On June 16, 2016, the United States Environmental Protection Agency ("EPA") issued a proposed rule titled Clean Energy Incentive Program Design Details ("Proposed Rule"). The Clean Energy Incentive Program ("CEIP") is an aspect of the Clean Power Plan ("CPP"), an EPA rule finalized in 2015 that regulates carbon dioxide ("CO2") emissions from existing power plants. States may opt in to the CEIP as part of individual state compliance plans under the CPP. Participation in the CEIP authorizes states to distribute allowances or to issue emission reduction credits ("ERCs") to eligible clean energy projects that occur in 2020 and 2021. Such projects include low‐income community projects (demand‐side energy efficiency and solar projects implemented to serve low‐income communities) and zero‐emitting renewable energy projects (wind, solar, geothermal, and hydropower in all communities). EPA then awards matching allowances or ERCs, which the CEIP project could sell or transfer to affected power plant electric utility generating units ("EGUs"), which would use them for compliance with the CPP's CO2 emissions limits. The Proposed Rule serves as a guide for states that choose to participate in the CEIP. EPA will accept public comment on the Proposed Rule for 60 days after publication in the Federal Register. EPA will also hold a public hearing on the Proposed Rule in Chicago on August 3, 2016.

Relationship of Proposed Rule to Stay of CPP

Although EPA intended the CEIP to incentivize early actions for CO2 emission reductions prior to the start of the CPP compliance periods in 2022, the timing of the CEIP and CPP implementation remain in flux due to the February 9, 2016, U.S. Supreme Court stay of the CPP. The CPP originally required states to declare their intent to participate in the CEIP by September 6, 2016. In the Proposed Rule, EPA clarifies that, as a result of the stay, states are not required to provide such notice by September 6, 2016. EPA's Proposed Rule recognizes uncertainty regarding future timing, stating that "it is currently unclear what adjustments, if any, will need to be made to implementation timing." Yet the Proposed Rule allows no flexibility and instead maintains "the timing elements of the CEIP that have already been finalized." The Proposed Rule further asserts that the "legal effect of the stay on the [CPP's] deadlines is ambiguous, and the question of whether and to what extent tolling is appropriate will need to be resolved once the validity of the [CPP] is finally adjudicated."

EPA acknowledges that "some of the stay applicants expressly requested that all of the [CPP's] deadlines be tolled for the period between the [CPP's] publication and the final disposition of their lawsuits." EPA nevertheless concludes that "it is appropriate to move forward with the design details of the CEIP" because "states have the authority to continue moving forward on their own volition with the design of state plans." Such assertions make it difficult for states to know whether they should continue executing the CPP while litigation is ongoing, and whether they will be penalized if EPA decides not to extend all of the applicable deadlines. Some states, such as Wisconsin, have directed their environmental agencies to cease CPP implementation in light of the stay. Other states, such as Connecticut, have indicated that they will continue to move forward with their state plan despite the stay. EPA's contradictory statements in the Proposed Rule may further perpetuate this patchwork approach throughout the country.

Key Provisions of Proposed Rule

Below is a summary of two key items within the Proposed Rule.

Matching Allowances and ERCs. The CPP indicates that EPA will award matching allowances or ERCs only up to a national limit of 300 million short tons of CO2 emissions, and that the 300 million ton matching pool will be apportioned among CEIP-participating states based on the amount of reductions from 2012 CO2 emission levels that the affected EGUs in each state are required to achieve relative to those in other CEIP states.

Under the Proposed Rule, the matching pool will be divided evenly, with 50 percent made available for renewable energy projects and 50 percent made available for low-income community projects. EPA is proposing that a CEIP-participating state may allocate allowances or issue ERCs up to an amount equivalent to the number of matching allowances or ERCs the state is eligible to receive from EPA. For example, the available matching allowances and ERCs for California, Illinois, and Pennsylvania would be as follows:

Click here to view table.

Requirements for States that Choose to Participate. The Proposed Rule also clarifies that a state plan that implements the CEIP must address certain topics, including:

  • Eligibility requirements for renewable energy and low-income community projects;
  • Submission of project eligibility applications;
  • Submission of monitoring and verification reports;
  • Accreditation of independent verifiers;
  • State allocation or issuance of allowances or ERCs;
  • Tracking system capabilities and infrastructure necessary to support state administration of the CEIP;
  • Actions to be taken if allowances or ERCs are found to have been improperly issued; and
  • A mechanism for ensuring maintenance of CO2 emission performance by affected EGUs in light of the state's participation in the CEIP.

The Proposed Rule contains example regulatory text for such state plan provisions.

Implications

EPA's Proposed Rule creates confusion by stating on the one hand that states do not need to meet current CPP deadlines in light of the stay, but on the other hand suggesting that compliance deadlines may or may not be extended following completion of the current judicial proceedings. Such conflicting messages make it challenging for states and the regulated community to understand and implement CPP requirements. Furthermore, it is unclear whether proponents of CEIP projects should plan to generate renewable energy and energy savings during 2020 and 2021, in which case eligibility determinations will need to be made, and construction will need to commence, in the next few years. EPA's position in the Proposed Rule could ultimately disincentivize early reductions if project applicants and states are not confident that they will receive credit. Although EPA continues to create uncertainty about the impact of the Supreme Court stay on the CPP's implementation schedule, the agency's current position is contrary to relevant precedent.

Further analysis regarding the impact of the stay is available here.