One deal, two jurisdictions – interpreting competing jurisdiction clauses
The Court of Appeal has provided comfort to the derivatives market by giving a wide, commercial interpretation to an exclusive English jurisdiction clause.
Wind and solar appear to be winners under the final Clean Power Plan that the US Environmental Protection Agency released in early August to reduce US carbon dioxide emissions from fossil fuel power plants.
The plan would require a 32% reduction in carbon dioxide emissions from power plants by 2030 compared to 2005 levels.
Each state has been assigned a percentage reduction in emissions, and it is up to each to decide among several options for how best to reach its emissions goal. The options include increasing the efficiency of existing coal-fired plants and shifting away from coal-fired power by investing in natural gas, renewable energy and energy efficiency.
EPA had issued a draft Clean Power Plan in June 2014. That plan was challenged in court by Murray Energy Corporation and the attorneys general in 12 coal-reliant states who question whether the agency has been given legal authority by Congress to regulate CO2 emissions under section 111(d) of the Clean Air Act. A US appeals court dismissed the suits in June as premature. Lengthy litigation is expected, and the fate of the plan will probably have to be decided ultimately by the US Supreme Court.
In the meantime, the states have until September 2016 to draw up their individual emissions reduction plans. EPA has discretion to extend the deadline by two years, until September 2018, if an adequate initial submission is submitted by September 2016. The deadline for commencing implementation of the individual plans is not until 2022. These deadlines will be enforced unless any new Republican administration that takes office in 2017 withdraws the requirements, Congress cuts off funding or a court issues an injunction blocking implementation. Congress is probably not in a position to block funding as long as the Democrats retain the White House. Sixteen states have applied to EPA to stay implementation of the final plan. EPA is expected to deny the petition, after which lawsuits are certain to be filed by the states and coal mining interests.
The final Clean Power Plan sets a goal of 28% electricity generation from renewable energy by 2030. Wind and solar are expected to contribute a substantial percentage of the increase in renewable energy. This is in part due to incentives created by the final plan. Incentives are not provided for other renewable sources of energy such as geothermal and biomass, but demand for such sources will probably increase given the overall increase in demand for renewables.
The draft plan had only a 22% target for renewable energy. The new higher target is a response to the concern voiced by some stakeholders that the draft plan could shift investment away from wind and solar in a “rush to natural gas.” The draft plan assumed that natural gas would account for a larger share of the energy mix in the first few years than is assumed in the final plan. The final plan assumes that gas capacity will not increase as significantly as projected earlier.
The government is now estimating that coal-fired generation will decline from approximately 39% of the US energy mix to approximately 27% by 2030. Total US generating capacity was 1.06 million megawatts at the end of 2013, the most recent year for which such data is available. The projected reduction is roughly 127,000 megawatts of generating capacity. Some consultants estimate that 100,000 MW of that capacity will be retired over the period 2017 through 2020.
State Options and Deadlines
The Clean Power Plan sets uniform emissions performance rates for fossil fuel power plants. The rates are in table 1.
Although the performance rates are uniform, the total emission reductions that each state will be required to achieve vary significantly. The emissions performance rates required by the final plan are significantly lower than the performance rates that coal-fired and gas-fired power plants are currently capable of achieving. The aim is to compel states to reduce reliance on coal and encourage investment in renewable energy, energy efficiency and natural gas.
Tables 2 and 3, at the end of this article, list the interim and final emissions targets for each state. Interim targets must be reached by 2022. Final targets must be reached by 2030. A state could choose to focus on the rate of emissions per megawatt hour of electricity generated, in which case the targets in table 2 would apply, or the state could focus on the actual tons of CO2 emitted, in which case the “mass-based” targets in table 3 would apply.
The reason the targets vary by state is EPA made an assessment for each state based on the extent to which it relies on coal and natural gas for generating electricity, how much room there is for fuel efficiency improvement, the degree to which the state can transition from coal-fired generation to gas-fired generation, and the degree to which the state can replace fossil fuels by moving to renewable energy.
States will have a choice between two types of plans to meet their goals: an “emissions standards plan” and a “state measures plan.” Under an emissions standards plan, the state would impose emissions performance rates on each power plant, but would also have the flexibility to allow emissions at some power plants to exceed the emissions performance rate, provided that the statewide emissions goal is met. For example, a state might impose more stringent emissions limits on cleaner gas-fired plants in order to compensate for lower efficiency and dirtier coal-fired plants.
In contrast, a state measures plan would consist of measures that a state plans to take and would not rely exclusively on imposing source-specific emissions performance rates. The measures might include a mix of renewable energy standards and programs to improve residential energy efficiency. A state measures plan must also include federally-enforceable standards that would be triggered if the state measures fail to produce the required emissions reductions.
