The Final Clean Power Plan Will Be Out Tomorrow — Issues to Watch

As we await the release of EPA’s final Clean Power Plan rule, we’ll be watching for 1) the overall ambition of the program and what it means for national emissions reduction goals, 2) how that ambition is shared across states, 3) the way zero-emitting resources contribute to meeting state goals, and 4) state decisions on whether to adopt a rate goal or a mass goal.

1. Decisions that affect the final and interim state goals

The first thing many state government agencies and stakeholders will do is look to see whether changes were made to the final and interim state goals. The sum of these changes is vital to the U.S. contribution towards international climate mitigation goals. On March 31, 2015, the Obama administration announced its Intended Nationally Determined Contribution (INDC) to reduce greenhouse gas emissions by 26 to 28 percent below 2005 levels by 2025. The power sector should play a significant role in meeting this goal. Earlier estimates by the World Resources Institute suggest that the Clean Power Plan as proposed,[1] in combination with federal appliance standards and new industrial measures that displace electricity, would contribute at least 40 percent of the emissions reductions needed to fulfill the U.S. INDC.[2] Recent press reports indicate that EPA has strengthened the overall ambition of the Clean Power Plan,[3] likely resulting in a greater share of the national economy-wide emissions goal coming from the power sector.

Changes made to the state goals could result from narrow fixes to problems with the 2012 base year assumptions (in cases where 2012 was idiosyncratic), adjustments to how the base year is calculated, or from changes related to the building block definitions and how each of the building blocks is captured in the formula used to calculate the state goals.[4] For example, EPA could decide to add or subtract building blocks,[5] revise the mitigation potential for existing building blocks, or change the rules for how existing zero-emitting energy resources (in building block 3) are captured in the state goal formula.

In addition, EPA has strongly hinted there will be changes in the interim goals, particularly for states where building block 2 (shifting from coal to underutilized natural gas) contributed an important share of the calculated emissions reductions goal. Beyond the extra two years of time until the start of the interim compliance period highlighted in press reports last week, we expect that emissions reductions assumed to come from building block 2 will be ramped up gradually to reflect time needed for natural gas pipeline construction and other technical improvements that EPA deems is needed to realize shifts from coal to natural gas. EPA could also adjust the assumed pace at which other building blocks can be deployed to reflect opportunities to more quickly realize energy efficiency or renewable energy investments. Such adjustments could at least partly compensate for reduced near-term ambition in building block 2.

If EPA strengthens the overall ambition of the Clean Power Plan as reported, we would expect that any changes that lead to some states receiving a higher (less stringent) state goal will be balanced, at least in the end, by other states that end up with a lower (more stringent) state goal.

2. Decisions that influence investments in zero- and low-carbon emitting energy resources

EPA’s proposed goal-setting methodology assumed participation from energy efficiency, renewable energy and nuclear energy. EPA is expected to permit some types of zero- and low-carbon-emitting energy solutions that displace fossil-fired electricity to count towards compliance. Such “outside the fence-line” measures are essential to realizing the emissions reductions called for under the Clean Power Plan. In the final Clean Power Plan, we anticipate EPA will weigh in on several design considerations that can influence how clean energy investments are credited as well as decisions on whether to maintain existing facilities and where and whether to invest in new zero- and low-carbon emitting power technologies. Press reports are already indicating that energy efficiency will be treated differently from other clean energy sources in the final rule.

a) Decisions on emissions leakage and double counting

A first consideration entails how EPA decides to address emissions leakage and double counting. The electricity displaced by a given clean energy investment (the marginal electric generating unit within a power region) could be located in a different state from that investment. Under a rate-based standard, giving the implementing or investing state full credit for the emissions reduced risks double counting the emissions reductions. This is because the state where the marginal unit operates less (if different from the state that makes the clean energy investment) can also benefit from lower emissions stemming from the same clean energy investment. Under a mass-based standard, if the marginal unit is located in another state, it is conceivable that the zero- or low-carbon investments could fail to produce in-state emissions reductions that would support achievement of the state’s mass-based goal. However, in both instances, this problem can be fixed if EPA sets strong rules for addressing emissions leakage.

If EPA’s final proposal addresses interstate leakage by requiring states to hold extra allowances or credits for emissions from net power imports (as compared to 2012), and allowing states to subtract out the emissions/emissions rates related to net power exports (also as compared to 2012), then states should be able to give energy efficiency and other sources of clean energy the full value of the emissions displaced without having to worry about double counting. For example, under a mass-based program, as more in-state demand is met with low- and zero-carbon resources, either generation would decline from an in-state marginal unit (in which case the emissions/rate reductions would automatically be captured towards the state goal), or other generation that previously served in-state demand would be exported to the regional power grid. With adjustments for leakage, the associated emissions from these new power exports would be exported alongside sales. Similarly, the state that houses or purchases energy from the marginal unit that operates less as a result of the clean energy investment might need to make up its power needs with additional imports (or make up its export commitments with different resources), and would be charged the associated emissions.

