By Joel C. Beauvais and Stacey L. VanBelleghem

On August 21, 2018 the Trump administration released its proposed Affordable Clean Energy (ACE) rule to replace the Obama administration’s Clean Power Plan (CPP). Both rules would regulate CO2 emissions from existing electric generating units (EGUs) pursuant to Section 111(d) of the Clean Air Act (CAA). The ACE proposal includes three elements:

  • Replacing the CPP with new emission guidelines for CO2 emissions from existing EGUs
  • Revising implementing regulations to guide the Environmental Protection Agency (EPA) and states on this and future Section 111(d) rulemakings
  • Revisions to the New Source Review (NSR) program for power plants

Here are six key points stakeholders should know about EPA’s proposed ACE rule.

1. Get Ready for State- and Unit-Specific Carbon Regulation

Whereas the CPP was based on federally determined emission rates for EGU categories, the ACE proposal calls for each state to establish its own standards of performance for affected EGUs. Instead of setting a presumptive numeric emission limit, EPA’s proposed guidelines identify a list of candidate heat rate improvement measures (including technologies and operational changes), which EPA has identified as the Best System of Emission Reduction (BSER) for CO2 emissions. As currently proposed by EPA, this BSER would only apply to coal-fired EGUs that are not integrated gasification combined cycle (IGCC) units, and it would not apply to gas-fired combustion units. The ACE rule calls on each state to set CO2 standards of performance, based on the state’s determination as to what each plant in its territory can achieve by applying candidate measures from EPA’s BSER list.

States can set standards based on unit-specific considerations and/or the characteristics of EGU subcategories they identify. The ACE rule also gives states the authority to design “custom compliance schedules” for affected EGUs or EGU subcategories, with latitude to consider unit-specific factors. Each state will develop an implementation plan that includes the standards, compliance timelines, and implementation and enforcement provisions. States must submit the plans to EPA for approval within three years of the final EPA rule.

Because the ACE rule provides states with significant leeway with respect to both stringency and timing, the regulated community can anticipate substantial variation from state to state and from unit to unit within any given state. These decisions may affect rates and/or markets, as well pollutant emissions. Power companies — especially those managing multiple units within a state and/or multi-state portfolios — will need to plan for sustained engagement in the state administrative proceedings to ensure their interests are appropriately represented.

2. The ACE Proposal Offers Greater Flexibility in Some Areas and New Constraints in Others

The ACE proposal would provide states with significant flexibility to account for state- or unit-specific considerations, based on EPA’s current interpretation of Section 111(d)’s division of roles and responsibilities between EPA and the states. Consistent with the text of Section 111(d), the ACE proposal would allow states to “take into consideration, among other factors, the remaining useful life of the existing source to which such standard applies.” The proposal would revise an existing regulatory variance provision to eliminate any distinction between health-based and welfare-based pollutants – and to establish the threshold demonstration states would need to make to support a less stringent standard or timeline for a specific unit or category:

  • Unreasonable cost of control resulting from plant age, location, or basic process design
  • Physical impossibility of installing necessary control equipment
  • Other factors specific to the facility (or class of facilities) that make application of a less stringent standard or final compliance time significantly more reasonable

The proposal would also give states considerable discretion in developing compliance schedules. While the proposal contemplates that state plans will require compliance “as expeditiously as practicable,” it assumes that a compliance schedule may be up to 24 months from the date of state plan submittal.  And states may allow for compliance extending beyond that 24 months if the unit meets one of the variance factors above, and if the state plan includes “legally enforceable increments of progress to achieve compliance.” From a practical perspective, given that the ACE rule requires submission of state plans within three years of a final rule, this means that sources may have compliance deadlines of up to five years after the final rule (i.e., 2024 or later). These deadlines may extend even longer if states adopt legally enforceable increments of progress for the source, or if a state fails to submit an acceptable plan, such that EPA must develop a federal plan.

Despite the ACE proposal’s considerable flexibility, regulated sources may face new compliance constraints. While the proposal recognizes that states may allow compliance with the standard of performance through a measure that is not on EPA’s BSER candidate list, EPA would require that any such measure be applied, and its emissions impacts be measureable, at the source itself. And unlike the CPP, which permitted averaging, banking, and trading of compliance instruments (i.e., emission reduction credits or allowances) between units, EPA is proposing only to allow emissions averaging among affected EGUs within a single facility. EPA’s position is that averaging and trading across affected sources or between affected and non-affected sources is inconsistent with its interpretation of BSER as limited to measures taken at and by the affected source. In addition, EPA’s proposal contemplates that the state-adopted standard of performance would be an emission rate — not a mass-based standard. These aspects of the proposal make it unlikely that states that have adopted a greenhouse gas (GHG) emissions trading program — such as the Regional Greenhouse Gas Initiative (RGGI) or California’s program — could use compliance with that program as a standard under the ACE rule. The practical implication is that, in many instances, individual units may have to make investments to comply with the ACE rule.

3. New Source Review Changes Go Beyond GHGs, and Could Be the Most Important Piece of the Rule

Equally, or more important than the proposed GHG guidelines described above, is EPA’s simultaneous proposal to change New Source Review (NSR) rules for power plants. NSR requires facility owner/operators to get a permit, including stringent pollution control requirements, before building a new major facility or making “major modifications” to existing facilities. Determining whether an upgrade constitutes a major modification requiring an NSR permit turns, in large part, on whether the change results in a “significant increase” and a “significant net increase” in regulated pollutant emissions. Under current NSR rules, this determination is based on changes in annual emissions. Critics argue that this deters efficiency upgrades, which can allow plants to run more (albeit at a lower hourly emission rate), thus increasing annual emissions and triggering NSR. This is a special concern under EPA’s proposal, which would require efficiency upgrades to coal-fired power plants.

