EPA Proposes Affordable Clean Energy Rule as Replacement for Clean Power Plan
On August 21, the Environmental Protection Agency (EPA) proposed the Affordable Clean Energy (ACE) rule as a replacement to the 2015 Clean Power Plan (CPP). The EPA had been expected to repeal the CPP ever since the former head of the department, Scott Pruitt, announced the agency’s intention to do so in October 2017.1 The new rule aims to create guidelines for states to reduce greenhouse gas (GHG) emissions from existing coal-fired power plants and is subject to a 60-day comment period. The proposed rule will likely lead to legal challenges from environmental and clean energy groups. The EPA is hoping to finalize the ACE rule by early 2019.
The EPA based its authority to promulgate the CPP on Section 111(d) of the Clean Air Act (CAA), and it is using Section 111 once again as the basis for the ACE rule. However, the new rule returns the agency to a more traditional reading of the Act where Section 111 is only narrowly applied to single sources of emissions (e.g., individual power plants).
As originally positioned in 2015, the EPA issued the CPP to establish statewide carbon dioxide (CO2) emissions standards for existing fossil fuel-fired electric generating units with the loose goal of cutting CO2 emissions by 32% by 2030, as measured from a 2005 baseline. It encouraged utility companies to make broad, systemic changes to reduce emissions, including replacing coal-fired generation with renewables and natural gas, and assigned each state a specific carbon emissions reduction goal.
States were given four main options for meeting the CPP goals:
- Improve the efficiency of existing coal-fired power plants
- Rely more on existing natural gas plants (lower emissions)
- Increase the use of renewable energy
- Participate in a multi-state emissions trading program
The enactment of the CPP was stayed by the U.S. Supreme Court and has never gone into effect.
In proposing the ACE rule, the EPA says that it hopes to reduce power sector CO2 emissions to around 34% of 2005 levels by 2030 by simply improving the heat-rate efficiency of existing coal-fired power plants. The rule would direct states to set limits on GHG emissions that can be achieved through relatively minor upgrades to existing coal power plants. States would have three years to submit their plans, and the EPA would then have 12 months to act on those plans. States can also opt out altogether if they choose.
To facilitate power plant upgrades, the EPA has also proposed rewriting its New Source Review (NSR) rule. Under the current NSR rule, a power plant must undergo new pollution permitting if an upgrade would increase its emissions over the course of a year. The proposed changes in the ACE rule would alter that timeframe and allow plants to avoid NSR review if they can show their emissions are not increasing on an hourly basis.
Implementation of the CPP was originally meant to help the United States fulfill its CO2 reduction commitments under the Paris Climate Accord,2 so the proposal to replace the CPP with the ACE rule further distances the U.S. from the Paris Accord.
The ACE rule proposal also has significant symbolic impact on the U.S. coal-based electric power industry given the increased latitude it provides. It is unclear; however, if the ACE rule would lead to new coal plant construction in the United States as other forces are also in play. Under the new rule, the EPA projects coal capacity growth to increase by 1%-3% with natural gas and renewable capacity growth both decreasing; however, some industry leaders and experts are skeptical given the attractive forward curves of natural gas and renewables.
The proposal to rewrite the NSR rule could also leave the ACE rule legally vulnerable. Two similar reforms to the NSR rule were rejected by the D.C. Court of Appeals in 2005 and 2006; however, the specific change from measuring emissions yearly to measuring them hourly has not yet been fully vetted in court.
Side-by-Side Comparison of the CPP and ACE Rule
|CO2 Emissions in 2030||32% of 2005 levels||34% of 2005 levels|
|EPA’s Policy Role||Broad||Narrow|
|Ways to Meet Goals|
|Can States Opt Out?||No||Yes|
|NSR Permitting||Power plants must go through NSR review if upgrades result in increased annual emissions||Power plants must go through NSR review if upgrades result in increased hourly emissions|
|Generation Mix Implications||Increased investment in natural gas and renewable capacity, as well as energy efficiency||Unclear, but most likely a slightly longer runway for coal plants with natural gas and renewables still dominating in the long term|
While the proposal of the ACE rule may carry symbolic and political implications, the regulatory changes are unlikely to materially tilt the marketplace away from an economic preference for natural gas and utility-scale renewables as sources of fuel versus coal-fueled sources. Going forward, both market forces and regulations will remain major factors with respect to competitiveness for electric generation, particularly coal. However, the die may have already been cast for the future of new coal generation development in the United States as well as coal plant retirements.
1ScottMadden Fossil Minute. “EPA Announces Repeal of Obama’s Clean Power Plan.” October 2017
2ScottMadden Fossil Minute. “Outlook for US Coal and Oil Electric Generation Industry with Exit from Paris Climate Accord.” July 2017
This report is part of ScottMadden’s Fossil Minute series. To view all featured Fossil Minutes, please click here.
Additional Contributing Author: Mike FlintView More
Welcome to ScottMadden!
Sussex Economic Advisors is now part of ScottMadden. We invite you to learn more about our expanded firm. Please use the Contact Us form to request additional information.