On June 2, the U.S. Environmental Protection Agency (EPA) released a long-anticipated plan to establish carbon standards for existing fossil fuel generators. The proposed rule consists of over 600 pages and is titled the Clean Power Plan. The Clean Power Plan was released under the authority of Section 111(d) of the Clean Air Act, which directs EPA to issue guidelines that facilitate state regulation of existing sources of air pollutants and gives EPA final approval of state plans.
By 2030, EPA's proposal is expected to reduce carbon emissions from the power sector by 30 percent nationally below 2005 levels. Further, according to EPA, the public health and climate benefits associated with the Clean Power Plan are "worth an estimated $55 billion to $93 billion per year in 2030, far outweighing the costs of $7.3 billion to $8.8 billion."
Key elements of the Clean Power Plan include:
- State-specific emission reduction targets which are framed as a rate: CO2 emissions in pounds (lbs) divided by state electricity generation in megawatt hours (MWh). EPA is also proposing to give states the option to convert the rate-based goal to a mass-based goal, if they choose to, in their state plans.
- Flexibility for states to work individually or in regional groups to meet compliance goals.
- State-specific plans to be approved by EPA for achieving emission reduction targets that must be completed by June 2016.
- An array of compliance options for states that fall under four main categories identified by EPA: (1) efficiency improvements at individual power plants; (2) substituting carbon-intensive power plants for less carbon-intensive fuels; (3) substituting fossil-fuel generation for renewable resources and nuclear; (4) reducing emissions through demand-side management programs.
- An interim compliance period from 2020-2029 with final compliance required by 2030.
- Comments requested by EPA on an alternative compliance option with a shorter period and less stringent levels of performance.
The Clean Power Plan was published in the Federal Register on June 18 initiating a 120-day commenting period that closes on October 16, 2014. The deadline for EPA to finalize the rule is June 2015.
What does it all mean?
The Clean Power Plan has already triggered a multitude of conversations at the national, regional, state, and local levels. Interested parties include everyone from advocacy groups and nonprofits seeking support for the rule, state agencies reviewing their specific targets and compliance paths, and industry groups and private sector businesses working to understand potential opportunities and risks.
Although the dialogue has taken many directions, and there is no clear consensus of what the final rule should look like, we all should recognize the incredible potential that the Clean Power Plan has to transform the U.S. economy. So, what will this mean for those of us involved in the energy field? Here are some preliminary thoughts:
New Business Models: Without doubt, the scope of the Clean Power Plan will result in tremendous industry innovation. New business models, service offerings, methodologies, and products can change the way we approach energy and carbon – whether through new technology or through changes in behavior. As an immediate example, one only needs to look at the efforts currently underway to establish consistent methods for quantifying emissions, new measurement and verification protocols that consider carbon, and revised emission factors that relate to fuel mix.
Cap and Trade: The Clean Power Plan describes in detail the benefits of implementing cap and trade programs such as those in place in California and northeastern states through the Regional Greenhouse Gas Initiative (RGGI). The proposed rule opens the possibility for states to join together to establish similar regional trading programs, but, there it is also likely that at some level the Clean Power Plan could drive the U.S. to a national cap and trade system akin to what has existed in the European Union for years. An economic approach at this scale would cause private sector entities to reevaluate their operations and seek out new revenue streams from a carbon emission perspective.
Nuclear: The Clean Power Plan points out that six percent of the nation's nuclear generation capacity is "at risk" of closure. The proposed rule may boost interest in nuclear generation and possibly change the current economics under which some facilities are struggling to remain cost-competitive against natural gas generation. In other words, by incorporating carbon emission externalities into the cost-benefit analysis, the proposed rule may level the playing field for nuclear generation.
Renewables: As a result of the Clean Power Plan, renewable energy technologies will likely see both an increase in demand and an influx in research funding. The ultimate result would be improved efficiencies and competition making both distributed and utility-scale renewables more cost-effective than in the past. In addition, advances in energy storage technology are likely to follow.
Education: The Clean Power Plan will provide an unprecedented opportunity to engage the general public on the topic of energy and carbon. The opportunity to make industry terms and concepts more mainstream will likely be a turning point for our industry and will facilitate access to and participation from previously unreachable utility customers.
Demand-Side Management Programs: The EPA estimates that "policies that encourage demand-side energy efficiency are valued at a very competitive $16 to $24 per metric ton of carbon". As the most cost-effective alternative, and given that the infrastructure is already in place, energy efficiency programs are likely to see most of the activity as a result of the proposed rule. Most jurisdictions will probably experience an expansion in established DSM programs and the establishment of new programs. Municipal and cooperative utilities not currently required to comply with state-mandated portfolio standards may also establish programs.
Although the final rule could look very different from what is currently proposed, without doubt this is the most significant environmental regulation that the U.S. energy industry has had to comply with in decades. Regardless of the final outcome there is much to be done right now. As with any major transition, our industry will need to build a support platform of tools, methodologies, processes, and even a "language" so all parties can operate under a common framework. Most importantly is the development of, and consensus for, accounting protocols that ensure reductions are not "double counted" and that provide a clear approach for dealing with electricity imports across state lines and other multistate issues.
Without doubt the dialogue over the next few months will be interesting and the opportunities endless – not just to increase the overall competitiveness of the U.S. but also to reinvent our industry in a more sustainable way. It is on us to get creative and identify the possibilities – they are there.