States are free to combine any of the options in a flexible manner to meet the targets and may also join together in multi-state or regional compacts such as, for example, a regional cap-and-trade program.
States that choose to develop their own plans must submit the details for approval to the EPA by September 6, 2016. The federal government may grant extensions of up to two years. State implementation plans must ensure that the power plants in the respective state — either individually, together, or in combination with other measures — achieve the interim CO2 performance rates between 2022 and 2029 and the final CO2 emissions performance rates for the state by 2030.
States that fail to submit their own plans will have to comply with a federal implementation plan. The draft federal plan requires power plants to achieve the same uniform emissions performance standards, but also contemplates emissions trading. EPA still must issue a final rule specifying whether emissions trading under any backup federal plan imposed on states that fail to adopt their own plans would be a “mass-based” cap-and-trade program or a program that relies on trading in emission rate credits.
In a mass-based program, EPA would create a state emissions budget setting the tons of CO2 that could be emitted by power plants in each state. EPA would initially distribute allowances among power plants based on their historic emissions. Allowances could be bought and sold on the open market or reserved for future use. Each power plant would have to have enough allowances to cover its actual emissions.
In a rate-based program, power plants must meet an emission standard, expressed as a rate of pounds of CO2 per megawatt hour. Plants that emit above their assigned rates would have to buy emission rate credits on the open market. A utility would accumulate emission rate credits by generating electricity from wind, solar or other zero- or low-emissions energy sources.Renewable Energy
The final Clean Power Plan includes a “clean energy incentive program” — called CEIP — that will help states transition to greater reliance on renewables and energy efficiency.
CEIP is a voluntary matching fund designed to encourage investment in solar and wind projects and in energy efficiency projects in low-income communities. CEIP will reward states that invest early in renewable energy generation and demand-side energy efficiency measures to reduce electricity usage during one or both of 2020 and 2021 by giving the states matching allowances or emissions rate credits that can be applied toward meeting emissions reduction goals or traded in an emissions trading marketplace.
The reason the government is focusing on solar and wind projects rather than renewable energy more broadly is it believes that solar and wind projects can be on line in time to provide electricity by 2020 and 2021. Projects with more lengthy development timelines, such as offshore wind farms, may not benefit from CEIP given the short time to complete projects to qualify.
A project must satisfy five requirements in order for a state to receive matching allowances or emission rate credits for the project under CEIP. First, the project must be physically in the state. Second, the state must have submitted its own state implementation plan, and that plan must provide for state participation in CEIP. Third, the project must not already be under construction, in the case of renewable energy projects, or already be in operation, in the case of energy efficiency, on the date the state submits its state implementation plan to EPA for approval. Fourth, the project must generate or save megawatt hours in 2020 or 2021. Only wind and solar projects qualify. Energy efficiency projects qualify only if they are in low-income communities.
Reliability of the grid is a potential issue. The Clean Power Plan requires each state to demonstrate that it has considered reliability issues in developing its state implementation plan, and there are mechanisms for revision of state implementation plans to address unforeseen reliability issues and a reliability “safety valve.” The safety valve would permit temporary operation of dirtier generating units to ensure grid reliability. EPA is coordinating implementation of the safety valve with the Department of Energy and the Federal Energy Regulatory Commission.
The Clean Power Plan may be President Obama’s signature environmental initiative, but its implementation and enforcement will be the responsibility of the next administration. The United States will go to the polls to elect a new president in November 2016 who will take office in late January 2017.
Any new Republican administration that takes office in 2017 would probably try to roll back the plan before it can be implemented. The Obama administration is hoping that a constituency will have developed by then to keep the plan in place, since states are required to have developed their own plans before the presidential election and the opposition to the plan has not come from the electric utilities as much as from coal mining companies. The utilities grow only by making new investments that go into rate base. New rules requiring utilities to invest in pollution control equipment or in new, cleaner power plants would allow the utilities to add to rate base. Utilities also need to be able to plan ahead. There is a widespread belief that measures to reduce CO2 emissions are inevitable. Many utilities might rather have certainty rather than be left with no clear guidance.
On the state level, the path forward is also rocky. A number of coal states, including Texas, Oklahoma, Indiana, Louisiana, Ohio and West Virginia, have either expressly said they will not comply or have expressed doubt about their intentions to comply. Faced with the prospect of having to comply with a fallback federal implementation plan if the states fail to act on their own, the coal states may eventually capitulate and adopt their own plans or delay submission in the hope that Republicans win the White House.
The Clean Power Plan has the potential to create significant investment opportunities in wind and solar over the next several years, but legal and political uncertainties remain that will have to be better understood in order to evaluate the potential.