To Our Clients and Friends Memorandum friedfrank.com Copyright © 2015 Fried, Frank, Harris, Shriver & Jacobson LLP 08/07/2015 A Delaware Limited Liability Partnership 1 EPA Issues Ambitious Clean Power Plan Mandating Significant Reductions to GHG Emissions from the Power Industry by 2030 On August 3, 2015, President Obama announced the release of the Environmental Protection Agency’s (EPA’s) Clean Power Plan, an ambitious regulation aimed at limiting carbon dioxide (CO2) emissions from existing fossil fuel-fired power plants.1 The Clean Power Plan, issued pursuant to EPA’s authority under Section 111(d) of the Clean Air Act (CAA) to issue and enforce performance standards for existing emissions sources, calls for a 32% nationwide reduction of CO2 emissions from 2005 levels by 2030. Under the Clean Power Plan, the overall 32% reduction is to be achieved through emissions targets set by EPA, to be phased in beginning in 2022. By regulating the largest contributor to greenhouse gas (GHG) emissions in the United States – electricity generation – the Clean Power Plan represents the most aggressive action to date by the Obama administration to combat climate change, and is expected to boost the United States’ efforts to encourage other nations to adopt GHG emissions controls at the upcoming international climate change negotiations in Paris this fall. Once implemented, the Clean Power Plan is expected to have a significant impact on the way electricity is generated in the United States, with coal-powered electricity generation giving way to renewables and, to a lesser extent, natural gas. However, the Clean Power Plan faces significant hurdles, including pending and anticipated legal challenges attacking EPA’s expansive and novel reading of Section 111(d), the announced intention of several states to refuse to comply with the Clean Power Plan and an uncertain political landscape after the upcoming presidential election. Background The Clean Power Plan is the latest in a chain of legal developments in the evolution of the regulation of CO2 and other GHG emissions in the United States, beginning with the Supreme Court’s decision in Massachusetts v. EPA, 549 U.S. 497 (2007), in which the Supreme Court held that GHGs constitute “pollutants,” as that term is defined by the CAA. In the face of Congress’s unwillingness to pass climate change legislation, EPA proceeded to use the Massachusetts v. EPA decision as a basis to address climate change pursuant to its authority under the CAA. In December 2009, EPA issued a finding that 1 Available at: http://www.epa.gov/airquality/cpp/cpp-final-rule.pdf. Fried Frank Client Memorandum 2 GHG emissions endanger the public health and welfare.2 This “endangerment” finding created the legal basis for the first of EPA’s efforts to regulate GHG emissions, including limitations of GHG emissions from vehicles and the application of the CAA’s Prevention of Significant Deterioration (PSD) permitting program to GHG emissions.3 The Clean Power Plan fulfills EPA’s pledge to regulate GHG emissions from existing power plants in the wake of the Massachusetts v. EPA decision. At the time of the Supreme Court’s decision, a group of plaintiffs, including several states and environmental groups, were challenging a 2006 EPA rule for failure to regulate power plant GHG emissions under Section 111 of the CAA in federal court. That provision requires EPA to develop emissions standards with respect to any new and existing stationary sources that EPA determines “causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare.”4 In light of the Supreme Court’s decision in Massachusetts v. EPA, in 2010, EPA changed course and settled the litigation, agreeing to issue emissions standards with respect to GHG emissions from new and existing fossil fuel-fired power plants. In July 2013, the Obama administration announced its intent to issue these standards as part of the Climate Action Plan.5 Emissions standards for new power plants, known as New Source Performance Standards (NSPS), were initially issued in draft form by EPA in September 2013.6 (A final version of these rules were announced concurrently with the Clean Power Plan 7 ). These standards require that new coalfired power plants include carbon capture and sequestration (CCS), a new, expensive technology that has had limited commercial implementation, and that new natural gas-fired power plants include natural gas combined cycle (NGCC) technology. Overview of the Clean Power Plan EPA’s Building Block Approach. The Clean Power Plan is based on EPA’s authority under Section 111(d) of the CAA, which authorizes EPA to issue emissions guidelines requiring states to develop and submit to EPA plans establishing “standards of performance” for existing sources in a source category that is subject to a NSPS. Because fossil fuel-fired power plants, as a source category, are subject to NSPS, EPA asserts that it is mandated to regulate existing fossil fuel-fired power plants under Section 111(d). EPA’s approach to regulation of existing power plants under the Clean Power Plan is novel. Under Section 111(d), EPA is required to determine the “best system of emissions reduction” (BSER) for the regulated source category. However, under the Clean Power Plan, rather than interpreting BSER as consisting of particular technologies designed to reduce CO2 emissions from individual power plants 2 74 Fed. Reg. 66496. 