On October 23, 2015, the U.S. Environmental Protection Agency (EPA) published in the federal register its highly anticipated final rules implementing the Clean Power Plan’s goal of significantly limiting carbon dioxide emissions from existing, new, modified, and reconstructed fossil fuel-fired electric generating units (EGUs). EPA also published its proposed model state trading rules and federal plans for implementation of the required emission reductions from existing EGUs. The rules were finalized on August 3, 2015 and published on EPA’s website at that time.

These rules, which will significantly impact the electric power sector, also have the potential to impact manufacturing operations. Businesses with high energy demands may see the effects of the rules in their electricity bills. However, the rules could also present an opportunity for manufacturers of control equipment for coal-fired steam EGUs as well as natural gas combined cycle units and zero-emitting renewable energy generating units.

The final rule for new, modified, and reconstructed EGUs went into effect on October 23, 2015. The final rule for existing EGUs will be effective on December 22, 2015, although numerous challenges to the rule have already been filed and the courts could stay the effective date of the rule pending review. Also, EPA will accept comments on the proposed plans until January 21, 2016.

Summary of EPA’s Rulemaking Actions

The “Standards of Performance for Greenhouse Gas Emissions from New, Modified, and Reconstructed Stationary Sources: Electric Utility Generating Units” rule establishes New Source Performance Standards for carbon dioxide that is emitted from new, modified and reconstructed EGUs.

The “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units” rule establishes standards to limit carbon dioxide emissions from existing fossil fuel-fired EGUs and requires states to develop plans to meet those goals. Rather than imposing uniform federal standards on all existing sources, the rule gives states flexibility to determine how to meet the required emission reductions. To assist states, EPA has proposed rate- and mass-based model trading rules that can be incorporated into state plans. In addition, EPA has proposed rate- and mass-based approaches for federal plans that will be adopted on a state-by-state basis if a state chooses not to develop a plan or if EPA does not approve a state’s plan.

Additional background regarding the proposed rules is discussed in our client alert available here.

Legal Framework

Section 111 of the Clean Air Act requires EPA to publish a list of categories of stationary sources, including any category of sources that “causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare.” In 1971, EPA listed fossil fuel-fired steam generating boilers as a source category subject to rulemaking, and in 1979 EPA listed fossil fuel-fired combustion turbines.

Once EPA lists a source category, it must publish standards of performance for new, modified and reconstructed sources within the category. Section 111(d) grants EPA the authority to also adopt regulations that establish a procedure for states to submit plans that establish standards of performance for any existing source in that category. The standards of performance must reflect the degree of emission limitation achievable through the application of the “best system of emission reduction” (BSER) that EPA determines has been adequately demonstrated, taking into account the cost of achieving the reduction, any non-air quality health and environmental impacts, and energy requirements.

The state must then submit its plan to EPA for approval. If a state does not submit a plan or EPA does not approve the plan, EPA must establish a plan for that state.

New, Modified and Reconstructed Sources

The proposed rule for modified and reconstructed sources identified BSER and proposed standards, each of which varied based on the type of source at issue. The final rule, set under authority of the Clean Air Act Section 111(b), changes key elements of the proposed rule and incorporates an earlier proposal for standards for new sources. The final rule establishes standards for new, modified and reconstructed units in regulations at 40 C.F.R. Part 60 Subpart TTTT. A “new” source is defined as any newly constructed fossil fuel-fired power plant that commenced construction on or after January 8, 2014. A “modification” is defined as any physical or operational change to an existing source that increases the source’s maximum achievable hourly rate of air pollutant emissions and such change occurred on or after June 18, 2014. A “reconstructed source” is defined as a unit that replaces components to such an extent that the capital cost of the new components exceeds 50 percent of the capital cost of an entirely new comparable facility and such unit reconstructs on or after June 18, 2014.

The carbon pollution standards still vary based on the type of source at issue. They are now separated into two types of fossil-fuel fired sources: generally coal-fired electric utility steam generating units, and generally natural gas-fired stationary combustion turbines. The standards rely on application of the BSER approved by EPA for each type of unit. The new standards by source are:

Notably, the standards do not apply to dedicated non-fossil fuel units, CHP units, stationary combustion turbines that are not physically capable of combusting natural gas, utility boilers and integrated gasification combined cycle units subject to limits on annual net-electric sales, municipal waste combustors, and commercial or industrial solid waste incineration units.

Existing Sources

What Standards Apply

EPA’s proposed rule for existing EGUs outlined an unprecedented approach to controlling emissions from existing sources: limit emissions at least in part by reducing generation from EGUs by substituting generation from less carbon-intensive affected EGUs and low- or zero-carbon generating units and by implementing demand-side energy efficiencies.

The proposed rule garnered significant feedback from regulated industry and environmental groups alike; more than 4.3 million comments were submitted on the proposed rule. The comments challenged EPA’s authority to adopt such an approach to controlling emissions, critiqued the assumptions and data that EPA relied on in establishing its emission reduction goals, and suggested improvements to specific requirements of the new regulatory framework. After considering those comments, EPA adopted a final rule that follows the proposed approach, with certain notable changes.

