On Monday, the Environmental Protection Agency (“EPA”) released its Clean Power Plan (“CPP”), the cornerstone of the Obama Administration’s multi-faceted regulatory approach to address climate change.1  The final rule is centered on reducing CO2 emissions from fossil fuel-fired power plants by 32 percent from 2005 levels by 2030. In order to meet this goal, electric generators will have to install controls on electric generating units (“EGUs”) or retire a percentage of coal-fired power generation within the next 15 years. To do this, the EPA has set uniform emissions rates for fossil fuel power plants. These uniform rates were derived from what the EPA calls the 3 building blocks of the CPP.

The building blocks are:

  1. Improving heat rate at affected coal-fired steam EGUs.
  2. Substituting increased generation from lower-emitting existing natural gas combined cycle units for reduced generation from higher-emitting affected steam generating units.
  3. Substituting increased generation from new zero-emitting renewable energy generating capacity for reduced generation from affected fossil fuel-fired generating units.

Based on analysis of these building blocks, the EPA set the uniform emission rates for fossil fuel-fired units and for combustion turbines.2  Then, the EPA determined on a state-by-state basis how much each state would have to reduce its CO2emissions in order to comply with the national target. The attached table demonstrates how states fare in the final rule.

Now, it’s the states’ turn.3 Because the rule is promulgated under Section 111(d) of the Clean Air Act (“CAA”), the states have until 2016 (2018 if they qualify for an extension) to develop plans to meet the new emission rates for CO2. States also have interim milestones they must meet by 2022. States have essentially three major decisions:

  1. Whether to develop a state plan. The law directs the EPA to develop and implement a plan if the state does not do so;
  2. Whether to establish limits applicable to each source or instead commit to a state plan for achieving reductions without establishing source-specific limits; and 
  3. Whether they will use state rate-based goals or state mass-based CO2 goals to comply.

If states choose to follow the mass-based goal approach, they can also participate in an interstate trading system. The EPA has proposed a model trading rule with the CPP. The proposal invites comments from stakeholders on the proposed trading program.

The final rule treats renewable energy and energy efficiency more favorably than natural gas. While construction of new natural gas-fired generation is still allowed, the ability of states to take credit for emissions reductions achieved by constructing new natural gas-fired generating units is limited.

On first reading, it might also appear that the final rule disfavors energy efficiency. The CPP as proposed contained a fourth building block entitled “Use electricity more efficiently,” which the final rule omits. EPA’s decision to remove the fourth building block, however, may be more a litigation tactic than a change in the EPA’s position.

There have been reports in the media that EPA removed the fourth building block in response to the Supreme Court holdings limiting deference to EPA and signaling that the EPA should use whatever authority it has to regulate greenhouse gases (“GHGs”) for emissions “within the fence line” and that other requirements that focused on demand side changes would likely be struck down. By finding other ways to justify – and even tighten – its reduction requirements EPA may hope to increase the odds that the CPP will be upheld by the courts.

EPA still intends, however, to strongly encourage use of demand supply measures to achieve the emissions reductions required by the rule. This is reflected in part by the inclusion of a new “Clean Energy Incentive Program” (“CEIP”) not provided for in EPA’s earlier proposal.

The stated goal of the CEIP program is “to encourage early investments in RE [(renewable energy)] and demand-side EE [(energy efficiency)].” Those states that take advantage of this option will be eligible to receive matching allowances from the EPA or emission rate credits (“ERCs”), up to a total for all states, which represents the equivalent of 300 million short tons of CO2 emissions. The formula for awarding ERCs provides twice as many credits for each ton of early reductions achieved through energy efficiency measures as it does for renewable energy – and zero credit for early reductions achieved by increased use of natural gas.

Further, EPA’s regulatory analysis indicates that EPA expects most of the emission reductions required by the CPP to be achieved through “verifiable and quantifiable” reductions in demand, with a 7.8 percent net reduction in projected U.S. electricity demand. By contrast, generation from renewables is expected to increase by less than 10 percent as a result of the program and no change in expected use of natural gas. Compared to EPA’s base case scenario, the number of new natural gas-fired combined cycle units added by 2030 is expected to decline.

It remains to be seen, however, how the rule will actually be implemented. The Clean Power Plan establishes the ground rules, but it is up to the states to decide how to meet the EPA-mandated targets for each state. While the final rule reduces the incentives to build new combined-cycle units, some states may decide to put heavy emphasis on demand side measures but others may take a different approach – focusing primarily on coal-plant retirements, aggressive efforts to expand renewables and increased use of existing natural gas-fired generating units.