Earlier this month, the Environmental Protection Agency ("EPA") proposed the new Clean Power Plan Rule, which has been touted as President Obama's most significant environmental proposal to date. The main goal of the Clean Power Plan Rule is to cut carbon dioxide emissions by 30% from 2005 levels by 2030, which also includes interim reductions that must take place between 2020 and 2029. Under the proposed Rule, states have a significant level of flexibility in developing their individual implementation plans to meet these emissions requirements. As a result, the impact on power plants and electricity prices will depend on how states choose to allocate these reductions among sources. For this reason, power plants and large electricity customers should take advantage of opportunities to comment and provide input on this proposed Rule, as well as the state implementation plans, to protect their interests as the EPA and state environmental agencies decide on the best methods for achieving these cuts. Comments on the proposed Rule are due by October 16, 2014, at the EPA.
Crucially, state goals for carbon dioxide emission reductions are not solely based on requirements for individual power plants. Instead, each state has flexibility to meet its goals by lowering its overall rate of emissions in the power sector. State carbon dioxide emissions are calculated under this Rule by dividing pounds of carbon dioxide emissions from fossil fuel-fired power plants by the megawatt hours produced in each state. This approach factors in megawatt hours from fossil fuel power plants plus other types of generation such as renewables and nuclear, and includes megawatt hour savings from energy efficiency measures. Accordingly, a state plan may take a portfolio approach that includes enforceable emissions limits on power plants, as well as other enforceable measures, such as renewable and energy efficiency measures to further reduce emissions.
Each state may establish its own set of standards for how it intends to achieve the reductions required by the Rule. Most importantly, the Rule requires that each state plan (1) identify the power plants that will be subject to emission reductions; (2) demonstrate how the required reductions will be achieved; and (3) identify the methods for quantifying, monitoring, and reporting on the reduction efforts. The EPA tasks states to develop their individual implementation plans by June 30, 2016, but also provides up to two additional years to supplement this plan.
Although we anticipate a number of legal challenges to the Clean Power Plan Rule, those legal challenges face an uphill battle due to the recent series of U.S. Supreme Court decisions recognizing that the EPA has broad authority to adopt new rules under the Clean Air Act. As a result, to the extent this rulemaking would impact your company, we recommend that you consider commenting on the Rule during the decisional and implementation phases at both the state and federal level.
We expect to see one or more of the following proposals from states, which may directly impact your company:
1. Switching from coal to natural gas. EPA estimates that coal-fired power plants emit approximately 2,239 pounds of carbon dioxide per megawatt hour of energy produced. By comparison, natural gas-fired power plants emit 837 pounds of carbon dioxide per megawatt hour of electricity produced. If states choose to focus on fuel switching to achieve compliance with this Rule, concerns related to electricity reliability may rise due to the increased reliance on a single fossil fuel source. A dramatic shift to greater reliance on natural-gas fired power plants may also result in significant electricity price increases (as evident in the PJM Interconnection, LLC, service territory this past winter) and significant increases in the delivered price of natural gas, as natural gas infrastructure continues to lag behind natural gas demand.
2. Retirement, or suspension of the operation of, coal-fired power plants. Although many eastern states with greater access to natural gas power already have experienced the closures of many coal-fired power plants, the costs associated with shutting down additional coal-fired power plants, or coal-fired power plants in other areas of the country, could be significant.
3. Making coal-fired power plants more efficient. As an alternative to shutting down, or suspending the operations of, coal-fired power plants, coal-fired power plant owners may decide to invest in emission control equipment. The EPA estimates that all coal-fired power plants could become 6% more efficient through the adoption of emission control technology by 2020. These efficiencies may be lost, however, where coal-fired power plants have already installed controls to comply with other clean air rules, such as the Clean Air Interstate Rule or the Cross-State Air Pollution Rule.
4. Increased renewable energy and energy efficiency sources. States are likely to push for additional renewable and energy efficiency programs to reduce the burden on power plants for meeting the full extent of the emission reductions. This could mean legislative expansions, or decisions not to reduce the phased implementation, of alternative energy portfolio standards and energy efficiency laws. If these laws are expanded, or the aggressive phasing of existing laws is not altered, large increases to energy prices may result.
5. Increased demand response programs. Demand response participation could provide states with a significant opportunity for reducing electric demand. Demand response programs allow for periods of shutdowns of large electric customer facilities to reduce demand during various periods of higher electric consumption. Small customers can also participate in demand response programs as a result of the widespread introduction of smart meters in many states. One potential barrier to the further expansion of demand response participation, however, is the United States Court of Appeals for the D.C. Circuit's recent opinion that the Federal Energy Regulatory Commission has no jurisdiction over the participation of certain types of demand response in wholesale energy markets. If the opinion stands, states and customers may be challenged to rely on demand response as a means of mitigating the impact of the new EPA rules.
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The first opportunity for commenting on this Rule is occurring at the EPA with a deadline of October 16, 2014. The EPA expects to finalize the Clean Power Plan Rule by June 2015. After June 2015, each state should offer its proposed implementation plan for additional public comment, with a goal of completing those plans by June 2016.
We realize that this Rule may impact your company from both a cost and operational perspective. For this reason, we are available to draft formal comments regarding the impact of this rule on your company. If a number of clients express interest regarding commenting, we will form a group of interested clients and draft a comprehensive set of comments on behalf of all. Thank you.