[UPDATED] EPA Issues More Ambitious But Flexible Final Clean Power Plan

Editor’s note (Aug. 3): Adds compliance cost details, key changes

The Environmental Protection Agency’s (EPA’s) final Clean Power Plan will seek to tamp down the nation’s carbon dioxide (CO2) emissions from the power sector by 32% from 2005 levels by 2030—about 9% more ambitious than its original proposal.

The first-ever final national standards to limit CO2 from power plants, released today—”the biggest, most important step we’ve taken to address climate change,” said President Obama—give states more time to develop and tailor plans.

State plans are now due in September 2016, but states that need more time can make an initial submission and request extensions of up to two years for final plan submission. The compliance averaging period in the final rule begins in 2022 instead of 2020, and emission reductions are phased in on a gradual ‘glide path’ to 2030.

As with the proposed rule, the EPA established interim and final statewide goals, but it expands them to three forms: A rate-based state goal measured in pounds per megawatt-hour (lb/MWh); a mass-based state goal measured in total short tons of CO2; and a mass-based state goal with a new source complement measured in total short tons of CO2.

Significantly, it also requires states to address grid reliability in their state plans. The final rule provides a “reliability safety valve” to address any reliability challenges that arise on a case-by-case basis. “These measures are built on a framework that is inherently flexible in that it does not impose plant-specific requirements and provides states flexibility to smooth out their emission reductions over the period of the plan and across sources,” the agency said.

Flexibility Strategies

Compared to the proposed rule, the final rule also provides more flexibility in how state plans can be designed and implemented. For one, it allows states to include trading and demand-side energy efficiency in their plans. It also allows states to develop “trading ready” plans to participate in an “opt in” emission credit trading market with other states taking parallel approaches, without the need for interstate agreements. Generation technologies that can play a role in state plans include renewables, energy efficiency, natural gas, nuclear, and carbon capture and storage.

According to documents released today, the Clean Power Plan is paired with a so-called “Clean Energy Incentive Program,” which is designed to drive “additional early deployment of renewable energy and low-income energy efficiency.” It will see credits for power generated from renewables in 2020 and 2021 be awarded to projects that begin construction after participating states submit their final implementation plans.

The EPA also released a proposed federal implementation plan, which it said could provide a “model” states can use to design plans.

The Cost/Benefit Question

The agency’s Regulatory Impact Analysis for the final rule estimates that annual incremental compliance costs for the rate-based approach will be $2.5 billion in 2020, $1 billion in 2025, and $8.4 billion in 2030, including costs associated with monitoring, reporting, and record-keeping. For the mass-based approach, annual incremental compliance costs will be $1.4 billion in 2020, $3 billion in 2025, and $5.1 billion in 2030.

That compares with the EPA’s estimated annual costs for its proposed rule of $5.5 billion to $7.5 billion in 2020 and $7.3 billion to $8.8 billion in 2030. EPA Press Secretary Melissa Harrison told POWER that the agency’s reduced estimates for compliance costs could be explained by “time, flexibility, and the increased affordability of renewable energy.”

Asked whether the Supreme Court’s recent decision in Michigan v. EPA—whereby the court ruled that the agency did not properly consider costs as it wrote its Mercury and Air Toxics Standards—had any impact on the final plan, Harrison said the “EPA … expects that states will consider costs as they implement programs to help businesses and homes use electricity more efficiently.”

Among the plan’s benefits listed by the EPA are that it will create “tens of thousands of jobs while ensuring grid reliability,” and that it will drive investment to clean energy technologies, “resulting in 30% more renewable energy generation in 2030.”

Other Key Changes

As directed by President Obama’s Climate Action Plan, the EPA on June 2, 2014, proposed its “Clean Power Plan” emissions guidelines for existing power plants under the Clean Air Act (CAA) Section 111(d) (see this infographic for how the rule evolved).

The proposal set state-specific, rate-based goals and relies on four “building blocks” to establish the best approach for each state to slash power sector CO2 emissions by 30% from 2005 levels by 2030.

The final plan is promulgated under Section 111(d) of the Clean Air Act, and like the proposed rule, it also sets CO2 emissions performance rates for affected power plants that reflect the “best system of emission reduction” (BSER).

Fewer building blocks. However, the final plan relies on three supply side–focused “building blocks”—not four as proposed. It eliminates demand-side energy efficiency as a building block while retaining but refining Building Block 1 (improved efficiency at power plants), Building Block 2 (shifting from coal to natural gas power plants), and Building Block 3 (shifting generation to “zero-emitting” renewables).

The EPA’s assumptions of how much improvement a building block can make depending on the region have also changed. The final rule says Building Block 1 will deliver 2.1% to 4.3% improvement, compared to 6% in the proposal, for example.

Other changes regarding the building blocks include using “net summer capacity factor” in lieu of “nameplate capacity” with regards to natural gas units to reflect real operating conditions, and including more use of new renewable energy than in the proposal “based on up-to-date information clearly demonstrating the lower cost and greater availability of clean generation.”

