The Environmental Protection Agency (EPA) proposed the Affordable Clean Energy (ACE) rule on August 21. The proposed rule would replace the Obama administration’s Clean Power Plan, establishing alternative guidelines for states to develop plans to reduce carbon dioxide emissions from existing fossil fuel-fired electric power plants. The ACE rule departs from the Clean Power Plan, among other ways, by removing incentives for natural gas and renewable energy use, limiting averaging and trading in state plans, giving states more flexibility in creating plans, slowing down state plan development and submission schedules, and proposing a new industry friendly test for the New Source Review permitting process. Overall, EPA has projected that the ACE rule will result in similar carbon dioxide emissions reductions in comparison to the Clean Power Plan.

By way of background, Section 111(d) of the Clean Air Act directs EPA to establish standards of performance for limiting nonhazardous or “criteria air pollutant” emissions from stationary existing sources. The section secures emissions reductions for existing sources via a federal-state collaboration. Under the program, EPA first promulgates guidelines for the best system of emission reduction (BSER) for a specific pollutant, listed source category, and the related achievable emissions reductions. States are then given flexibility to make and submit plans to EPA to achieve the emissions reductions for an existing source. EPA reviews the state plans and may or may not approve them. If a state does not submit a satisfactory plan, EPA develops and implements a federal plan.

The ACE rule contains three main parts, including proposals:

First, EPA determined the BSER for fossil fuel power plant CO2 emissions. EPA concluded that coal-fired power plants can reduce CO2 emissions by making on-site efficiency upgrades – “heat rate improvements.” Further, EPA has determined that heat rate improvement is the BSER for affected existing coal-fired power plants and proposes a list of “candidate technologies” of heat rate improvement measures for states to use in establishing standards of performance under the Clean Air Act. EPA is not proposing a specific methodology for establishing standards of performance for existing sources in this action. Under EPA’s new approach, states have been given more flexibility to consider the candidate technologies and determine how to apply standards of performance to sources. The new rule does not propose BSER determinations regarding heat rate improvement for natural gas simple cycle turbines and combined cycle turbines.

Second, EPA seeks to create new implementing regulations that “make it clear that states have broad discretion in establishing and applying emissions standards consistent with the BSER.” EPA will do so, in part, by providing additional guidance to the states to help them develop their state plans, more time for state and EPA action on plans, and providing states additional flexibility and latitude to develop plans that include variances from the EPA guidelines regarding the remaining useful life of existing source and other factors in determining a performance standard.

Third, EPA proposes revisions to the New Source Review (NSR) permitting program that allows facilities to adopt heat rate improvements without having to comply with onerous NSR modeling and control obligations. Whether an action constitutes a “major modification” of the facility, triggering NSR, is based in part, on an assessment of the annual emissions rate that a modified unit is projected to emit over a certain period. EPA proposes a new hourly emissions increase test, instead of an annual one, for determining whether a physical or operational change made to a power plant constitutes a major modification that triggers NSR. Under the new approach, only projects that increase a facility’s hourly rate of pollutant emission would trigger an NSR analysis.

In addition to the above three main parts of the rule, the ACE rule departs significantly from the Clean Power Plan in two respects. First, EPA has determined that “there are both legal and practical concerns [that] may weigh against the inclusion of averaging and trading between existing sources in state plans at any level more broad than averaging between sources across a particular facility.” This determination means that EPA would reject state plans that include statewide or interstate cap-and-trade programs. Second, EPA has reinterpreted the Clean Air Act to exclude increased generation from natural gas or renewable energy as BSERs for CO2 emissions. As such it will not credit those actions in its review of state plans.

EPA expects that approximately 600 coal-fired electric generating units at 300 facilities could be covered by this proposed rule. It also projects that this rule could result in $3.4 billion in net benefits, including $400 million annually while at the same time reducing “CO2 emissions by up to 1.5% from projected levels” by 2030. EPA projects that when “states have fully implemented the ACE rule, U.S. power sector CO2 emissions could be around 34% below 2005 levels” – which is similar to that of the 36% reduction estimates under the Clean Power Plan. Comments on the rule will likely be due in October 2018.