3 75 Fed. Reg. 31514. In Utility Air Regulatory Group v. EPA, 134 S. Ct. 2427 (2014), the Supreme Court narrowed this rule and held that EPA could only apply GHG emissions limitations under the PSD program to sources already subject to PSD permitting based on non-GHG emissions. 4 42 U.S.C. 7411(b). 5 Available at: https://www.whitehouse.gov/sites/default/files/image/president27sclimateactionplan.pdf. 6 79 Fed. Reg. 1430. An earlier rule proposing NSPS for fossil fuel-fired power plants was issued in 2012 and later withdrawn. 7 Available at: http://www.epa.gov/airquality/cpp/cps-final-rule.pdf. Fried Frank Client Memorandum 3 subject to EPA regulation, such as the mandates for CCS and NGCC under the NSPS for new power plants described above, EPA determined that BSER consists of three strategies, or “building blocks,” in the parlance of the Clean Power Plan, that in combination would reduce aggregate CO2 emissions from the power sector across a given state. The building blocks include: 1. Improving the efficiency, or “heat rate,” of coal-fired power plants, 2. Shifting electricity generation from coal-fired power plants to lower emitting existing NGCC plants, and 3. Shifting electricity generation from fossil fuel-fired power plants to new wind, solar and other renewable sources.8 EPA then calculated emissions targets based on the aggregate CO2 emissions reductions that it determined can be achieved through the use of the building blocks. The Clean Power Plan expresses these targets in three different ways, each of which is designed to achieve equivalent emissions reductions overall: as statewide rate-based emissions reduction targets (i.e., reductions in pounds of CO2 emitted per megawatt of electricity generated), statewide mass-based emissions reduction targets (i.e., reductions in the aggregate short tons of CO2 emitted) or emissions performance targets applicable to individual power plants. States have the option of choosing any of these targets. Taken together, EPA concluded that these targets would amount to an overall nationwide reduction in CO2 emissions of 32% by 2030 compared to 2005 emissions. Compliance Options and Timelines. States are required to prepare state implementation plans (SIPs) describing how they intend to comply with the targets and submit them to EPA for approval. States are free to develop their own strategies to meet the targets and are not required to use any of the building blocks identified by EPA. Thus, states may choose to incorporate into their SIPs strategies such as implementing demand-side energy efficiency standards or shifting electricity generation from fossil fuels to nuclear power (which does not result in CO2 emissions) to lower emissions, even though those steps are not included as building blocks under the Clean Power Plan. In addition, the Clean Power Plan permits states to create regional initiatives to meet the emissions targets and is designed to allow for state or regional CO2 emissions credit trading systems, including existing systems such as the Regional Greenhouse Gas Initiative (RGGI) and the trading program enacted in California. The Clean Power Plan sets a deadline of September 6, 2016 for states to either submit their SIPs or seek to extend the SIP submission deadline until September 6, 2018. The Clean Power Plan requires regulated sources to begin meeting interim targets by 2022 and to meet the final targets by 2030. Clean Energy Incentives. The Clean Power Plan includes a proposed incentive program that rewards states that develop wind or solar prior to the 2022 initial compliance date. States will receive emissions allowances based on the amount of electricity generated by wind or solar projects that meet the requirements of the program, which in turn can be used as a credit against their CO2 emissions. The program will be the subject of future regulatory action. 8 The draft Clean Power Plan included a fourth building block – increasing demand-side efficiency – which is not included in the final Clean Power Plan. Clean Power Plan, pp. 389-90. Fried Frank Client Memorandum 4 Federal Cap-and-Trade Plan for Non-Compliant States. EPA also released a proposed federal implementation plan (FIP) that will be put into place in states that refuse to prepare a SIP that complies with the plan.9 The FIP consists of emission caps directly applicable to regulated power plants, along with a trading system that will allow a power plant with GHG emissions above the cap to purchase credits from other participants. The FIP is also being presented as a model for states to follow in their own SIPs. Anticipated Impact of the Clean Power Plan The Clean Power Plan is expected to have a significant and near-term impact on the way in which the nation generates electricity, with the coal industry taking the most significant hit. EPA predicts that by 2030, approximately 27% of the country’s energy will be generated by coal, down from 39% currently. Natural gas will increase from 27% to 33%, and renewables will increase from 13% to 21%. The government’s energy research arm, the Energy Information Administration (EIA), predicts (based on the draft version of the plan) an even more dramatic shift by 2030, with coal and renewables each contributing about a quarter of the nation’s electricity and natural gas accounting for approximately 31%. Coal. This shift will have a significant impact on the coal industry. The EIA predicts the