportive of the Plan, will begin developing their implementation plans. In both instances, industry will be concurrently working to influence the shape of the implementation plans and prepare for a transformative period that will fundamentally change the way electric power is produced.

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