On September 20, 2013, the U.S. Environmental Protection Agency (EPA) proposed New Source Performance Standards (NSPS) for regulating the emissions of carbon dioxide (CO2) from new fossil fuel-fired electric utility generating units (EGUs) that produce at least 219,000 megawatt-hours of electricity (MWh) per year. EPA proposes separate standards for natural gas-fired stationary combustion turbines and coal-fired utility boilers and integrated gasification combined cycle (IGCC) units that are both in the 1,000 to 1,100 pounds of CO2 per megawatt-hour (lb CO2/MWh-gross) range, taking into account unit size (for gas-fired units) and compliance period alternatives (for coalfired units).

The proposed NSPS reflects a significant refinement of EPA’s legal and technical justification for the rule, compared to EPA’s 2012 NSPS proposal. However, by continuing to propose an emission standard for coal-fired power plants that will require the implementation of partial carbon capture and storage (CCS), the proposal is nearly certain to draw legal challenges from developers of coal-fired power plants and utility industry groups. Ultimately, the proposal demonstrates that EPA is not backing down from regulating greenhouse gas (GHG) emissions, upon which President Obama has, in part, staked his second term legacy. The proposal is also significant for what it might reveal with respect to the existing power plant standards that EPA will propose in 2014 and that have the potential to achieve significant GHG emissions reductions from the electricity sector.

EPA released its pre-publication version of the proposed rule on September 20, 2013. EPA will accept comments on the proposal for 60 days after publication of the rule in the Federal Register. The proposed rule is available at:  http://www2.epa.gov/sites/production/files/2013-09/documents/20130920proposal.pdf.

Background

On April 13, 2012, pursuant to Clean Air Act (CAA) section 111(b), EPA proposed, for the first time, an NSPS to limit CO2 emissions from new fossil fuel-fired EGUs. The 2012 proposal would have required natural gas-fired stationary combustion turbines  and coal-fired utility boilers and IGCC units to all meet the same “standard of performance” of no more than 1,000 lb CO2/MWh. EPA based this proposed standard on the performance of natural gas combined-cycle (NGCC) technology, which is currently in wide use throughout the United States and represents the majority of the new electricgenerating capacity that will be built through 2030.

The 2012 proposed NSPS contemplated that new coal-fired boilers and IGCC units would be able to meet this standard by employing CCS. Further, the 2012 proposal would not have applied to new simple-cycle power plants (plants that do not capture waste heat to generate more power or useful thermal energy) or power plants that burn biomass.

EPA was supposed to, but did not, finalize the 2012 proposal in April 2013. After some doubt about whether EPA or the White House would entirely scrap EPA’s 2012 proposed NSPS, on June 25, 2013, President Obama directed EPA to issue a new NSPS proposal for regulating the CO2 emissions from new power plants by September 20, 2013 and propose CO2 guidelines for existing power plants by June 1, 2014.

According to EPA data, the average natural gas-fired power plant emits 1,135 lb CO2/MWh, while the average coal-fired power plant emits 2,249 lb CO2/MWh. On the other hand, new NGCC plants emit 1,000 lb CO2/MWh or less, while new coal-fired plants emit 1,800 lb CO2/MWh or less.

Performance Standard For New Coal-Fired Utility Boilers and IGCC Units

EPA proposes a “standard of performance” for fossil fuel-fired utility boilers and IGCC units of 1,100 lb CO2/MWh-gross over a 12-operating month period, or 1,000-1,050 lb CO2/MWh over an 84-operating month (7-year) period. (EPA’s standard of performance would apply to all new fossil fuel-fired utility boilers, but its analysis focuses on coal-fired boilers.) Regardless of the compliance period the source owner elects, the standard of performance would require institution of partial CCS (i.e., capture of 35- 50% of CO2 emissions, depending on the plant’s base efficiency).

Under the CAA, a “standard of performance” is “a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements) [EPA] determines has been adequately demonstrated.” EPA refers to this simply as the best system of emission reduction standard, or BSER.

EPA considered three alternatives in its BSER analysis for new coal-fired utility boilers and IGCC units: (1) highly efficient new generation that does not include CCS technology, (2) highly efficient new generation with “full capture” CCS and (3) highly efficient new generation with “partial capture” CCS. EPA rejects the first alternative because it “would inhibit the development of technology that could reduce CO2 emissions significantly, thus defeating one of the purposes of the CAA’s NSPS provisions.” On the other hand, EPA rejects the second alternative of “full capture” CCS because it is outside the range of costs that companies are considering for comparable electricity-generating resources.

