On June 2, 2014, the U.S. Environmental Protection Agency (“EPA”) announced proposed regulations to limit greenhouse gas emissions from existing fossil fuel fired electric generating units (“EGUs”)(the “Clean Power Plan”). These sweeping regulations establish rate-based (pounds of CO2 per MWh), state-specific goals for carbon dioxide emissions which will require an overall 30% reduction of greenhouse gas emissions by the electricity sector from 2005 levels by 2030.

If enacted, the regulations will be the most significant step taken by the EPA to implement President Obama’s pledge to reduce greenhouse gas emissions by 17% over 2005 levels by 2020, and by 83% by 2050. The electricity sector is the largest single source of greenhouse gas emissions in the United States, accounting for 40% of total emissions.

The Clean Power Plan is the most ambitious set of regulations proposed by EPA to reduce greenhouse gas emissions, and will have a profound impact on the electricity sector, the mining and gas industries, manufacturing, and electricity consumers.

Important Dates

  • June 2, 2014 – EPA announces the proposed regulations
  • 120 day public comment period which runs from the date of publication in the Federal Register
    • July 29, 2014 – Public hearing held in Atlanta, Georgia
    • July 29, 2014 – Public hearing held in Denver, Colorado
    • July 31, 2014 – Public hearing held in Pittsburgh, Pennsylvania
    • July 28th -August 1st – Public hearing held in Washington, D.C.
  • June 1, 2015 – EPA anticipates finalizing the Clean Power Plan
  • June 30, 2016 – Amended State Implementation Plans (“SIP”) which incorporate the regulations are due, although states can request up to an additional two years to complete their amended SIPs
  • June 30, 2017 – EPA proposes to approve or deny each SIP within twelve months of submittal
  • January 1, 2022 – Each state must compare the emissions performance achieved by affected EGUs with the emissions performance projected in the SIP and report the results to EPA
  • 2020-2029 – States must comply with the interim average emissions-intensity goals
  • 2030 – States must comply with the final emissions-intensity goals

Who It Affects

Existing EGUs

The Clean Power Plan applies to approximately 1,000 fossil-fuel fired EGUs. Because the regulations limit emissions using a rate based formula they will have a higher impact on EGUs that have a higher greenhouse gas emissions to power output ratio – namely, coal fired EGUs. Coal fired power plants represent approximately 37% of national electric power generation, but 74% of the greenhouse gas emissions from the electricity sector, compared with natural gas fired power plants which account for approximately 30% of electricity generation, but only 24% of the greenhouse gas emissions from the electricity sector. As a result, there will likely be an increased demand for natural gas fired electricity generation.

Market Based Program Options

The Clean Power Plan also allows states to include cap-and-trade, or emissions credits programs into their SIPs. Depending on how these programs are structured, the Plan may provide opportunities for nonregulated entities to generate emissions credits by reducing their demand for electricity supplied by fossil fueled central station generation. While the specifics of these incentive programs will only be finalized once the EPA approves the SIPs that include them, it is likely that California and the states that participate in the Regional Greenhouse Gas Initiative will include similar programs in their SIPs.

Large Energy Consumers Policing Utility Cost Pass Through

Utilities that rely heavily on coal fired power plants are expected to bear a large share of the costs of implementing the Clean Power Plan. Other utilities that rely on natural gas fired EGUs, or alternative energy sources are likely to bear less of the cost of compliance, however, they will likely still incur some additional costs. These costs are likely to be passed down to customers as utilities implement the changes required to meet the rate based goals.

However, depending on the way that states structure their SIPs, there is the possibility that industry may be able to generate emissions credits by reducing their demand for electricity supplied by fossil fueled central station generation.

How It Works

The Clean Power Plan is a departure from the traditional means of regulating most air pollutants under the Clean Air Act. Instead of setting national emissions standards for each pollutant, the Clean Power Plan utilizes EPA’s authority under Section 111(d) of the Act to set state-specific limits on the rate based carbon intensity of each state’s electric power sector, and requires the states to come up with their own plans for meeting those reduction goals, expressed in amended SIPs.

  • In determining the emissions goals for each state, the EPA considered four “building blocks” which collectively make up the “best system for reducing carbon pollution,” as follows:
  • Improving energy efficiency at fossil fuel power plants. One suggested method of increasing efficiency at existing plants is to increase heat rates at coal-fired power plants by 6%.
  • Operating existing lower greenhouse gas emitting sources more frequently, for example by encouraging the dispatch of natural gas combined cycle plants so that they would operate with as much as a 70% capacity factor.
  • Increasing electricity generation from zero and low emitting sources such as solar, wind and nuclear power sources.
  • Reducing electricity demand aimed at 1.5% annual electricity savings from 2020-2029.

EPA applied these building blocks to each state’s existing electric generation fleet to arrive at each state’s emissions intensity goals.

State Implementation

The Clean Power Plan provides the states with significant flexibility in meeting the emissions goals depending on how states structure their compliance plans.

Rate Based Emissions

States may use any combination of the four building blocks that they wish to achieve the reductions in rate based emissions.

Mass-Based Limits

In addition, the Clean Power Plan allows states to use an aggregate limit on total CO2 emissions from that state. This would allow states to set a hard cap on the volume of EGUs’ CO2 emissions and set up a trading program for EGUs that wish to emit over the rate based limit. These types of trading programs could be state-specific, or could include several states to create a larger marketplace for emissions credits.

Conclusion

The Clean Power Plan will no doubt be the subject of extensive public comments from industry, citizen, and environmental groups, and will likely face extensive legal challenges. However, the EPA is proposing the regulations in the wake of two high profile legal victories. First, the D.C. Circuit upheld EPA regulations limiting emissions from the cement industry, finding that the emissions-related provisions of EPA’s National Emission Standards for Hazardous Air Pollutants for the Portland Cement Manufacturing Industry and Standards of Performance for Portland Cement Plants, were permissible. Second, the Supreme Court upheld EPA’s Cross-State Air Pollution Rule (“Transport Rule”), holding that EPA had correctly applied the Good Neighbor provisions of the Clean Air Act to amend State Implementation Plans to combat the spread of air pollution from upwind states to downwind states.

The Clean Power Plan will reshape the electricity sector, and all upstream and downstream industries that are related to it.