What to Watch For in EPA’s Final Clean Power Plan: More Guidance from EPA on “Outside the Fence” Measures

Nathan Richardson and Karen Palmer

Later this summer, the US Environmental Protection Agency (EPA) will release its final Clean Power Plan, setting carbon emissions goals for existing power plants. This is the sixth post of ten in a series—What to Watch For in EPA’s Final Clean Power Plan—in which RFF experts address what to look for when the final regulations are released.

One of the virtues of the Clean Power Plan is the flexibility allowed in the development of state plans. For example, states that choose to retain an emissions rate goal (rather than converting to a mass-based goal) can get credit for increased generation from renewables and for energy savings resulting from investments in energy efficiency. These investments are often described as “outside the fence” options because they are not made at emitting facilities. Another type of flexibility is the ability to average emissions rates across facilities, including facilities out of state. EPA’s assumptions about outside the fence options and emissions rate averaging (trading) are the subject of some legal controversy, as discussed in RFF’s legal FAQ, but here we consider some practical rather than legal complications about how they interact. In EPA’s proposed Clean Power Plan, there are important features of these outside-the-fence compliance options that raise potentially fatal flaws that make interstate trading under a rate-based policy difficult. We will be looking for EPA to bring more clarity to this situation in its final rule.

One issue is crediting of energy efficiency. EPA expects that energy efficiency will make an important contribution to compliance with rate-based goals, but this may be difficult to achieve in practice. In the construction of the four building block components of state targets, EPA discounted the value of energy efficiency in power-importing states—no one gets credit for the discounted portion. This situation might be remedied if the states that trade power combine forces and propose a joint plan to EPA, but cooperation on this front raises another complication.

Most states have developed their own systems for measuring the performance of energy efficiency policies and measures. Setting aside for the moment some very fundamental issues about current approaches for the measurement of energy savings addressed in a prior blog post, one might stipulate that all these systems provide an acceptable measure of energy savings. However, one thing is for certain—they are different. These differences make interstate crediting of energy efficiency difficult. Moreover, the fact that the methods are different provides political and potentially legal standing for interested parties who want to object to the use of credits from out of state where energy efficiency is measured differently. As to how well current approaches work, evidence from recent economics studies suggests that engineering methods similar to those that are used in many state and utility efficiency program evaluations tend to overestimate the energy savings of such programs. Empirical and experimental approaches to evaluating programs can provide a more reliable measure of program-induced energy savings that are actually achieved. EPA will likely address these evaluation and measurement issues in its final rule and may provide more specific guidance on how to narrow or reconcile the differences among approaches and perhaps address ways to encourage states to transition to more evidence-based analysis.

With respect to renewables, the proposed rule indicates that renewable energy from existing facilities might be attributed to the state where customers provide financing, which in the case of a renewable portfolio standard essentially means who gets the renewable energy credits (RECs). But new renewables may be perversely affected by this approach as a result of substantial differences in state emission rate goals. Moving an investment 20 miles across state lines may change the value of the investment due to the greater number of credits that could be earned. Such a short move may not affect its resource value, but the same incentives exist to potentially move the renewable generator hundreds of miles. Such a move may cause renewables to be built not where they are of most technical value, but instead where they are of greatest compliance and financial value.

In combination, these issues pose serious challenges to the prospects for rate-based interstate trading. With the exception of small groups of neighboring states served jointly by one or two utilities where coordinated energy efficiency evaluation and renewables planning may have already been addressed, confronting these issues on a state-by-state basis could be very daunting. Further complicating potential cooperation around rate-based policies is the need to come up with a multi-state emissions rate average that is likely to disadvantage some states and require some intensive interstate bargaining.

We will be looking at the final rule to see if EPA finds a way to resolve these challenges. Maybe EPA will come up with a regional approach to crediting new renewables or its own protocol for energy efficiency evaluation for purposes of Clean Power Plan compliance. Another way to resolve these issues is for states to convert to a mass-based system. This approach makes the renewable energy and energy efficiency crediting issues moot, from EPA’s perspective, and it leaves those issues in the hands of the states (though it doesn’t eliminate them). While it is unlikely that EPA will go so far as to require mass- based approaches for cooperation, it will be interesting to see if the final rule offers greater incentives for a mass-based approach or otherwise makes it the path of least resistance for states.

Read the other posts in the series, What to Watch For in EPA’s Final Clean Power Plan:

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