Under the final rule, BSER for existing EGUs consists of the following three building blocks:

  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.

The proposed rule had also suggested a fourth building block – reduction of emissions from EGUs in the amount that results from the use of demand-side energy efficiency to reduce the amount of generation required was identified as BSER – but that building block was eliminated in the final rule.

The final rule implements other changes, including that EPA’s mandatory emission reductions begin in 2022 instead of 2020 as proposed, with a gradual application of BSER over the 2022-2029 interim period; that source-specific performance rates are uniform for fossil fuel-fired electric utility steam generating units and stationary combustion turbines; and that rate-and mass-based state goals facilitate emission trading.

Implementation of the Standards

To implement the final rule, states must develop plans to meet the emission reduction goals. State plans may take an “emission standards” approach under which the state may establish emission standards for affected EGUs sufficient to meet the required performance rates or state goals. Alternatively, states may follow a “state measures” approach that allows states to impose state-enforceable measures on entities other than affected EGUs, with backstop emission standards applicable to affected EGUs that would be triggered if the plan failed to achieve the required emission reductions. A state must submit a final plan by September 2016, or submit an initial plan with a request for an extension to September 2018 to submit a final plan.

Certain affected EGUs do not need to be included in state plans, including reconstructed or modified units subject to the NSPS for new, modified or reconstructed EGUs at 40 C.F.R. Part 60 Subpart TTTT, steam generating and integrated gasification combined cycle units subject to limits on annual net-electric sales, non-fossil fuel units, stationary combustion turbines that are not physically capable of combusting natural gas, combined heat and power (CHP) units, units that serve a generator along with other units where the generation capacity is 25 MW or less, municipal waste combustors, and commercial or industrial solid waste incineration units.

EPA has proposed a rate-based model trading rule and a mass-based trading rule intended to help facilitate the use of a trading system to achieve compliance with the state emission reductions. EPA has also indicated that a state program that follows the model trading rules would be presumptively approvable. EPA intends to finalize both model trading rules in summer 2016, and has requested comment on numerous aspects of the model rules.

EPA has also proposed two approaches a rate-based approach and mass-based approach– for federal plans that would be adopted on a state-by-state basis when a state does not submit a plan or EPA does not approve the plan. EPA will select a single approach for use in all states in which it adopts a federal plan. EPA has requested comment on its intent to finalize a single approach, as well as whether to adopt the rate- or mass-based approach.

What This Means to You

The final rule for new, modified, and reconstructed EGUs went into effect on October 23, 2015, and the final rule for existing EGUs will go into effect on December 22, 2015. However, any person or business that is “adversely affected or aggrieved” by EPA’s adoption of the rules can file a petition for judicial review and request the court to postpone the effective date pending review. At this time, challenges to the rule have already been filed by 24 states, and challenges by regulated EGUs and industry groups will almost certainly be filed as well.

Implementation of the final rules could significantly impact businesses with high energy demands in two ways: (1) higher electricity prices, and (2) increased demand for control equipment, components of combined cycle and renewable EGUs, and equipment exempt from the emission standards.

With respect to the emission standards relating to existing EGUs, EPA acknowledges that the delivered natural gas price is projected to increase by an average of 7 percent over the 2022-2030 period, and that projected wholesale electricity prices were projected to increase by less than 4 percent over the same period. In addition, it states that changes in natural gas and electricity prices as well as coal prices “can impact markets for goods and services produced by sectors that use these energy inputs in the production process or supply those sectors,” and that changes in the cost of production “may result in changes in prices, quantities produced, and profitability” of affected manufacturers. With respect to the emission standards for new, modified, and reconstructed EGUs, EPA states that it does not anticipate that the rules will have any impact on the price of electricity, but bases this conclusion on the assumptions that the owners of newly constructed facilities “will likely choose technologies that meet the standards even in the absence of this rule, due to existing economic conditions as normal business practices” and that few units will trigger the modification and reconstruction provisions.

However, the new rules may also benefit manufacturers of heat rate control equipment for coal-fired steam EGUs, natural gas combined cycle equipment, and equipment used in new zero-emitting renewable energy generating units, as implementation of the rules will likely increase demand for such equipment. Which manufacturers will be most significantly impacted will depend primarily on the approach adopted by each state. In addition, the new rules may encourage the development of units exempt from the rules, including CHP units that may be located at large manufacturing facilities.

Submission of comments regarding the proposed rate- and mass-based model trading rules could impact the development of your state’s plan, as EPA has indicated that state programs adhering to the model trading rules would be presumptively approvable. In addition, submission of comments to EPA regarding the proposed rate- and mass-based federal plans for adoption on a state-by-state basis could significantly impact regulation of EGUs in your state, as the federal plan will control if the state decides not to develop an implementation plan or if its proposed plan is not approved by EPA. Comments must be submitted by January 21, 2016.