In a much-anticipated action, the US Environmental Protection Agency (EPA) has finalized a rule to replace the Clean Power Plan previously promulgated by the Obama administration to reduce greenhouse gas emissions (GHGs) from power plants. On June 19, EPA revealed its final Affordable Clean Energy Rule (ACE). The ACE targets coal-fired electric utility generating units (EGUs) and provides what the Trump administration intends as achievable standards for reducing GHGs. The EPA’s move came in conjunction with two related but individual rulemakings: (1) the repeal of the Clean Power Plan (CPP), and (2) the finalization of new regulations for EPA and state implementation of ACE and any future emissions guidelines issued under Clean Air Act (CAA) Section 111(d).

The CPP was a key component of the Obama administration’s efforts to address climate change. The US Supreme Court stayed the CPP in 2016 amid legal challenges from several states and groups. Both the CPP and ACE are premised on the regulatory authority granted to EPA pursuant to Section 111(d) of the CAA. However, EPA has more recently signaled that CAA Section 111(d) would not be viewed as providing the agency with the broad authority to set performance standards that were contemplated by the CPP. After the CPP’s repeal, the EPA will be interpreting CAA’s authorization more narrowly, particularly as to the implementation of best system of emissions reduction (BSER). BSER is the best technology or other measure that has been adequately demonstrated to improve emissions performance for a specific industry or process.

ACE’s Positions, Guidelines, and Takeaways

The ACE only applies to coal-fired EGUs for now, but it could address BSER from other EGUs in later rulemaking. The ACE establishes heat rate improvement (HRI), or efficiency improvement, as the BSER. The EPA’s new stance is that defining BSER as what can be directly accomplished at an individual facility is the only appropriate interpretation of CAA Section 111. This interpretation differs from the CPP’s reading, which sought to go “beyond the fence” by allowing more flexible measures, such as generation shifting or emissions trading.

Also, the EPA does not set a presumptive numeric emission limit, as the ACE requires states to establish their own standard of performance for affected EGUs on a unit-specific basis. With HRI as the new BSER, the ACE lists six candidate technologies (as well as additional operating and maintenance practices) for states to choose from and provides information regarding the degree of emission limitation achievable for each candidate technology.

One of the notable changes between the 2018 ACE proposal and the newly finalized rule is the EPA’s decision to proceed with a separate rulemaking for New Source Review (NSR) rules for power plants. The NSR rules require facility operators to get a permit, with strict pollution control requirements, before building a new major facility or making “major modifications” to existing facilities. Different factors determine whether an upgrade constitutes a major modification, but the 2018 ACE proposal sought to change the heavily influencing factor—whether the modification results in a “significant increase” and a “significant net increase” in regulated pollutant emissions—to an hourly emissions test, instead of the annual test that the current NSR rules require. While EPA intends to take final action on NSR reform “at a later time,” it is unclear when this regulation will pass. Although agency officials claim the NSR program in its current format discourages plant owners from making efficiency upgrades, officials say that waiting for the new rulemaking should not affect states’ abilities to formulate implementation plans.

The EPA claims that the ACE will reduce GHG emissions by as much as 35% from 2005 levels by 2030, when combined with emissions reduction from industry trends. The agency claims that the ACE, by itself, will cut GHG emissions by 11 million tons by 2030.

Broader Implications and Uncertain Future

States will have broader discretion to draft standards and implementation plans without specific requirements or model plans. However, the ACE would appear to restrict states from adopting market-based or compliance mechanisms that rely on external reductions for flexibility. The ACE provides that compliance measures must be “inside the fence,” and prohibits the averaging and trading of compliance instruments between units. Thus, not only will plans likely vary from state to state, but there may be inconsistencies from unit to unit within any given state. These variations could affect rates or pollutant emissions differently than CPP’s regulations. Companies should pay close attention to these changes, especially those managing multiple units within a state or with multistate portfolios, because there will not be a bright line, uniform benchmark to follow.

Another important point to note is that most sources will not have to comply with the ACE for several years. The ACE requires that the states’ plans are due in three years of the final rule. This timeline could be longer if states adopt legally enforceable increments of progress to achieve compliance, or if a state submits an unacceptable plan.

In the meantime, we anticipate legal challenges to the ACE. California Attorney General Xavier Becerra and New York Attorney General Letitia James have already vowed to challenge the ACE. These lawsuits will likely focus, at least in part, on the EPA’s newly narrowed interpretation of the scope of CAA Section 111(d). EPA’s interpretation and assertion that this is the only reading of Section 111(d), and not just a better reading than the CPP’s interpretation, would appear to be a more risky legal position than was necessary.

The repeal of the CPP and adoption of the ACE will impact the regulatory planning and assessment at coal-fired EGUs and facilities competing with these EGUs.