Nuclear and utility-scale renewables. Significantly, the final BSER analysis does not include existing or under‐construction nuclear power or existing utility‐scale renewable energy generation as part of Building Block 3. “Generation from under‐construction nuclear facilities and nuclear plant uprates can still be incorporated into state plans and count towards compliance,” the EPA said, however. “In fact, nuclear power competes well under a mass‐based plan, as increased nuclear generation can mean that fossil fuel units are operating less and emitting fewer tons of CO2.

The nuclear industry had mixed sentiments about the changes. “We are pleased that EPA recognizes in the final rule that nuclear plants under construction should not be part of the goal-setting calculation, but should count toward compliance when they are operating,” said Nuclear Energy Institute CEO Marvin Fertel on Aug. 3, noting that the plan is still under review. “We are also encouraged that power uprates that increase nuclear plants’ carbon-free output should count toward compliance.”

Source‐specific CO2 emission performance rates. The final rule expresses BSER in the form of two source-specific CO2 emission rates: one for coal steam and oil steam plants, and one for natural gas plants. As a result, the EPA says, “power plants are subject to the same standards no matter where they are located.”

A regional analysis. Responding to industry concerns that the grid isn’t constrained by state borders, the final BSER determination formulates performance rates by applying the building blocks to the three established regional electricity interconnects: Western, Eastern and the Electric Reliability Council of Texas. “From the three resulting regional coal plant rates, and the three regional natural gas plant rates, the most achievable rates become the CO2 emission performance rates for the country,” said the EPA.

What Happens Now?

The EPA said it sifted through four million comments while drawing up the final rule. Its release has been orchestrated to build momentum toward international climate talks in Paris this December, and to help the U.S. achieve lofty climate goals to slash emissions in the range of 17% below 2005 levels by 2020—and by 26% to 28% below 2005 levels by 2025.

But during a recent Congressional hearing, experts told lawmakers that despite requests from various observers, the administration has yet to disclose how it intends to meet its 26% by 2025 commitment. The final Clean Power Plan will play a central role, but even in the “unlikely event that the [plan] is actually implemented, it will not achieve substantial emission reductions by 2025,” Jeff Holmstead, partner in law firm Bracewell & Giuliani testfied on July 8.

Meanwhile, the final rule has been much-anticipated by stakeholders, who are split about the rule’s possible impact.

Industry group the Edison Electric Institute (EEI), representing investor-owned utilities, said in a statement on Aug. 2, preceding the final rule’s release, that the power sector “already is making significant investments to transition to a cleaner generating fleet and to enhance the electric grid. This transition is exemplified by the 73 gigawatts of publicly announced coal plant retirements or retrofits scheduled to take place by 2022—enough to power 36 million households. Overall, the industry’s capital expenditures are projected to be approximately $100 billion per year through 2016, with a record-high $108.2 billion estimated for 2015.”

EEI’s primary concern remained the overall timing and stringency of near-term reduction targets. “Until we review the final guidelines in their entirety, it is difficult to assess whether they address the range of concerns we have raised over the past year. Ultimately, it is imperative that the final guidelines respect how the electric system works and provide enough time and flexibility to make the necessary changes to achieve carbon emission reductions,” said EEI President Tom Kuhn.

Environmental groups have criticized the proposed rule as too weak, while stakeholders of coal power have railed against the proposed rule’s costs. Often cited is a NERA (National Economic Research Associates, an economic consulting firm) study that puts the total cost at $366 billion through 2031 and estimates increases in electricity prices of 12% or more.

If there’s one thing that’s agreed upon, it is that the rule will surely be challenged in court. “Petitioners are champing at the bit to challenge EPA’s anticipated rule restricting carbon dioxide emissions from existing power plants. But EPA has not yet issued a final rule. It has issued only a proposed rule,” wrote Circuit Judge Brett Kavanaugh in a June 2015 opinion for the D.C. Circuit in which the federal court rejected challenges to the Clean Power Plan filed by coal firm Murray Energy Corp. and 12 states.

One argument certain to be litigated is whether the EPA’s use of Section 111 of the Clean Air Act gives the agency the statutory and constitutional authority to adopt its plan.

That has been the subject of dozens of hearings in the U.S. Congress and in state legislatures.

For more on the Clean Power Plan, see these POWER stories:

General:

The EPA’s Proposed Clean Power Rule in Three Infographics

Viewpoints:

Viewpoints on the EPA’s Proposed Clean Power Plan Abridged

Six States Sound Off on EPA’s Clean Power Rule

McCarthy: Supreme Court Decision on MATS Won’t Affect the Clean Power Plan Rule

States Can “Just Say No” to the EPA’s Carbon Rule, Expert Says

Reliability:

FERC’s Work on the Clean Power Plan | POWER Magazine (by Cheryl LaFleur)

MISO Says Clean Power Plan Could Cut Its Coal Generation by Half

NERC: EPA’s Clean Power Rule Could Transform Coal Power Use

Legal Challenges:

Clean Power Plan Achievable but Challenges Large, Say Experts

Experts: EPA Clean Power Plan’s Legal Uncertainty May Have Lasting Impact

Legal Challenges to Clean Power Plan Begin to Take Shape

Compliance:

Clean Air Act Section 111(d): The Case for Multi-State Compliance

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)