On April 29, 2014, in a decision that may impact electric prices and service reliability for McNees clients in the region, the United States Supreme Court reinstated EPA’s Cross-State Air Pollution Rule (CSAPR). CSAPR was vacated by the D.C. Circuit in August 2012, which held that the EPA exceeded its authority when adopting CSAPR. With the reinstatement of CSAPR by the Supreme Court, power plants in "upwind states" (including Pennsylvania and Ohio, among others) will be subject to strict regulations on sulfur dioxide and nitrogen oxide emissions, which contribute to the formation of fine particle and ground-level ozone pollution in downwind states. The costs associated with a reinstated CSAPR may impact electric generation prices for large consumers of electricity by increasing the costs imposed on power plants and applying additional pressure on power plants to shutdown or convert to natural gas.
What is CSAPR? CSAPR was adopted by EPA based on the premise that the sulfur dioxide and nitrogen oxide emissions from upwind states prevent downwind states from attaining air quality standards imposed by EPA for fine particulates and ozone levels. EPA determined that all upwind states subject to emissions limits both (1) presently contribute to one percent of the non-attainment of air quality standards in downwind states, and (2) may eliminate this contribution to non-attainment cost-effectively. Under CSAPR, power plants are required to install pollution controls to comply with emissions limits, or participate in a "cap-and-trade" system for buying, trading, and selling emission credits.
In their challenge to CSAPR, power plants argued that the pollution controls required to comply with CSAPR were unduly costly, leading to older plants shutting down and potential reliability issues for the electric grid. Upwind generators further argued that the costs for complying with CSAPR outweighed the benefits provided by CSAPR. EPA contended that it maintains broad authority to implement CSAPR under its Clean Air Act obligation to minimize cross-state air pollution, and continued to argue that air quality improvements in upwind states could be accomplished in what it viewed to be a cost-effective manner.
The Supreme Court agreed with EPA, finding that the broad authority granted under the Clean Air Act allowed EPA to implement CSAPR to ensure that power plant emissions in upwind states do not significantly contribute to non-attainment of air quality standards in downwind states. Specifically, the Clean Air Act states that EPA must prevent states from adopting emissions control plans (known as State Implementation Plans) that prevent or interfere with another state's ability to meet air quality standards. Because a downwind state's air pollution levels may be governed by emissions in upwind states, the Supreme Court held that EPA may determine how to allocate responsibility for reducing emissions among multiple states. As the Clean Air Act is silent regarding how emissions reductions should be allocated among upwind states, the Supreme Court held that CSAPR is a permissible interpretation of the allocation of these reductions.
As noted above, one of the issues presented by the implementation of CSAPR is its effect on electricity prices and reliability. A list of the states and the power plants subject to CSAPR can be viewed at the following link: http://www.epa.gov/airtransport/CSAPR/pdfs/TRFacilities.xls. All of these sources are either power plants or cogeneration facilities, which are likely also subject to other impending EPA restrictions, such as the emissions limitations within EPA's Mercury and Air Toxics Standards (MATS). Compliance with these rules likewise will require substantial efforts to bring generation facilities into compliance with environmental requirements. Because other environmental rules and the impact of the Clean Air Act on generation services are long-standing issues and will take some time to implement, it is not clear how the Court’s decision may impact future retirements or conversion/retrofitting of generation facilities. Forward market prices for electricity may already incorporate the effects of expected environmental regulations including compliance with the Clean Air Act. Some indication of the effect of the decision may be evident in the next PJM Base Residual Auction for capacity that is scheduled in May 2014.
The EPA has yet to identify an implementation timeframe for CSAPR now that it has been reinstated by the Supreme Court.