TOPIC #1

EPA’s Proposed Power Plant Rule: Third Time’s the Charm?

EPA proposed greenhouse gas rules for fossil fuel-fired power plants that anticipate future technologies.

Notes & Sources

On May 11, 2023, the U.S. Environmental Protection Agency (EPA) proposed new CO2 emissions standards for fossil fuel-fired power plants. The proposal sets limits for new and reconstructed gas-fired combustion turbines (CTs); existing coal, oil, and gas-fired steam generating units; and certain existing larger, more frequently used gas-fired CTs. Those limits are based upon emissions benchmarks set by high levels of carbon capture and storage or hydrogen-rich fuel blends.
The proposed rule does not encompass new fossil fuel-fired steam generating resources, as it does not believe any new such units will be constructed or reconstructed. Moreover, there is some expectation that EPA will propose a rule for smaller gas-fired units not covered under this proposed rule.
The proposed rule would repeal the 2019 Affordable Clean Energy (ACE) rule, which had been vacated and remanded by a federal court. ACE had proposed Clean Air Act (CAA) compliance for existing coal units through on-site heat rate improvement measures as well as six candidate technologies and operation and maintenance practices. EPA deemed that the ACE did not reflect the best system of emissions reduction for steam generation units. ACE had been the successor to EPA’s 2014 Clean Power Plan (CPP).
Comments were closed on the proposed rule after August 8, 2023. The timing of final promulgation is unclear, particularly as FERC will discuss the impact of the proposed rule at its annual technical conference on reliability in early November 2023.

Figure 1.1: Top 15 Owners of Gas-Fired Generation Units* Potentially Subject to EPA Proposed GHG Rule

Note: *Currently operating units with nameplate capacity >300 MW and annual capacity factor >50%.

Source: S&P Global Market Intelligence

KEY TAKEAWAYS

For the third time in as many presidential administrations, EPA has taken another run at CO2 emissions rules for fossil fueled-fired power plants. The Supreme Court’s 2007 decision in Massachusetts vs. EPA allows EPA to regulate greenhouse gases; the recurring question is how.

The key issue of whether standards based upon 90% carbon capture and 96% green hydrogen are “adequately demonstrated” will be hotly debated and likely litigated.

Industry participants, including FERC, will focus on additional analysis and discussion of potential reliability impacts of the proposed rule.

Incentives in the Inflation Reduction Act are expected to facilitate development and commercialization of the carbon capture and sequestration and hydrogen technologies required under the rule, but the question remains: how soon will they arrive?

The key issue of whether standards based upon 90% carbon capture and 96% green hydrogen are “adequately demonstrated” will be hotly debated and likely litigated.

Industry participants, including FERC, will focus on additional analysis and discussion of potential reliability impacts of the proposed rule.

Structure of the Rule: Numerous Unit Categories

Under the CAA, new stationary emissions sources like power plants are subject to use of the “best system of emissions reduction” (BSER). The proposed rule does not use the broader approach of the CPP, which attempted to interpret BSER to include outside-the-fence approaches.
The proposal varies targets and BSER based upon technology, duty (i.e., baseload, load-following, or peaking), and fuel. It differentiates emissions reduction limits, approaches, and compliance expectations (see Figures 1.3 to 1.5) under the following rubric:

Fuel type (coal or natural gas, primarily)
Capacity of the unit (the proposed rule has established a 300 MW threshold for comment)
New or existing generation
Remaining lifespan of unit (i.e., whether operation is planned beyond certain date thresholds)
Capacity factor

Figure 1.2: Operating U.S. Gas-Fired Plants Potentially Subject to EPA's GHG Proposal*

EPA has estimated that 38.6 GW of gas-fired CTs are likely subject to the proposed rule.
An analysis by BTU Analytics finds that the affected generation could be twice EPA estimates if steam capacity is prorated to CTs that are part of a combined-cycle plant.

Note: *Currently operating units with nameplate capacity >300 MW and annual capacity factor >50%.

Sources: S&P Global Market Intelligence; BTU Analytics

The proposed rule puts gas-fired plants under a more rigorous compliance standard than they are currently subject to. Some other key features of the rule:

The proposal assumes all coal units will retire by 2040 or implement carbon capture and sequestration (CCS) at a 90% capture rate. Note that the rule requires legally enforceable commitments and milestones for affected coal units that have indicated their intent to retire to avoid retrofits under the rule.
Natural gas plants will have to use hydrogen blending (proportions vary by compliance year) or CCS at a high capture rate.

