EPA Officially Commences Unprecedented Regulation of Power Plants, Threatening Grid Reliability - Litigation Ensues

by Jackson Walker

On October 23, 2015, the Environmental Protection Agency (EPA) published in the Federal Register its new rules to limit emissions from power plants. The most significant rule limits CO2 emissions from existing power plants.1 Called the "Clean Power Plan" by EPA, its scope and impact are unprecedented. If it survives legal challenge, it will profoundly and irreversibly change the way electricity is generated. EPA also concurrently published a proposed Federal Plan, including a CO2 emissions trading system, to be implemented among the states if they do not create their own plans to comply with the Clean Power Plan2 and will be publishing in a subsequent action a proposal outlining a credit system for states that invest early in renewable technologies and energy efficiencies.

EPA also finalized rules for new, modified, and "reconstructed" power plants,3 which, counterintuitively, and for the first time ever, impose less burdensome requirements for new sources (and modified and reconstructed sources) than for existing sources. Most importantly, new plants, let alone existing plants, cannot meet any of these standards—even the higher one for new sources—with existing technology. This functionally prohibits coal-fired power plant construction in the U.S.

This publication "starts the clock" for the rules' compliance deadlines and begins the 60-day window for filing legal challenges. Twenty-four states and numerous industry petitioners have already sued to block the "Clean Power Plan," and suits challenging the other rules are expected.

Key Facts About the Clean Power Plan

The Rule calls for a 32 percent nationwide reduction (compared to 2005 emissions) in CO2 emissions from fossil-fueled power plants. States are assigned individualized emissions targets to reach during an interim period (2022-2030) and then from 2030 onward.

To create these targets, EPA used "outside-the-fence" strategies such as forced fuel switching from coal and natural gas to renewables and from coal to natural gas. EPA's model assumes that the country will be able to build more new wind and solar generation than the entire world has today. EPA also expects states to reduce electricity demand.

For individual units, the CO2 emissions limit for existing coal-fired power plants is 1305 lbs CO2/MWh plants. The limit for new plants is 1,400 lbs CO2/MWh; for reconstructed (e.g. rebuilt and tuned up existing plants) the limit is 1,800 lbs CO2/MWh for large units and 2,000 lbs CO2/MWh for small units. The limit for existing natural gas combined cycle plants is 771 lbs CO2/MWh; the new-source limit is 1,000 lbs CO2/MWh. None of these limits, even the highest, can be met by any plants, new, existing, or reconstructed. That is, existing and new plants cannot meet even the higher limit for reconstructed plants with existing, commercially available technology. Therefore, each state is expected to mandate the construction of new renewable generation and to implement energy efficiency programs and other measures not directly related to power plants.

States are expected to develop comprehensive plans to implement the Rule's requirements. State plans are due September 6, 2016, but EPA provides an opportunity to secure a two-year extension to filing a final plan, so long as a request for extension is filed by the September 6, 2016, date. The request for extension does not require much detail, and it is assumed that many states will seek one. If an extension is granted, a progress report is due on September 6, 2017, and the final plan on September 6, 2018.

State Compliance Expectations

EPA's rule will require individual states to reduce their CO2 emissions by 2030 from between approximately 7 percent to 48 percent. Texas is expected to reduce its CO2 emissions by approximately one third. Given the size of Texas' electricity market and the electricity demand from Texas' large manufacturing and chemical industries (far larger than any other state), Texas will be required to reduce more CO2 emissions, as a matter of tons, than any other state. Texas will also be required to construct more renewable resources than any other state and, generally, comply with the greatest share of the reductions required by the Clean Power Plan (i.e., existing-source) rule.

Legal Challenges Are Being Filed

As this e-Alert is being distributed, lawsuits have been and are being filed challenging the legitimacy of EPA's rules and requesting a stay of the existing-source rule until all legal challenges and appeals are heard.

Numerous legal arguments will be put forward, and many of those are still in development, but it is expected that these arguments will focus on EPA's use of "outside-the-fence" requirements to set compliance standards, the apparent contradiction of having new-unit limits that are stricter than existing-source limits (heretofore unheard of), and numerous other legal infirmities in the rule. It is a virtual certainty that the fate of this rule will ultimately be determined by the U.S. Supreme Court, probably within the next two years.

1 80 Fed. Reg. 64,662.

2 80 Fed. Reg. 64,966.

3 80 Fed. Reg. 64,510.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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