The Final U.S. Clean Power Plan

On August 3, the U.S. Environmental Protection Agency (EPA) released two final rules regulating greenhouse gas emissions from new and existing fossil-fired power plants. The rule represents the first-ever national standard on greenhouse gas emissions from power plants. This critical questions provides a brief overview of the new rule for existing power plants, explains how it differs from the draft rule, and why it is important. The rule is expected to have far reaching impacts on the U.S. electric power sector, the nuances of which will not be fully understood for some time to come.

Q1: What is the Clean Power Plan?

A1: The Clean Air Act gives the head of the EPA the authority to regulate pollutants emitted from stationary sources, and EPA is using that authority to regulate greenhouse gases from new and existing fossil-fired power plants. The Clean Power Plan is the name for the EPA’s rule to regulate greenhouse gases (often referred to by the administration as carbon pollution) from the electric power sector and is a component of the Obama administration’s larger overarching plan to address climate change. Regulating greenhouse gases from electricity generation in the United States is important because the sector is responsible for over 30 percent of U.S. greenhouse gas emissions—more than any other single sector.

The rule covering existing power plants does not mandate an overall level of emission reductions required, but instead determines what is considered the “best system of emission reduction” (BSER) and uses the BSER to set state-level targets. The EPA leaves it entirely up to the states to decide how they meet those targets, as long as states submit a plan detailing how they will do so and demonstrate that the plan is enforceable. The EPA estimates that the Clean Power Plan will result in emission reductions of 32 percent below 2005 levels by 2030 across the nation’s electric power sector.

Q2: How does the final version of the rule differ from the draft?

A2: The final rule is different from the draft rule (which was released in June 2014) in several important ways. In response to stakeholder comments, EPA made several significant changes that will impact the ultimate cost and effectiveness of the rule.

Timeline

The final rule gives states more time to prepare their plans and meet their targets. The deadline for states to submit their final compliance plan is still September 2016 but states will be able to request a two year extension with all final plans due by September 2018. Many stakeholders had requested that EPA extend the timeline to accommodate the administrative, technical, and policy challenges of designing a compliance plan. EPA accommodated that request by offering an extension, but in order to ensure that states stay on track and do not procrastinate on planning, EPA is requiring that states submit an “initial” state plan by September 2016.

Once states submit a final implementation plan, EPA still has up to one year to approve it, and states will have an additional three years before they must demonstrate interim compliance in 2022. In the draft rule, the interim compliance period began in 2020, but in the final plan, the compliance period does not begin until 2022.

Targets

The draft and final rule achieve similar levels of expected emission reductions nationally (30 percent reduction by 2030 for the draft and 32 percent reduction for the final – a 9 percent difference in emissions reduction in total), but the final rule has changed elements of the methodology used for calculating the emission intensity target for each state.

The draft rule had four “building blocks” used to make calculations about the emission intensity reduction possible in each state: heat rate improvements at coal plants, fuel switching to natural gas, fuel switching to renewables and nuclear (up to a point), and energy efficiency. All of these building blocks were likely revised in some way. Most dramatically, the energy efficiency block was removed entirely and therefore not used as part of the criteria for setting state targets, although states will still be able to use energy efficiency as a compliance mechanism. Some states argued that consumer oriented energy efficiency was outside their control and therefore not a viable building block for setting expectations for a state’s baseline. As a result of changes to the building block methodology and baseline, the goals for many states have changed from the draft rule.

Flexibility

The final rule includes a number of innovations on the draft rule that are designed to give states additional flexibility over and above a more generous timeframe.

States can choose from among three ways to interpret their emissions standard (rate-based goal, mass-based goal and a mass-based plus option) and two types of plans to meet their goals (an emissions standard plan and a state measures plan). States can also engage in trading of credits or permits with other states and determine the trajectory of emissions reduction during the compliance period.

Reliability

The draft rule came under fire by certain critics claiming the aggressive timeframes and targets would threaten grid reliability. The final rule addresses reliability concerns in several ways, including providing longer planning and compliance timeframes and providing flexibility in program design options so states have the flexibility to address their unique reliability concerns. Additional measures include a requirement that states consider reliability in the plans, mechanisms for states to revise plans should they encounter unanticipated reliability concerns, a reliability safety valve to allow a power plant to override its emissions constraints to provide reliability of critical generation, and coordinated monitoring of final rule implementation by the Department of Energy and the Federal Energy Regulatory Commission (FERC).

Shifts in Emphasis

The final rule includes a number of other important changes to how it emphasized or promoted certain energy sources and community engagement.

First, the final rule remedied some disadvantages for nuclear. The draft CPP was criticized by many for its treatment of nuclear power, the largest source of zero carbon electricity in the United States -nuclear provides approximately 19 percent of U.S. power generation. Many commenters sought greater incentives for nuclear power to ensure the stable and ongoing supply of zero carbon base load electric power. In the draft rule, many stakeholders argued that nuclear was unfairly treated—both in terms of nuclear units under construction and existing nuclear plants. With regards to the former, the five units under construction in three states had been treated by EPA as already operational and were not given credit for emission reductions under the draft rule. EPA now allows those states to count those plants as means of compliance and not in their baseline.

