What to Watch For in the Clean Power Plan

What to Watch For in EPA’s Final Clean Power Plan: When Do New Plants “Exist”?

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 final post in the 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. 

As you probably already know, especially if you have been following this blog series, the Clean Power Plan applies to the country’s existing fleet of power plants. New plants are subject to different, stricter standards. But the Clean Power Plan sets targets out to 2030 and beyond. “New” plants could be more than a decade old by that time. When—if ever—do these new plants fall under the scope of the Clean Power Plan?

Unfortunately, the treatment of new generators under the Clean Power Plan was not resolved by EPA in its proposed rule. This matters especially for new natural gas combined cycle (NGCC) generators. Utilities have been making NGCC investments for years and are likely to continue doing so. Excluding new NGCCs from the Clean Power Plan would have important economic consequences, but EPA gave little, if any, guidance on when and how new plants become “existing” plants and therefore subject to the plan.

Instead, EPA requested comment on two issues—first, on whether states’ ability to build new NGCC should be included as a building block in calculating state emissions goals and, second, on whether (and how) states should be allowed to include new plant emissions in their compliance plans, regardless of whether EPA considers them in setting goals. In short, EPA punted on new plants in the proposal. This is possibly the most important unresolved aspect of the Clean Power Plan. It seems likely that EPA will resolve these issues in the final rule, having now received many comments on the topic. What can EPA do? What should it do? What will it do? The answers have both an economic dimension and a legal dimension.

From an economic standpoint, NGCC investments offer a cost-effective emissions abatement pathway; as such, EPA should include new NGCCs as a building block for setting state goals and should allow states to include them in compliance plans. Investments in NGCCs allow for reduced utilization or retirement of coal boilers. Displacing coal boilers with new renewables offers more abatement potential but at a higher cost than with new NGCCs. For the modest level of emissions abatement called for by the Clean Power Plan, new NGCCs are a more cost-effective pathway to emissions reductions than new renewables in many states. If low natural gas prices do not persist or renewables costs fall faster than predicted, renewables will become a more attractive investment—but new NGCCs will likely remain cost-effective in some states anyway.

A second economic reason to allow for the inclusion of new NGCCs in state plans is to avoid the division that will occur in electricity markets if they are excluded. Especially in states that adopt mass-based compliance plans, the exclusion of new NGCCs could relatively disadvantage incumbent fossil-fired generators by obligating them to pay a CO2 emissions fee, while sparing new NGCCs of that burden. The lack of equity in such an approach is obvious. Furthermore, this bifurcation could allow for and encourage increased emissions from new NGCCs at the cost of the environmental integrity of the program since new NGCC emissions would not count against state targets.

Legally, there is little guidance from EPA and almost none from the statute. Standards for new sources are common and well understood, but EPA has very rarely issued standards for existing sources since their emissions are usually covered under other Clean Air Act programs. That means there’s little legal precedent for how new- and existing-source standards interact. The law says new source standards should be revised every 8 years. Apparently, EPA’s past practice was to keep new and existing sources separate until the next revision of the new source standards. That means a new source would not be subject to existing-source standards for up to 8 years.

Historically, this didn’t matter much. New source standards are stricter, so any new source would already meet the existing standards. Past existing-source standards also usually applied to individual emitters—the regulations lacked the state targets and trading programs the Clean Power Plan has. Without this larger structure, there was no perverse incentive to escape the program by building new plants, and no relative advantage to new entrants since, again, new sources were subject to stricter standards.

The Clean Power Plan probably requires EPA to revisit this traditional approach, for the economic reasons described above. Luckily, the agency can do so. The traditional approach isn’t required by the Clean Air Act. The statute doesn’t say anything at all about how new- and existing-source programs are supposed to work together. Implicitly, therefore, Congress delegated authority to EPA to work the issue out. The agency’s past approach worked, but it has the authority to change it now. In principle, it appears EPA could declare that new sources become “existing” and therefore subject to the plan as soon as they, well, exist. Or it could pick some other time period—perhaps a year. In any case, however, EPA will need to make a decision and state it in the final rule. This is one issue states cannot decide on their own.

So what will EPA do? The guess here is that they will not add a building block for new NGCCs to be used in developing state emissions targets because it would require a type of equilibrium modeling that was avoided in developing the four building blocks set forth in the proposed rule (maybe as an attempt to avoid lawsuits that focus on modeling issues). Adding another building block could also provide another route for legal attack. Even without a new building block, allowing states to include new NGCCs in a compliance plan seems likely. The economic arguments for such an approach are so overwhelming that they may trump any legal risk aversion.

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