On August 3, 2015, the Environmental Protection Agency (EPA) issued the “Clean Power Plan” (CPP). The much-anticipated final rule establishes limits on carbon (CO2) emissions from existing fossil-fuel electric generating units under Section 111(d) of the Clean Air Act.

Policy-makers and industry participants have raised a variety of legal and technical concerns since EPA first proposed the CO2 emissions limits in June 2014. The Federal Energy Regulatory Commission (FERC) and industry participants have focused particular attention on the potential impact of such limits on the reliability of the electric grid, given the massive changes in the energy supply portfolio envisioned by the proposed rule. As we reported in earlier coverage in Speaking Energy, in May of this year, all five sitting FERC commissioners signed a joint letter to EPA highlighting industry concerns regarding the timing of the proposed CO2 emissions reductions and outlining two potential roles that FERC (as well as planning authorities and reliability entities) could play to address any reliability issues that arise during the process of complying with a final rule. EPA adopted several changes in the final CPP to address potential legal challenges and technical concerns raised in response to the proposed rule. Among the changes are certain additional measures that respond to reliability concerns and the FERC commissioners’ suggestions regarding reliability issues.

Overview of Requirements to Reduce Carbon Emissions of Electricity Sector by 32 Percent

The CPP establishes standards of performance to limit CO2 emissions from two subcategories of existing fossil fuel-fired generating units: steam electric generating units (typically coal- and oil-fired) and natural gas combined cycle units.1  In aggregate, these standards will require an approximately 32 percent overall reduction in carbon emissions by the electricity sector from 2005 levels.

To calculate the final standards of performance, EPA concluded that three emissions reduction strategies (referred to as “building blocks”) represent the “best system of emission reduction . . . adequately demonstrated,” as required by the Clean Air Act. The three emissions reduction strategies used by EPA are (1) upgrading equipment and applying best practices to improve the operating efficiency (or “heat rate”) of coal-fired electric generating units; (2) shifting electricity generation from higher-emitting power plants (such as coal-fired, oil-fired or inefficient natural gas-fired plants) to lower-emitting combined cycle natural gas-fired plants; and (3) substituting electricity generated by high-emitting fossil fuel power plants with electricity generated by new renewable energy resources. EPA applied these emissions reduction strategies to existing fossil fuel-fired generating units covered by the rule to determine an achievable emissions rate limit, which it then set as the performance standard. In the final CPP, EPA did not include a fourth emissions reduction strategy that it had included in the proposed rule—emissions reductions resulting from increased demand-side energy efficiency—due to concerns that such measures fall outside of federal jurisdiction. States may continue to use such measures to achieve required emissions reductions, however.

In addition to setting source-specific standards of performance, the CPP also establishes state-specific CO2 emissions goals, which reflect the weighted aggregate of the standards of performance when they are applied to affected generators in each state. While the source-specific standards of performance are uniform nationwide, the state-specific goals vary, because they are based on each state’s unique mix of affected generators. EPA established the state-specific goals in three forms: (1) a rate-based goal, expressed as pounds (lbs) per megawatt hour (MWh); (2) a mass-based goal, which is a cap on total short tons of CO2 emitted; and (3) a mass-based goal with a “new source complement,” also expressed as a cap on total short tons of CO2 emitted, which allows a state to use the same compliance plan to address carbon emissions from both existing and new generators.2

The CPP requires each state to develop a compliance plan that describes the measures it will take to achieve the required emissions reductions. By establishing both source-specific emissions performance standards and state-specific emissions goals, the CPP allows states to choose to comply in a number of ways. For example, a state can simply adopt a plan that imposes the federally enforceable, source-specific emissions performance standards adopted in the CPP on individual affected generators in their state. Alternatively, a state could adopt a plan that pursues broader energy-supply-mix changes that have the effect of reducing emissions from those affected generators, provided that the end result is overall emissions that meet its state-specific goal. An example of the latter would be replacing a portion of the output of a fossil fuel-fired generator with electricity generated by new lower- or zero-carbon resources or with energy savings from the implementation of efficiency programs. A state plan could also combine both approaches.

The CPP sets forth both interim and final emissions performance standards and state goals. The interim compliance period begins in 2022 and includes three “interim performance periods” (2022-2024, 2025-2027 and 2028-2029) that are intended to establish a more gradual “glide path” of emissions reductions over time while putting milestones in place to ensure that states are making progress toward the final required reductions. States will be required to demonstrate that they have achieved the interim milestones, on average, over the two to three years of each interim performance period and that they have met the interim goals, on average, during the entire eight years of the interim period. The final emissions performance standards or state-specific goals must be achieved by 2030. To comply, states will be required to meet those standards or goals, on average, over two-year periods going forward.

Final state compliance plans or an initial compliance plan with a request for extension must be submitted to EPA by September 6, 2016, and all completed final compliance plans must be submitted by September 6, 2018. If a state does not submit a compliance plan, EPA can promulgate a federal plan for that state.3

In the final CPP, EPA made several important changes and additions to its original proposal, including (but not limited to):

  • increasing the overall emissions reductions required by 2030 from 26 to 30 percent to approximately 32 percent
  • delaying the start of the interim compliance period from 2020 to 2022 and adjusting the pace of required emissions reductions during the interim period to provide for a more gradual phase-in
  • adding a “Clean Energy Incentive Program” through which states can receive additional emissions credits or allowances for early adoption of wind and solar generation, or the implementation of energy efficiency programs in low-income communities
  • providing additional guidance and proposing or adopting design features (including proposed model rules) intended to support multistate emissions trading as a means of compliance.