EPA settles on the “partial capture” CCS option as BSER because, comparing the levelized cost of electricity of different technologies other than NGCC, EPA analysis shows that the costs of coal-fired boilers and IGCC units with partial CCS are in the range of $92/MWh to $110/MWh, which is comparable to the costs of other non-NGCC generation  (e.g., nuclear or geothermal). Further, EPA points to the Southern Company’s Kemper facility in Mississippi and SaskPower’s Boundary Dam project in Sackatchawan, which are both currently under construction and incorporate CCS, as demonstrating the technical feasibility of the standard of performance.

While EPA discusses extensively the cost and technical basis for every phase of CCS (i.e., CO2 capture technologies, transportation logistics, and different storage or sequestration techniques), EPA is sure to face stiff opposition regarding its cost estimates and the overall feasibility of CCS, such as whether there are sufficient sequestration sites for captured CO2.

Performance Standard For New Natural-Gas Fired Stationary Combustion Turbines

Additionally, EPA proposes a standard of performance of 1,000 lb CO2/MWh-gross for larger gas-fired units (i.e., greater than 250 MW) and 1,100 lb CO2/MWh-gross for smaller gas-fired units (i.e., 73-250 MW). Ultimately, EPA’s standard of performance for new gas-fired turbines is based on EPA’s determination that NGCC technology reflects BSER because “it is technically feasible and relatively inexpensive, its emission profile is acceptably low, and it would not adversely affect the structure of the electric power sector.”

EPA also proposes that applicability of either NSPS (i.e., standards for coal- and gas-fired units) should be based on electric sales, such that the proposed standards of performance apply to a facility if the facility supplies more than one-third of its potential electric output and more than 219,000 MWh net electric output to the electric grid per year averaged over three years. This would effectively exempt simple cycle turbines from the NSPS because such turbines are constructed as “peaking” units: only 0.2% of existing simple cycle turbines have a three-year average capacity factor of greater than one-third.

Impact Of NSPS On Upcoming Rulemaking To Establish Existing Power Plant Rule

In its 2012 NSPS proposal, EPA proposed to combine electric utility steam generating units (boilers and IGCC units, which are currently included in the NSPS Subpart Da category) and certain combined cycle units (which are currently included in the Subpart KKKK category) into a new category (Subpart TTTT) solely for the purposes of GHG emissions regulation under the NSPS.

In the September 20, 2013 proposal, EPA indicates that it is considering two options for codifying the substantive requirements of the NSPS. Under the first option, EPA would codify the CO2 NSPS for electric utility steam generating units in Subpart Da and the standard for stationary combustion turbines in Subpart KKKK. In the alternative, EPA would create a new Subpart TTTT (like the 2012 proposed rule) and include all standards of performance for covered sources in that subpart. Unlike the 2012 proposal, the subpart would contain two different sub-categories: (1) one for utility boilers and IGCC units and (2) one for natural gas-fired stationary combustion turbines. EPA has discretion to establish sub-categories of sources under section 111(b) of the CAA.

This distinction is especially relevant for what comes next: EPA must propose a rule for regulating the CO2 emissions of existing power plants under CAA section 111(d) in 2014. Under section 111(d), EPA likely has significant discretion to establish a so-called “emission guideline”, which serves as the benchmark for states to establish emissions standards regulating existing power plants in each state. According to some prominent proposals, EPA could use its section 111(d) authority to allow averaging, banking, and, trading (ABT) among sources in the source category or allow a cap-and-trade system as BSER.

However, such flexible market-based mechanisms may need to be limited to the regulated source category. Accordingly, if EPA were to keep the existing Da and KKKK categories, one might argue that it could not authorize trading of emissions credits between existing coal-fired and gas-fired plants. On

the other hand, if the proposed TTTT category were established, then no such argument could be made and EPA would face one less obstacle in establishing an emissions guideline for coal-fired and gas-fired power plants which allows trading between the two sub-categories. In either case, an emission guideline which authorized trading would arguably be a more efficient and cost-effective result than source-by-source regulation. Accordingly, EPA seeks comment in its September 20, 2013 proposal on whether the TTTT category “will offer any additional flexibility for any future emission guidelines for existing sources, for example, by facilitating a system-wide approach, such as emission rate averaging, that covers fossil-fuel fired steam generating units and combustion turbines.”

Conclusion

EPA is proposing stringent new standards for new power plants. While EPA’s economic model suggests that no new coal-fired power plants will be built in the near-term regardless of its rule, some utilities may seek additional new coal-fired generation for fuel diversification purposes. Further, EPA’s proposal opens the door for stakeholders to begin providing input on how EPA’s proposed new plant standards may influence the structure or design of the existing plant standards, which, unlike the NSPS, have the potential to provide significant reductions in GHG emissions from the electricity sector that are not already likely to occur due to market forces. Given the potential consequences of its proposal, EPA is sure to face a political and legal fight ahead.