Second, the final rule created a new mechanism to reward early investment in renewable energy and demand-side efficiency efforts in low-income communities. The Clean Energy Incentives (CEI) plan allows states to earn tradable credits by investing in wind, solar, or low-income community energy efficiency programs for investments made in 2020 and 2021. These credits, earned before the compliance period begins, could then be used towards compliance or sold to other entities to meet compliance. The CEI is a brand new feature of the CPP and EPA will be taking public comment on it before the plan finalized. The final rule a great deal of information about the estimated public benefits as well as resources for local communities, especially low-income communities, to engage.

Q3: What are the energy sector implications of the final rule?

A3: The final rule is likely to continue to push the electricity sector in a direction it is already heading: towards greater reliance on natural gas, renewables, and energy efficiency. Our joint analysis with the Rhodium Group on this topic in November that found that natural gas is likely to be a primary mechanism for compliance with the CPP, but that state implementation choices matter immensely in determining the upstream impacts the CPP. However, we anticipate that a few facets of the final rule will have energy sector impacts. First, the most direct impact may be on how the final rule sets targets for individual states. Each state will make its own compliance decisions and those decisions will influence both the electric power markets in that state or region but also perhaps the upstream energy sector as well. Second, there is a tremendous amount of uncertainty in the planned versus realized impacts of energy efficiency measures. It remains to be seen whether the lack of energy efficiency in the building blocks may make some states more conservative about how they use it as a compliance mechanism (although the EPA made it clear that demand side energy efficiency is a valid compliance option.) Energy efficiency is an important tool for reducing demand—and keeping costs low. By reducing the demand for new generation, energy efficiency also allowed more coal to stay online than in scenarios without energy efficiency. Whether and how states end up using energy efficiency matters a lot for the ultimate energy sector impacts.

In addition, the longer timeline for implementation may dampen the “dash to gas.” The shorter timeline meant that states might have ended up relying on natural gas to replace a large portion of coal-fired generation, because natural gas is cheap, easy to build (and finance), and can be put in place relatively quickly (especially compared with, for example, a new energy efficiency program). The final CPP, by extending the interim compliance deadline, may allow more time for states that want to put in place policy signals allowing the development of renewables (and provide more time for renewable costs to come down, becoming more competitive with coal). In addition, the announced incentive program only provides incentives for renewables—not for gas—providing another way for states that are interested in developing renewables to do so.

It is far too early to tell what the broader energy sector impacts of the CPP will be, but the final rule announcement today will allow states and other stakeholders to start analyzing various option on the table. We plan to follow up our work modeling the draft CPP with additional modeling on the final rule, again in partnership with the Rhodium Group. That work is forthcoming this fall.

Q4: What is the importance of the Clean Power Plan for the Paris UNFCCC climate negotiations at the end of this year?

A4: The Clean Power Plan is the single-most important contribution to meeting the Administration’s goal of reducing greenhouse gas emissions 26-28 percent by 2025, submitted to the UNFCCC in the form of an INDC. While the INDC includes other actions, such as reducing methane emissions, reducing emissions from vehicles, and a host of other measures, finalizing the rule is important for demonstrating to the international community that the United States has the political will and commitment to take concrete action on climate change. While some have claimed that a Republican administration could undo the CPP and therefore undermine the international negotiations, a new administration would have to go through the same notice and comment rulemaking to withdraw the rule, and would also have to replace it with another rule—a tedious, time-consuming, and more onerous process than the alternative (more leniency in enforcement). In defending the final rule, the administration is going to great lengths to emphasize how ambitious and legally defensible they believe the CPP is – a message that is intended for both domestic and international consumption.

Q5: What comes next?

A5: The hard work of implementing the Clean Power Plan has just begun. From this point forward, activity surrounding the CPP will follow three parallel tracks. First is the ongoing administrative process at EPA. EPA will take public comments on the CEI and the model federal implementation plan (FIP) released along with the two final rules. The model FIP is an idealized model plan that resembles what EPA would impose were states to refuse to submit their own plans (or submit plans that did not meet EPA’s criteria in terms of stringency or enforceability).

Second is the process at the courts. Both rules announced today have been targets of legal challenges. The timeframe for hearing the lawsuits is uncertain but several years of litigation, both of the rule itself and of the state implementation plans, are certain. The administration believes that several changes made between the draft and final rule strengthen the legal grounds for the final rule but legal challenges are expected just the same.

The third track is at the state level. States will continue deliberations with the EPA and their own stakeholders over interpretations of the rule and begin the complicated process of determining their compliance plans. The process in each state is likely to be different, involving a variety of administrative bodies (including the governor’s office, state public utility commission, air regulatory agency, and, in many states, the state legislature), stakeholder groups (including citizens), and regulated entities.

Sarah Ladislaw is a senior fellow and director of the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Michelle Melton is a research associate with the CSIS Energy and National Security Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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