EPA therefore is proposing to change its NSR rules for all power plants and all pollutants to use an hourly emissions test, instead of an annual one, in determining whether a facility upgrade triggers NSR. Environmental NGOs and some states are certain to challenge any such change in court. But if upheld, this change could significantly reduce the scope of the NSR program for power plants. Other industry sectors, including oil and gas, chemicals, and manufacturing, hope to obtain similar changes to the NSR regulations that apply to them.

4. What the Numbers Show

EPA has provided a top-line summary of its economic analysis of the proposal here. Below are a few important nuggets from the analysis:

  • NSR- and cost-related assumptions play a key role in determining the estimated costs and benefits from the rule. EPA assumes power plants could achieve 4.5% improvements in efficiency with NSR changes, but only 2% without such changes. The agency looks at costs of US$50/kW and US$100/kW for BSER measures under the 4.5% scenario, but only US$50/kW for the 2% scenario.
  • The proposal’s estimated GHG impacts (positive or negative) are limited. EPA estimates that the ACE rule will increase 2035 CO2 emissions by 3% as compared with the CPP. If compared with just repealing the CPP, the ACE rule would reduce projected 2035 emissions by 1% or less. Despite this limited impact, power sector decarbonization is expected to continue: 2030 CO2 emissions under the replacement rule would still decline by 33-34% from 2005 levels, as compared with a 36% reduction under the CPP.
  • The rule may result in modest cost savings or added costs, and these may be higher or lower than under the CPP.
    • If compared with implementation of the CPP, the rule’s 2035 impacts would range from US$100 million in added annual costs, to US$600 million in annual cost savings.
    • If compared with no CPP, however, the rule’s impacts on 2035 annual costs range from US$800 million in added costs to US$200 million in cost savings.
  • Coal production would be higher than under the CPP, but would still decline. EPA estimates that 2035 coal production for power sector use under the rule would be 7.4% to 9.5% higher than under the CPP, but would be equal to or slightly lower than if the agency simply repealed the CPP. Under the rule, by 2035, coal production for domestic power sector use would decline by roughly 30% from 2017 levels, and coal-fired plants would account for roughly 19% of total US generation (down from roughly 30% in 2017).
  • EPA’s net benefits estimates depend, in large part, on whether the agency considers health effects of non-GHG pollutants.
    • Considering only domestic GHG effects, EPA estimates the rule’s present value impacts relative to the CPP would range from US$5.4 billion in net costs to US$3.4 billion in net benefits — depending on the scenario and discount rate.
    • If EPA considers non-GHG pollutant impacts (especially health impacts of ozone and fine particulate matter), it estimates that the rule imposes net costs on a present value basis for all scenarios analyzed — ranging from US$12.8 billion to US$72 billion, depending on the scenario and discount rate.

5. Changes to Section 111(d) “Implementing Rules” Would Govern Future Regulations for Other Sectors

As noted above, EPA also proposes to update the foundational implementing rules for existing source emissions guidelines under CAA Section 111(d), which were promulgated in 1975. Proposed changes include:

  • Authorizing EPA to tailor any given emission guideline to supersede the default implementing regulations.
  • Changing the definition of “emission guideline” such that a guideline is not required to presumptively reflect the degree of emission limitation that the BSER can achieve. Instead, EPA would have to provide “information” on what emission limitation could be achieved, but the decision could be left to states. Importantly, it is not entirely clear whether this proposed change would still permit EPA to establish presumptive limitations if it chooses to do so.
  • Giving states three years (instead of nine months under existing rules) to submit implementation plans after EPA finalizes a guideline.
  • Giving EPA 18 months (instead of four) to approve or disapprove a state plan after submission. (This includes six months to determine if an application is complete, and another 12 months to approve or disapprove.)
  • Giving EPA two years (instead of six months) to finalize a Federal Implementation Plan if a state fails to submit an approvable plan.
  • Replacing the existing definition of “emission standard” with a definition of “standard of performance” reflecting the current version of the statute.
  • Updating the “variance” provision, as noted in item 2 above.

These and other changes would apply prospectively, affecting any Section 111(d) guidelines EPA may adopt in the future. This includes any future guidelines addressing GHG emissions from other sectors — such as oil and gas production, refineries, chemical plants, coal mines, or other stationary source categories. As with EPA’s proposed changes to the NSR rules, stakeholders from virtually every sector of the economy will want to be engaged on these issues.

6. Notable Items EPA Did Not Include in the ACE Proposal

EPA’s proposal does not revisit or reconsider EPA’s 2009 finding that elevated concentrations of GHGs in the atmosphere may reasonably be anticipated to endanger public health and welfare of current and future generations (Endangerment Finding). That Endangerment Finding served as the basis for the CPP and other GHG regulations and remains on the books. Also of note, the ACE rule does not revisit EPA’s carbon pollution standards for new, modified, and reconstructed power plants under Section 111(b), which is a legal predicate for the ACE rule’s proposed regulation of existing power plants. Recent press reports suggest that EPA may propose a replacement for the Section 111(b) new source performance standards later this year.

Next Steps

A public comment period of 60 days will follow EPA’s publication of the ACE proposed rule in the Federal Register. Stakeholders in the power sector, as well as other industries subject to NSR regulations or possible future GHG regulation, should submit comments and engage with EPA on key issues.