Electric Grid Reliability Considerations

EPA responded to concerns regarding the potential impact of the CPP on electric grid reliability in a number of ways. First, it pointed to the overall design and structure of the rule itself as “intended to support system reliability.”. For example, EPA states that the overall flexibility of the final rule, including the ability to use a variety of state plan types and emissions reduction measures, and the opportunities for trading compliance obligations within and between states, will allow the industry to maintain reliability as it complies with the rule’s requirements, in part by allowing states to design emissions limits that account for reliability-critical generators. EPA suggests that relatively inflexible plans imposing emissions performance standards on individual generators, in particular, may be more likely to encounter reliability issues when those generators are needed for reliability, but are running into their emissions limits.

To address the concerns of FERC’s commissioners and others that the proposed interim compliance requirements would not provide sufficient time to allow affected entities to meet the required reductions while maintaining reliable service, EPA pushed the start of the interim compliance period two years later, from 2020 to 2022, and adjusted the interim goals to give affected entities additional flexibility to phase-in the rule’s requirements and develop any needed infrastructure.

EPA also included three “reliability assurance mechanisms” in the final CPP to address potential electric grid reliability issues:

  • State Plan Demonstration - Each state is required to demonstrate that it has considered electric reliability issues in the development of its plan. While EPA makes clear that it will not substantively evaluate reliability impacts when reviewing state plans, the agency argues that this requirement will help ensure that an effective reliability evaluation takes place so that future conflicts between state plans and reliability are avoided.

EPA encourages states to consult with the relevant Independent System Operator/Regional Transmission Organization (ISO/RTO) or other planning authority regarding potential reliability impacts, and to document the consultation process, the recommendations made by the ISO/RTO or planning authority, and the state’s response to those recommendations in its final state plan submittal. EPA emphasizes that this consultation is “designed to inform how the state might adjust its plan for meeting the CO2reduction requirements” while maintaining reliability and “is not a basis for relaxing” the requirements. In addition, EPA encourages state environmental regulators to consult with state utility regulators and state energy offices when developing their compliance plans.

  • State Plan Amendments - The final CPP allows a state to seek approval from EPA to amend its approved state plan if, during implementation, a reliability issue emerges that cannot be addressed through actions or measures already in the plan. In cases where a state requests expedited review of proposed amendments to its plan, EPA will require the state to obtain an analysis of the reliability risks from an ISO/RTO or other planning authority with a conclusion that “there are no practicable alternative resolutions to the reliability risk.” 
  • Reliability Safety Valve - This provision allows a state to temporarily modify its plan to permit an affected generator to exceed its emissions limit (up to a new temporary limit) for 90 days to provide “reliability-critical generation in emergency circumstances.”  The reliability safety valve is available for only “extremely serious events, outside the control of affected [generators].”  For this mechanism to apply, (1) the event causing the reliability emergency must be “unforeseeable, . . . extraordinary, unanticipated, [and] potentially catastrophic; (2) operation of the generator in question must be necessary to avoid “some form of failure”; and (3) the applicable state plan in question must impose emissions limits such that operation of the generator at issue will result in emissions levels that violate those limits.

Examples of the kinds of circumstances under which the reliability safety valve would apply include catastrophic events that damage equipment necessary for reliable grid operation, weather events that damage a generator and require it to shut down, and the unexpected loss of a nuclear unit. EPA warns that generators operating under a state plan that allows for emission trading would not be likely to meet these criteria. A state seeking to use the reliability safety valve will be required to submit extensive documentation regarding the reliability concern and how it is coordinating with reliability authorities to address the situation. The state must provide a written concurrence from the relevant reliability coordinator and/or planning authority confirming the “imminent reliability threat” and the need to establish temporarily higher emissions limits for the generator.

If the reliability issue extends beyond 90 days, the state must submit a state plan revision to establish new emissions performance standards for the affected generator, along with a second written confirmation from the relevant reliability coordinator that there are no other reasonable ways to address the reliability issue.

While FERC and other federal agencies have no formal role in the reliability assurance mechanisms, EPA explains that it will coordinate its efforts and work with the Department of Energy and FERC to monitor electric grid reliability and address any issues that may arise as implementation of the final CPP progresses.

In a separate memorandum made public concurrently with the final CPP, the three agencies set forth a joint strategy for monitoring the development of state compliance plans, based largely on their approach to monitoring potential reliability issues during the implementation of the Mercury and Air Toxics standards. The agencies commit to holding regular meetings (no less than quarterly) to discuss any potential reliability concerns that arise during the development of state plans, and to meet to determine approaches to resolve reliability issues that do arise. The memorandum describes specific steps each agency will take to monitor state plan development. FERC “will continue to focus on issues related to the CPP involving the reliability of the power grid, the efficient operation of wholesale electricity markets and the potential for need for additional energy infrastructure, especially new electric transmission and natural gas interstate pipelines,” and will stay informed about the development of state plans and provide assistance to EPA on “reliability and other matters as requested.” 

While it appears that FERC will remain in a monitoring role, it will likely have a significant say in addressing any potential reliability impacts, ensuring that needed infrastructure is developed and ensuring that wholesale markets adapt as implementation progresses. In separate public statements posted following the issuance of the CPP, Commissioners Tony Clark, Collette Honorable, Cheryl LaFleur and Phillip Moeller, while expressing varied opinions on the merits of the rule, all highlighted, to some degree, these potential FERC roles.