retirement of 50 gigawatts in coal-fired capacity compared to the baseline case (i.e., the number of retirements expected in the absence of the plan). Most of those retirements are expected to occur during the years prior to the interim target date, as states prepare to comply.10 EPA predicts a more modest decrease of between 27 and 38 gigawatts in coal-based electricity generating capacity as compared to the expected baseline.11 EPA also estimates a 14% to 17% decrease in coal production as compared to the baseline. Natural Gas and Renewables. Natural gas and renewables are both expected to benefit under the Clean Power Plan, as those sources are expected to pick up the slack left by coal production and capacity decreases. However, the long-term winner under the plan is expected to be the renewables sector. While a bump in new natural gas generating capacity is expected in 2020 (presumably due to the rush to meet the 2022 initial compliance target), by 2030, the increase in natural gas capacity is expected to be 17% to 30% lower than the baseline case, due mainly to lower expected electricity demand under the plan. In contrast, renewables capacity is expected to increase between 18% and 20% compared to the baseline by 2030. EPA’s planned incentive program for early development of renewables discussed above (which has not been incorporated in EPA’s estimates) will further boost capacity from this sector.12 Cost and Reliability. The impact of the Clean Power Plan on consumers is less clear. EPA predicts that the plan will have little or no impact on electricity prices. Because EPA predicts that the plan’s energy efficiency measures will lower electricity demand, the cost to consumers is predicted to decrease approximately 7% under the plan as compared to the baseline. In contrast, EIA’s analysis estimated a modest increase in cost to consumers of between 1% and 4% above the baseline over the course of the 9 Available at: http://www.epa.gov/airquality/cpp/cpp-proposed-federal-plan.pdf. 10 Analysis of the Impacts of the Clean Power Plan. Available at: http://www.eia.gov/analysis/requests/powerplants/cleanplan/. 11 See Regulatory Impact Analysis: Clean Power Plan Final Rule. Available at: http://www.epa.gov/airquality/cpp/cpp-final-rule-ria.pdf. 12 Nuclear power generation, which currently accounts for approximately 19% of the nation’s energy mix, is not expected to change significantly under the Clean Power Plan according to EPA. Fried Frank Client Memorandum 5 plan, and NERA Economic Consulting, in an analysis on behalf of industry,13 estimated an increase in cost to consumers of over 10% above the baseline. The EIA and other experts also warn that the shift away from coal is likely to decrease reliability, as natural gas relies on a less predictable delivery infrastructure than coal (which is stored onsite) and renewables are by nature intermittent. The final draft of the Clean Power Plan includes provisions to mitigate these risks, including a “reliability safety valve” subjecting regulated power plants to less stringent emissions limits for 90 days in emergency situations. Potential Obstacles Legal Challenges. As noted above, the Clean Power Plan is based on a novel reading of Section 111(d) of the CAA. Several states, energy companies and other groups have announced their intention to bring litigation challenging the EPA’s interpretation of Section 111(d). The key legal theories are expected to include the following: 1. EPA cannot regulate “beyond the fenceline” of the regulated sources. Section 111 calls for regulation of emissions from the stationary sources in the source categories selected by EPA for regulation. However, the Clean Power Plan’s “building block” approach achieves emissions reductions not only by mandating reductions from regulated power plant sources, but also by lowering overall emissions from the power sector through increased reliance on natural gas and renewables. Regulating beyond the fenceline of the regulated sources is arguably inconsistent with Section 111. One indication of EPA’s sensitivity to the potential strength of this argument is its decision not to include demand-side efficiency as a building block in the final version of the Clean Power Plan. Demand-side efficiency was included as a fourth building block in the draft version of the rule and was seen as particularly vulnerable to the “beyond the fenceline” argument, as it is unrelated to power generation altogether. However, this change has not mollified critics of the Clean Power Plan, who insist that the plan continues to regulate beyond the fenceline, given the inclusion of building blocks that call for shifting generation to natural gas and renewables. 2. EPA authority to regulate power plants under Section 111(d) is precluded by other power plant regulations. Some opponents of the Clean Power Plan have argued that Section 111(d) precludes regulation of existing sources that are the subject of regulation under Section 112. Because existing fossil fuel-fired power plants are regulated (for different pollutants) under Section 112, they argue that EPA cannot regulate them under Section 111(d). This argument is complicated by the fact that the relevant statutory language, which was added in the 1990 amendments to the CAA, differs in the House and Senate version of the legislation, which were never reconciled. 