Figure 1.3: Compliance Pathways: Proposal for New Stationary Combustion Turbines

Source: EPA

Figure 1.4: Compliance Pathways: Proposal for Existing Stationary Combustion Turbine

Source: EPA

Figure 1.5: Compliance Pathways: Proposal for Existing Coal-, Gas-, and Oil-Fired Boilers

Source: EPA

EPA Estimates Effects of Proposed Rule

EPA modeled the impact of the rule in its regulatory impact analysis (RIA) (see Figure 1.6). To characterize the effect of the rule, it set as baseline a post-Inflation Reduction Act (IRA) analysis, which modeled a significant reduction in emitting resources and increase in renewable resources. The baseline accounts for a significant amount of change in the forecast; thus, the assumed impact of the proposed rule is an incremental 23 million metric tons over the IRA baseline in 2040.
A graphical illustration of the changes in installed capacity and generation by fuel type is shown at Figures 1.7, 1.8, and 1.9.
A few criticisms of the RIA from some industry participants include the following:

Assumes “overnight” transmission: The analysis assumes that required transmission to deliver significantly higher renewable energy to demand centers becomes operational as needed.
Natural gas prices at odds with EIA forecast: The RIA assumes a long-term Henry Hub price of natural gas of $1.90 to $2.00* per MMBtu in 2035-2040 versus EIA projections of gas prices of $3.68 to $3.94 during the same period.
Too bullish cost of hydrogen: Clean hydrogen, which consumption under the RIA reaches nearly 300 trillion Btu (with 11 GW of natural gas units co-firing with hydrogen by 2035), is assumed to reach a price of $1/kg by 2035 (equivalent of ~$7.40/MMBtu) and $0.50/kg by 2040, compared with a current cost of $5/kg to $7.50/kg. Both hydrogen and natural gas costs are critical assumptions, as the RIA projects no effects on retail electricity prices from the baseline (estimated at ~9.3¢/kWh* in 2040). The rule also assumes adequate hydrogen delivery infrastructure by the relevant implementation dates, an ambitious target.
Understatement of electrification effects: The RIA shows that under the proposed rule, power generation would increase from 4,341 TWh in 2028 to 5,050 TWh in 2040, a 1.3% growth rate (compare 3,945 BkWh total end use in 2021 ). It is unclear whether assumed widespread vehicle and building electrification is factored into the analysis and costs.

Figure 1.6: Key Impacts of EPA Proposed GHG Rule

Key Impacts of EPA Proposed GHG Rule per EPA Analysis

Overall shift from coal to gas and renewables
Projected impacts are highest in 2030, reflecting the imposition of the proposed emissions guidelines, and are smaller thereafter
Analysis assumes 45(q) (tax credits for CCS) is available for 12 years, after which units must dispatch based on unsubsidized operating costs, reducing CCS utilization
45 GW of coal-fired units have committed retirements by 2035 and operate at an annual capacity factor of 20% or less in 2030; only 9 GW of coal-fired units (all with CCS) remain by 2040
Total coal retirements between 2023 and 2035 are projected to be 126 GW (or 18 GW annually), compared to a recent historical retirement rate of 11 GW per year from 2015 to 2020
25 GW of economic gas combined-cycle additions occur by 2035 (300 MW incremental to the IRA baseline), and 43 GW of economic gas CT additions occur by 2035 (23 GW incremental to the IRA baseline)
Thermal resources tend to be operated less frequently over time

Source: EPA

Figure 1.7: Projected Capacity by Fuel Type Under Baseline EPA Analysis (IRA) (2028-2040) (GW)

Source: EPA

Figure 1.9: Projected Generation by Fuel Type Under Proposed EPA Greenhouse Gas Rule (2028-2040) (TWh)

Source: EPA

Figure 1.8: Projected Capacity by Fuel Type Under Proposed EPA Greenhouse Gas Rule (2028-2040) (GW)

Source: EPA

EPA assumes that its proposed GHG rule will have only modest incremental impacts on the capacity mix, attributing much of the anticipated changes in that mix to effects of the Inflation Reduction Act.

"Adequately Demonstrated" or a Big Bet on New Technology?