If EPA does not address emissions leakage, it is left with either double counting the emissions reductions, which compromises the overall effectiveness of the Clean Power Plan, or awarding clean energy sources and the states that sponsor those investments less credit than the emissions reductions they caused.

b) Decisions on clean energy ownership

A second consideration relates to the question of zero-emitting energy ownership. This is an issue for renewable energy given that the proposed rule allows existing renewable energy to count towards compliance and the fact that many states rely on out-of-state purchases of renewable energy to meet their renewable portfolio standards. If left to the states, both the states producing the energy and the states purchasing the energy (if different) have a claim to the carbon emissions reductions, potentially leading to double counting of emissions reductions from the same power projects. The way existing renewable energy projects are treated with respect to ownership will affect the ease with which states are able to achieve their assigned goals. Ownership rules for new zero-emitting resources could influence future siting decisions. This issue requires EPA to provide certainty on the ownership issue. If ownership is given to long-term buyers of renewable energy, this can encourage deployment of the most cost-effective renewable energy opportunities.

c) Decisions that encourage states to maintain and extend nuclear power

A third important consideration is how EPA decides to treat nuclear energy, which in 2013 made up roughly 60 percent of net electricity generation from zero-emitting electric generation sources nationwide. Whereas the proposal assumed that 6 percent of nuclear plants are at-risk in all markets, in reality, a much larger share of nuclear generation is at risk, but only in competitive electric markets where low natural gas prices and investments in renewable energy have lead to electricity prices below the variable cost of operation for nuclear plants. To ensure that nuclear energy continues to provide zero-emitting electricity where the cost of operating that electricity is less than building new zero-emitting resources, the Clean Power Plan could be designed to provide built-in incentives to maintain the at-risk units and encourage nuclear relicensing (so long as safety standards are met). Some promising options include: leaving existing nuclear energy out of the rate-setting formula but counting losses due to economic retirements; and allowing some portion of relicensed nuclear generation to meet compliance in addition to new nuclear power and nuclear uprates. EPA’s decisions on treatment of nuclear energy can have an important effect on the attention paid to these resources and on the ability of certain states to meet their assigned goals, both in the near- and longer-terms.

3. Changes that affect the choice of a rate or a mass standard

Finally, a key threshold decision faced in every state plan will be whether to define the goal in the form of an emissions rate (lbs of CO2/MWh) or in the form of a mass-based emissions limit (tons of CO2). While many state government agencies and stakeholders increasingly recognize a variety of advantages in using a mass-based approach, either approach is technically feasible and EPA’s final rule could influence state decisions. States will be looking carefully at decisions that might bias their choice of state plan design, either in favor of a rate- or mass-based standard. Key among these is EPA’s decision on how to specify or quantify the mass-based standard. If one form of the standard is perceived as significantly harder or more expensive to meet than the other, this would influence the state’s decision on which type of standard to adopt. A second factor relates to the ease of linking state programs under the two approaches.

In the technical support documents addressing how to calculate a state’s mass-based limit from the rate goal (rate-to-mass conversion), EPA offered several different approaches resulting in different outcomes in terms of stringency and different ways of accommodating future growth in electric demand. Considering the percent change required from current levels or business-as-usual levels, some mass-based limits appear more stringent than the rate standard, while others appear less stringent. (Ultimately, dispatch modeling would be needed to understand the relative costs of meeting different forms of the standard.) The answer on relative stringency differs from state to state and the national mitigation impacts of the different methods also differ. Ideally, EPA’s choice of methodology will consider overall program stringency and equity considerations while also avoiding a bias in favor of a rate-based standard.

A second design consideration affecting state decisions on the form of the standard is whether EPA decides to relax the requirement that states with rate goals average their state goals together into a single emissions rate before they can trade. This rule makes sense as a way to prevent emissions leakage, but it also requires such a degree of inter-state coordination that it could deter states from establishing multi-state plans under a rate-based state goal. In this circumstance, states that want to benefit from lower cost opportunities available through inter-state trading will opt for a mass-based approach.

As we sort through EPA’s final rule in the coming weeks, we look forward to seeing how EPA resolves these and other challenging issues. We also look forward to working with state governments to define state plans that meet their assigned goals in ways that best align with state interests and stakeholder priorities.

[1] The EPA estimated that the proposed Clean Power Plan would reduce power plant emissions by 30 percent below 2005 levels in 2030.

[2] See Hausker et al., Delivering on the U.S. Climate Commitment: A 10-Point Plan toward a Low-Carbon Future, Executive Summary, 2015.  http://www.wri.org/sites/default/files/Delivering_on_the_US_Climate_Commitment_ES.pdf

[3] The Washington Post reports the final Clean Power Plan will reduce power plant emissions by 32 percent below 2005 levels.

[4] In its proposal, EPA used four technology building blocks to define the best system of emissions reductions and goals for each state: 1) heat rate improvements; 2) shifting from coal to underutilized natural gas combined cycle capacity; 3) renewable energy and nuclear energy; and 4) demand-side energy efficiency.

[5] Press accounts on the final rule design suggest energy efficiency will no longer be a building block and therefore will not be used to quantify state goals.