14 A critical procedural issue that will be addressed in the course of the litigation is whether the Clean Power Plan should be stayed while the litigation proceeds. EPA sought to weaken the case for a stay by 13 Potential Energy Impacts of the EPA Proposed Clean Power Plan. Available at: http://www.nera.com/content/dam/nera/publications/2014/NERA_ACCCE_CPP_Final_10.17.2014.pdf 14 The Senate version has been read to prevent EPA from crafting new rules for a pollutant that is already regulated, while the House version has been read to prevent EPA from regulating a source that is already regulated. Fried Frank Client Memorandum 6 delaying the final SIP deadline and the initial compliance deadline by two years in the final version of the plan as compared to the draft. While the lack of any meaningful judicial interpretation of Section 111(d) makes it is difficult to predict the outcome of these legal challenges, we can be certain that the expected legal challenges will take several years to resolve, and that litigation is likely to continue at each stage of the implementation of the plan. Lack of Cooperation by States. Over a dozen states have already indicated that they do not intend on developing SIPs to comply with the Clean Power Plan. While the Clean Power Plan proposes a FIP for states that fail to prepare their own, some critics of the plan predict that direct federal regulation may potentially lead to ugly and politically difficult standoffs between the federal government and power plants in non-compliant states, particularly if the trading systems proposed by the FIP are not effective. Some have predicted that the EPA is likely to back off under such circumstances, essentially rewarding states for non-compliance and incentivizing other states to refuse to comply as well. Political Uncertainties. The Clean Power Plan’s timeline provides that much of its implementation and enforcement will occur after President Obama leaves office. Accordingly, the fate of the Clean Power Plan lies in the hands of the winner of the 2016 presidential election, who will get to pick the next EPA administrator and gain control over the regulatory process. While the key Democratic candidates have all endorsed the Obama administration’s approach to GHG regulation, Republican candidates have either denounced the plan outright or have rejected the scientific notion of climate change and the need to regulate GHG emissions altogether. Impact of Legal and Political Obstacles on the Implementation of the Plan. While the legal and political obstacles to the Clean Power Plan are serious, their practical impact remains to be seen. Complying with the targets under the Clean Power Plan will require investment and business decisions well in advance of the initial compliance date in 2022. Accordingly, barring an immediate stay or other event that stops the Clean Power Plan in its tracks, utilities and other energy companies will need to proceed under the assumption that the plan is good law. By the time the legal challenges are sorted out and the political landscape is settled, many of the investments in lower or zero-carbon sources necessary to meet the plan’s initial targets may have already begun, notwithstanding the ultimate fate of the plan. Conclusion The Clean Power Plan represents President Obama’s boldest attempt to address climate change since his efforts to convince Congress to enact economy-wide cap-and-trade legislation failed. In fact, the Clean Power Plan shares a number of similarities to cap-and-trade legislation. Like cap-and-trade, the Clean Power Plan is a broad regulatory scheme that addresses climate change on an industry-wide level, rather than focusing on individual emitters. In addition, the plan includes cap-and-trade as a compliance option for states, and mandates it for states that refuse to cooperate. Although the Clean Power Plan is narrower in scope than economy-wide cap-and-trade legislation, its impact will be felt across the entire economy. While operators of coal-fired power plants are the clearest losers under the plan, companies that mine, process and transport coal, or otherwise service the coal industry, may be adversely impacted as well, unless such companies can retool their operations for other Fried Frank Client Memorandum New York Washington, DC London Paris Frankfurt Hong Kong Shanghai friedfrank.com 7 industries or otherwise enter new markets. On the other hand, the shift to renewables mandated in the plan is likely to spur continued investment in additional electricity generation from solar, wind, hydroelectric and other renewables, as well as in underlying technology. The industrial activity that has developed around the exploration and extraction of natural gas is expected to continue its growth under the plan, although as noted above, this growth is expected to be somewhat tempered as compared to baseline estimates. Finally, the impact to energy consumers is subject to significant uncertainty, with critics predicting substantial increases in electricity prices and disruptions in energy supply and supporters predicting cost savings. * * * Authors: David A. Zilberberg Donna Mussio Mary Beth Phipps This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions about the contents of this memorandum, please call your regular Fried Frank contact or an attorney listed below: Contact: New York David A. Zilberberg +1.212.859.8419 [email protected]
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