A key requirement under the Clean Air Act §111, EPA must determine the BSER that is "adequately demonstrated", taking into account the cost of the reductions, non-air quality health and environmental impacts, and energy requirements to determine the emissions limitations under its regulations (emphasis added). The EPA spends much time in the proposal discussing adequate demonstration from a legal perspective.
EPA argues in the proposal that it may treat a set of control measures as "adequately demonstrated" regardless of whether the measures are new or in widespread commercial use and may reasonably project the development of a control system at a future time and establish requirements that take effect at that time (emphasis added). EPA states that CCS with 90% CO2 capture and clean hydrogen co-firing meet the criteria for adequate demonstration.

In its 2015 greenhouse gas (GHG) new source performance standards, EPA found that CCS was adequately demonstrated (including being technically feasible) and widely available and could be implemented at reasonable cost.
EPA also found that low-GHG hydrogen co-firing is a BSER for the target compliance date given developments in turbine technology that can accommodate increasing blends of hydrogen.

Critics point out that both CCS and clean hydrogen fuel require significant new pipeline infrastructure to sequester CO2 or move hydrogen, respectively, and the difficulty of siting such facilities. They also point to the lack of scale of either technology and uncertain time and cost of those technologies.
The Biden administration points to generous tax credits under the IRA that will be drivers of these technologies: $85/ton of CO2 captured and stored; $3/kg for hydrogen with a CO2-emitted equivalent of <0.45 kg of CO2-equivalent per kg of hydrogen.
EPA’s interpretation of “adequately demonstrated” will likely be a subject of litigation over the rule, if promulgated as proposed.

Many Open Questions and Issues

The proposed rule solicited comments and input on many issues surrounding implementation and left open others for consideration. Those include the following:

Thresholds: Characterization of “large” (300 MW) and baseload (>50% capacity factor) may be adjusted based upon comments.
RULOF: EPA notes that states could apply less stringent standards based upon a particular facility’s remaining useful life and other factors (RULOF), although it is uncertain what kind of showing is required to demonstrate that the facility cannot reasonably achieve the stringency of the BSER.
Operating disincentives: ISO-New England pointed out in it comments that the capacity factor thresholds will incentivize less efficient operations of the natural gas fleet and will also reduce production by gas units nearing the 50% threshold that may be needed for system reliability. Its simulations found that fossil generation would not decrease, but it would shift from larger, efficient gas turbines to smaller, less efficient oil- and gas-fired units.

System operators had significant concerns about the effect of the rule, fearing that if the technology and infrastructure failed to timely materialize, then forced retirements of coal and even efficient gas-fired generation would leave the future supply of dispatchable generation below what is needed to serve demand, potentially resulting in “material, adverse impacts” to reliability.
The proposal may be favorably received by utilities that have been pursuing net-zero goals and IRA-assisted projects, such as NextEra, which includes in its blueprint converting 16 GW of gas units to run on green hydrogen.
Other comments by various stakeholders are summarized in Figure 1.11.

Figure 1.10: Capacity (MW) of Gas-Fired Combustion Turbines Potentially Affected by Proposed GHG Rule by Reliability Region and Subregion

Sources: S&P Capital IQ Pro; ScottMadden analysis

Figure 1.11: Selected Filed Comments on EPA’s Proposed Power Plant GHG Rule

Note: Some comments have been summarized and paraphrased for brevity.

Source: Comments of parties noted, available at www.regulations.gov/docket/EPA-HQ-OAR-2023-0072

IMPLICATIONS

The Biden administration continues its “all of government” carbon emissions reduction efforts, of which EPA’s proposed power plant GHG rule is a part. It is unclear how many of the terms of the proposed rule will be promulgated, and another rulemaking for smaller units can be expected.

Utilities with net-zero mandates or aspirations are likely considering emissions reduction strategies, including (but not limited to) the BSER proposed by EPA. But both utilities and system operators will need to analyze risks (particularly around reliability), bridging and compliance strategies, and unit-specific implications of the proposed rule. Regardless of outcome of the proposal, the pressure on the thermal generation sector will continue.

CONTACT OUR EXPERTS

On EPA's Proposed Power Plant Rule

Ed Baker

Partner

ebaker@scottmadden.com 404.814.0020

Gerardo Morales

Partner

gjmorales@scottmadden.com 404.814.0020

RECENT INSIGHTS

Available at scottmadden.com

ScottMadden posts energy and utility industry-relevant content and publications on a regular basis. The list below is a sample of recent insights prepared by our consultants.