Clean Power Plan will bring changes for the US power sector

On August 3, 2015, the U.S. Environmental Protection Agency ("EPA") issued its final Clean Power Plan, which establishes historic new standards and emission guidelines intended to reduce carbon pollution from power plants.1  The EPA adopted the Final Rule after considering input received through outreach to the power industry and its regulators, as well as over four million public comments submitted to the agency.  The Final Rule includes several important changes from the proposed rule issued last year, including a new "reliability safety valve" and extended compliance periods.2  Notwithstanding the revisions, this Final Rule presents sweeping new clean power requirements for the energy industry and establishes the first-ever carbon emissions ceiling for power plants.  The Final Rule, which becomes effective 60 days after its publication in the Federal Register, will impact power market participants across the generation base, and will present significant compliance challenges as well as market opportunities should it ultimately survive expected legal challenges and come into force. 

Specifically, the Clean Power Plan sets standards to reduce carbon dioxide ("CO2") emissions by 32 percent from 2005 levels by 2030.  These cuts represent a further 9 percent reduction to those announced in the Proposed Rule.  The Final Rule proposes interim and final target rates of CO2 emissions for each state.  Progress towards meeting the target rates can be measured as rate-based (in pounds per megawatt hour), mass-based (in total short tons of CO2), or mass-based state goals with new source complement measured in total short tons of CO2.  

The CO2 emissions target assumes how much a state could reduce emissions using three carbon-reducing measures, or building blocks, which the EPA has identified as the "best system of emission reduction" ("BSER") under Section 111(d) of the Clean Air Act.  The building blocks are: 

1. improved energy efficiency at power plants;
2. shifting generation from higher-emitting coal to lower-emitting natural gas power plants; and
3. shifting generation to zero-emitting renewables. 

The EPA eliminated from the Final Rule a potential fourth building block, increased demand‐side energy efficiency. 

The Final Rule's BSER analysis builds on current investments in renewable technologies, including a greater reliance on new renewable energy than in the Proposed Rule, and takes into account recent reductions in the cost of clean energy technology.  The BSER analysis also indicates that assumed continued cost reductions for renewable energy and shifting generation away from coal may impact wholesale market prices.  Specifically, the EPA's analysis indicates that shifting more generation from coal to natural gas would put upward pressure on power prices but that replacing some existing generators with renewables would yield lower prices because of lower variable costs.  

Implementation

The Clean Power Plan includes guidelines for the states' development, submittal, and implementation of plans to reduce emissions.  Each state is required to develop and implement a plan to ensure that the power plants in that state – either individually, collectively, and possibly in combination with other measures – achieve both the interim CO2 emissions performance rates over the period of 2022 to 2029, and final CO2 emission performance rates, rate-based goals or mass-based goals by 2030.  States may choose between two plan types to meet their goals:  (1)  an emission standards plan, which includes source-specific requirements for all affected power plants within the state, or (2) a state measures plan, which includes a mixture of measures implemented by the state, such as renewable energy standards and programs to improve residential energy efficiency, that must result in affected power plants meeting the state's mass-based goal.

Coordination with several areas of federal and state government will be required to fully implement the Clean Power Plan.  The following implementation elements are of particular interest:

• A new focus on grid reliability.  The Final Rule takes a number of steps to address concerns about the reliability of the electric supply.  For example, it:
  • Requires states to address reliability in their final state plans, and consult with an appropriate reliability or planning agency.
  • Provides for coordination among the Federal Energy Regulatory Commission, the EPA and the Department of Energy on reliability issues during the implementation of the Clean Power Plan.  The three agencies have issued a memorandum to reflect their coordination plans.3 
  • Allows a state to propose amendments to an approved plan in case of unanticipated and significant reliability challenges.
  • Begins the compliance period two years later than the Proposed Rule – in 2022 – which will provide extra time to put required infrastructure in place.
  • Provides a "reliability safety valve" for grid emergencies and must-run situations on a case-by-case basis.  The Final Rule would require states to justify the need for a safety valve exception and obtain sign-off from the grid operator or reliability coordinator in their region.  If conditions require a plant to continue operating under the safety valve exception for more than 90 days, then the state would have to revise its compliance plan to make up for the excess carbon emissions.
• Timelines for state compliance.  State implementation plans are due in September 2016.  States may request extensions of up to two years.  The compliance period begins in 2022, with emissions reductions phased in over the 2022‐2029 interim period on a "glide path" to 2030.  The glide path is separated into three periods – 2022-2024, 2025‐2027, and 2028‐2029 – and interim targets are also achievable "on average" over the interim period.  States additionally can customize their glide path, smoothing out their emissions reductions over a given period, as long as they meet their interim targets and meet milestones they have defined in their state plans.  
• A head start to wind and solar deployment.  The Final Rule's Clean Energy Incentive Program will enable states to "bank" credits in 2020 and 2021 for complying with the Final Rule during its interim (2022-2029) and final (2030 and onward) performance periods.  Under this program, renewable projects that begin construction after a state submits a final plan will receive emission reduction credits (for rate-based plans) or allowances (for mass-based plans) on a one-for-one basis for each MWh generated in 2020 and 2021.  These incentives are meant to spur investment in zero-emissions approaches and may also kick-start broader carbon-trading efforts.

