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EPA’s Final Clean Power Plan Requires Reduction of Greenhouse Gas Emissions, Extends Compliance Period

On August 3, 2015, the Environmental Protection Agency (“EPA”) announced final greenhouse gas (“GHG”) emissions reduction regulations for existing fossil fuel-fired electric generating units (“EGUs”) (the “Clean Power Plan” or “Final Plan”). The Final Plan is being issued following consideration of over 4 million comments submitted since issuance of the plan proposal on June 2, 2014, including concern from states that the plan set a steep compliance “cliff” date of 2020. In response, the Final Plan sets three incremental compliance periods beginning in 2022, two years later than under the proposal, with final compliance due in 2030. At the same time, the Final Rule is calculated to result in a 32% reduction of GHG emissions over 2005 levels, a 2% increase over the proposal. A further significant change is an increase in the percentage of electricity that utilities are expected to produce from renewable energy sources like solar and wind: 22% under the proposed rule to 28% under the Final Rule.

The final rule retains the same structure as the EPA’s June 2014 proposal (for more information regarding the proposed rule, see our June 3, 2014 Alert). In particular, the Clean Power Plan establishes state-specific goals for power sector carbon dioxide (“CO2”) emissions, and guidelines for states to follow in developing plans to achieve those goals. In addition, the Clean Power Plan establishes CO2 emission performance rates for the two subcategories of existing fossil fuel-fired EGUs, electric steam generating units and stationary combustion turbines.

State plan amendment submissions are due by September 6, 2016, with extensions of up to two years available for the submission of final plans in some instances.¹ Affected EGUs must achieve the final emission performance rates or equivalent state goals by 2030. In addition, beginning in 2022, affected EGUs must meet interim emission performance rates, with separate interim requirements for the periods 2022-2024, 2025-2027 and 2028-2029. If a state fails to submit a complete plan by the deadline or the plan is not approvable, the EPA will develop, implement, and enforce a Federal Implementation Plan (“FIP”). The EPA offers two approaches for FIP compliance - (i) a rate-based emission trading program under which affected EGUs can meet a specific CO2 emission rate standard (in pounds of CO2 per megawatt-hour) via acquisition of emission rate credits, and (ii) a mass-based emission trading program under which affected EGUs would be allocated emission allowances (in tons of CO2) based on total allowable emissions set for a given state.

The Final Rule

The Clean Power Plan is predicated on Section 111(d) of the Clean Air Act, 42 U.S.C. Section 7411(d), which allows 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, state 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.

The EPA has 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:” (i) improving combustion efficiency (heat rate) at affected coal-fired steam EGUs, (ii) substituting increased generation from existing lower-emitting natural gas-fired combined cycle EGUs for reduced generation from higher-emitting affected coal-fired steam EGUs, and (iii) substituting increased generation from new zero-emitting renewable energy generating capacity for reduced generation from affected fossil fuel-fired EGUs. Applying these measures, the EPA has established specific emission performance rates reflecting BSER for fossil fuel-fired steam generating units and stationary combustion turbines of 1,305 pounds of CO2 per megawatt-hour and 771 pounds of CO2 per megawatt-hour, respectively.

States can require that individual affected EGUs meet the applicable EPA-established emission performance rates or adopt a portfolio approach that includes enforceable CO2 emission limits for EGUs as well as other enforceable measures, such as renewable energy and demand-side energy efficiency measures, that avoid fossil-fuel fired EGU CO2 emissions. States also may permit the use of “cap and trade” credits such as those available from the RGGI consortium of northeast states. States adopting a portfolio approach and choosing to achieve rate-based (rather than mass-based) goals would be able to make adjustments to the emissions rates of affected EGUs to account for measures that reduce CO2 emissions but do not affect emissions rates from affected EGUs, such as demand reduction or dispatch of low or zero-emission sources.

In addition, instead of placing all requirements directly on the affected EGUs, states can elect to meet either an equivalent statewide rate-based goal or mass-based goal by requiring emission reductions from entities other than affected EGUs, either in lieu of, or in conjunction with, enforceable emission standards for affected EGUs. A state that adopts such an approach must include backstop emission standards for affected EGUs that will apply in the event the plan does not achieve the anticipated level of CO2 emission performance.

The Final Rule also includes a new mechanism to reward early investments in certain renewable energy and demand-side energy efficiency projects, the Clean Energy Incentive Program (“CEIP”). Under the CEIP, states may generate emission rate credits for wind and solar energy projects and demand side energy efficiency projects implemented in low-income communities that, in each case, (i) commence construction after the submission of a final state plan to the EPA (or September 6, 2018, for states that do not submit a final plan prior to that date), and (ii) generate or save electricity in 2020 and 2021. States are otherwise required to consider disparate impacts on the communities that live near regulated power plants (“environmental justice” considerations).

Key Changes

In summary, significant differences between the final Clean Power Plan and EPA’s June 2014 proposal include the following.

• Under the final rule, the compliance period begins in 2022, two years later than the start date proposed in June 2014. Full compliance still is required in 2030 as initially proposed, but with three interim compliance targets.
• The EPA has refined its BSER determination, including the deletion of demand-side energy efficiency, which was a fourth “building block” in the June 2014 proposal. States still may adopt demand-side measures as part of their compliance strategies.
• EPA has set each state’s emission goal equal to the weighted average of the uniform emission performance rates for fossil fuel-fire steam generating units and stationary combustion turbines as applied to the EGUs in the state. In the June 2014 proposal, EPA derived the proposed emissions goals from a number of state-specific factors, including – for each state – the state’s fuel mix and electricity market.
• EPA has provided incentives for early investment in renewable energy and demand-side energy efficiency projects through the CEIP.

Legal Challenges

The Clean Power Plan faces stiff opposition from the states with coal-fired facilities that would be primarily impacted as well as from industry interest groups. Separate early challenges focusing on the scope of the EPA’s authority under Section 111(d) of the Clean Air Act were brought by Murray Energy Corp. and a group of twelve states (Alabama, Indiana, Kansas, Kentucky, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, South Dakota, West Virginia and Wyoming). These challenges, which were dismissed as premature by the Court of Appeals for the D.C. Circuit, are likely to be renewed, with Murray Energy Corp. and fifteen states already announcing their intent challenge the rule. Additional challenges to the substantive provisions of the rule also are likely, including a request for a stay on implementation during the pendency of litigation. The U.S. Supreme Court will almost certainly be the arbiter of these challenges, with recent decisions as to the EPA’s implementation of the Clean Air Act (including under the Cross-State Air Pollution rule and rules limiting power plant mercury emissions) leaving much uncertainty as to the degree of deference the Court will allow the EPA under Section 111(d).

[1]  Because Vermont and the District of Columbia do not have affected EGUs, they are not required to submit plan amendments. The Clean Power does not apply to Alaska, Hawaii, Puerto Rico or Guam.