EPA Proposes Affordable Clean Energy Rule to Replace Clean Power Plan

On August 21, 2018, the US Environmental Protection Agency (EPA) proposed a new rule to regulate greenhouse gas (GHG) emissions from an estimated 300 existing coal-fired electric utility generating units (EGUs) (the “Affordable Clean Energy Rule” or “ACE Rule”).  The ACE Rule, which has not yet been published in the Federal Register, would replace the Obama Administration’s Clean Power Plan (Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, 80 Fed. Reg. 64662 (Oct. 23, 2015)) with revised emissions guidelines.  (For more information regarding the Clean Power Plan, see our August 4, 2015, alert here.)  New York Attorney General Barbara Underwood announced a plan by a coalition of states and local governments to oppose any effort to implement the new rule.  Opposition is also expected from a number of environmental groups, including Earthjustice and Sierra Club.

The Clean Power Plan has never gone into effect due to challenges from multiple states and state agencies, as well as industry and trade groups.  In February 2016, the Supreme Court stayed the rule pending resolution of these legal challenges.  West Virginia v. EPA, No. 15A773 (S. Ct. Feb. 9, 2016).  On March 28, 2017, President Donald Trump issued a sweeping executive order directing the rollback of the Clean Power Plan and other Obama Administration climate policies.  (For more information regarding the Energy Independence Order, see our April 3, 2017, alert here.)  In October 2017, the EPA proposed the repeal of the Clean Power Plan.  82 Fed. Reg. 48035 (Oct. 16, 2017).

Both the ACE Rule and the Clean Power Plan are predicated on Section 111(d) of the Clean Air Act, 42 U.S.C. Section 7411(d), which allows the EPA to require states to submit state implementation plan (SIP) amendments that adopt standards of performance for stationary sources as to air pollutants for which air quality criteria have not been issued.  Under Section 111(d) of the Clean Air Act, SIP amendments must establish standards of performance that reflect the degree of emissions limitation achievable through the application of the “best system of emission reduction… adequately demonstrated” (BSER), taking into account the cost of achieving such reduction while also considering any non-air-quality health and environmental impacts and energy requirements.

In the Clean Power Plan, EPA determined that BSER for existing fossil-fuel-fired EGUs is the combination of emission rate improvements and limitations on overall emissions at affected EGUs that can be accomplished through three sets of measures (or “building blocks”): (1) improving combustion efficiency (heat rate) at affected coal-fired steam EGUs, (2) substituting increased generation from natural-gas-fired combined cycle EGUs for reduced generation from coal-fired steam EGUs, and (3) substituting increased generation from new, zero-emitting renewable energy generating capacity for reduced generation from affected fossil-fuel-fired EGUs.  Building blocks 2 and 3 were particularly controversial, as they required implementing measures “outside-the-fenceline” of individual emission sources (by substituting electricity generation from those sources with electricity generation from lower-emitting facilities).  Applying these measures, the EPA established specific emission rates reflecting BSER for fossil-fuel-fired steam generating units and stationary combustion turbines of 1,305 pounds of carbon dioxide (CO₂) per megawatt hour and 771 pounds of CO₂ per megawatt hour, respectively.

The ACE Rule eliminates the use of outside-the-fenceline control measures and also omits specifying numerical emission rates.  According to the EPA, Section 111(d) of the Clean Air Act explicitly tasks states—not the EPA—with establishing standards of performance and directs the EPA to allow states to take into account source-specific factors when doing so.  Thus, rather than setting power-sector-wide emission rates, the EPA is required to identity, as BSER, emission reduction measures that can be applied to or at individual stationary sources.

Similar to building block 1 of the Clean Power Plan, the ACE Rule identifies “heat rate improvements,” i.e., reducing the amount of CO₂ emitted per unit of electricity generated (CO₂ intensity) as BSER for coal-fired EGUs.  However, instead of applying a sector-wide percentage improvement as it did when developing the Clean Power Plan, in the ACE Rule, the EPA identifies specific technologies and practices to improve heat rate, and then directs states in their SIP amendments to set a standard of performance (emission rate) for each affected EGU by evaluating, among other factors, the specified technologies.  The heat rate improvement technologies in the ACE Rule are neural network (computer model) control devices and intelligent sootblowers; boiler feed pumps; air heater and duct leakage control; variable frequency drives; redesign or replacement of economizer; and improved operating practices.  The EPA considered and rejected as BSER for coal-fired EGUs carbon capture and storage, and alternative fuel (biomass or natural gas) co-firing.  The ACE Rule does not identify BSER for integrated gasification combined cycle units or natural-gas-fired stationary combustion turbines. 

The ACE Rule will have little immediate effect on the electricity generation sector for several reasons.  First, the Clean Power Plan was already on hold, given the stay issued by the Supreme Court and the EPA’s proposed repeal.  In addition, as noted, proponents of the Clean Power Plan have promised to challenge the repeal of that rule and the promulgation of any replacement rule that, like the ACE Rule, does not include a requirement to switch to lower- or zero-emission technologies.  Moreover, and as discussed by the EPA in the preamble to the ACE Rule, even in the absence of the federal GHG regulations, “market factors, reduced electricity demand, and policy and regulatory efforts” are already driving changes in the electricity generation mix to include more natural-gas-fired and renewable energy generation capacity relative to coal-fired capacity.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Eric Rothenberg, an O'Melveny partner licensed to practice law in New York and Missouri, Kelly McTigue, an O'Melveny partner licensed to practice law in California, Hugh E. Hilliard, an O'Melveny senior counsel licensed to practice law in the District of Columbia and Maryland, and John D. Renneisen, an O'Melveny senior counsel licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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