Effects on the Power Sector

The Clean Power Plan is anticipated to affect all major areas of the generation base:

• Wind and solar: The Clean Energy Incentive Program incentivizes wind and solar projects which can be implemented relatively quickly.  The White House has stated that renewable energy sources will account for 28 percent of the nation's capacity by 2030, a large portion of which is anticipated to come from utility-scale wind and solar.  Renewables expansion had previously been largely dependent on tax incentives, but the EPA has stated that the projected increase in renewables generation will happen even if the production tax credit for wind is not renewed.  If the Clean Energy Incentive Program alone is not sufficient to incentivize investment in renewables, the government may consider implementing additional policies.  These could include extending the wind production tax credit and the investment tax credit for solar – or putting in place another form of tax credits for renewables – through the start of the Clean Power Plan's compliance period in 2022.    
• Natural gas: The revised target of CO2 level reductions may come at the expense of natural gas.  The EPA initially projected increased natural gas generation, but its updated analyses show relatively steady levels of generation from these assets.  Shifting from coal to natural gas generation, however, is still one of the three remaining "building blocks" the EPA has used to calculate its state-level targets, and many states may still emphasize that approach when crafting their compliance plans.  The CO2 emission performance rates for existing natural gas combined cycle units is 771 lb/ CO2/MWh.
• Coal: Ultimately, 1,000 fossil-fuel-fired generation plants with about 3,100 individual generating units will be covered by the Clean Power Plan, which sets source-specific CO2 emission performance rates of 1,305 lb/ CO2/MWh for existing coal units.  Generation from coal is generally declining across the country and coal plant retirements are projected to continue to increase.  This is in part because of other EPA regulations, such as the implementation of the Mercury and Air Toxics Standards.  The Clean Power Plan may therefore be seen as merely continuing an ongoing transition from coal to lower-emitting fuel sources.
• Nuclear: New nuclear plant construction, as is occurring in the southeastern United States, can be incorporated into state implementation plans and count towards compliance targets.  Nuclear plant uprates (increasing actual power output from an existing nuclear plant) may also be included.  Maintaining and/or extending the life of existing nuclear plants, however, is not incentivized under the Final Rule. 
• Hydro: Consistent with other types of renewable energy, new hydropower generating capacity installed after 2012 is eligible to help meet states' targets under the plan.  Hydropower uprates also count towards compliance.

Proposed Federal Plan

Along with the Final Rule, the EPA concurrently proposed a federal plan to implement the requirements of the Clean Power Plan in states that fail to submit an approvable state plan.4  The proposed FIP ultimately relies on a carbon credit marketplace, setting forth two distinct trading programs – mass-based or rate-based – of which the EPA plans to finalize only one.  The FIP is intended to be adopted by states that do not have their own approvable plan, and provides model rules from which states can develop presumptively approvable state plans, that also can be linked with other similar state plans and any federal plan for trading purposes.  The EPA expects to complete the FIP next year after receiving feedback from states and other parties.  The EPA will accept comments on the proposed FIP for 90 days following its publication in the Federal Register.

Legal Challenges

States and affected industry participants will inevitably mount legal challenges to the Final Rule.  Among other legal theories, they may claim that Congress never provided the EPA the authority under the Clean Air Act to encourage emission-control methods that lie outside the "fenceline" of a power plant, such as changing the dispatch of natural gas and increased renewable energy use.  The U.S. Court of Appeals for the District of Columbia Circuit ruled on June 9, 2015 that a group of private corporations and state governments could not challenge the regulation before the EPA released the final version of the Clean Power Plan.5

The Clean Power Plan will ultimately strengthen a fast-growing trend toward lower-emitting energy.  In the days and years ahead, the Clean Power Plan will loom large, as states subject to the Final Rule decide on steps towards complying (or not complying), and resulting shifts begin to manifest across the power sector.