Rethinking the Clean Power Plan

EPA’s proposed Clean Power Plan, released in June, has been the subject of unprecedented debate.  On October 28, EPA took the unusual step of issuing a notice which highlights the areas of vulnerability it sees in its proposal and the path it may take to fix them.

The notice addresses three important issues:  (1) the role of natural gas in lowering power plant emissions, (2) the timeline for emission reductions, and (3) the impact of renewables and energy efficiency on the amount of power produced by burning fossil fuels.   

EPA’s notice illustrates how it might rework the Plan to make it more realistic and palatable to critics while maintaining and perhaps strengthening the Administration’s climate policy goals.

More Gas, Less Coal

The Clean Power Plan is anchored in four “building blocks.” As described in earlier blogs, these building blocks together represent the Best System of Emission Reduction (or BSER) that EPA believes is available to reduce power plant emissions.  Building Block 2 would reduce emissions by substituting cleaner-burning natural gas for coal as a power generation fuel.  To accomplish this, the plan calls for states to increase operation of gas plants to a 70 percent utilization level and to produce correspondingly less power at coal plants.

The notice acknowledges three interrelated problems with Building Block 2. First, some states may be unable to achieve the 70 percent target quickly because of lack of critical infrastructure (i.e. pipeline and transmission capacity) necessary to increase reliance on natural gas. Second, the rapid scale-up of natural gas generation may force premature retirement of newer coal plants which have recently incurred large costs to meet non-carbon pollution control requirements, resulting in deep financial writeoffs and creating electricity reliability risks in the event gas supplies are constrained.  Third, the focus on increasing gas plant utilization places the largest burdens on states that have a balanced fleet of coal and gas plants and thus the greatest ability to burn more gas and less coal at existing plants.   

In response, EPA suggests redefining Building Block 2 so that states can boost reliance on natural gas not only by  increasing utilization of existing gas plants but by building new gas plants  and modifying existing coal plants so they  can “co-fire” with natural gas.  This approach, EPA says, might be implemented by setting a “natural gas floor” – i.e. by requiring all states with fossil-fueled power plants to obtain a minimum level of power from natural gas, with a choice of strategies to achieve this result.

Should EPA adopt this approach, it would have the effect of reallocating emission reduction burdens among states that derive a significant portion of their power from coal.  States that now have only coal plants would need to replace a portion of their coal generation with new gas plants.  This would mean  greater emission reductions in coal-dependent states like West Virginia, Kentucky and North Dakota – states that, according to Phil Wallach and other critics, had received a virtual free pass under EPA’s proposal.   

Conversely, EPA could set less stringent emission reduction targets in states with mixed coal and gas fleets, allowing them to phase down utilization of coal plants more slowly. This would address the fairness concerns of states like Virginia, Georgia, Ohio and North Carolina, who claim that they are being penalized precisely because they already made large investments in natural gas capacity and closed numerous coal plants over the last decade.  These states might find it easier to comply with EPA’s rule because they would be under less pressure to retire those efficient, well-controlled coal plants that remain in operation.  

Relaxing Interim Goals

The ultimate compliance date under EPA’s proposal is 2030. However, the proposal requires states to meet “interim” emissions reduction goals from 2020 to 2029. According to critics, these interim goals are “front loaded”– i.e. require steep reductions starting in 2020 which are only slightly below the final 2030 goals. In fact, EPA’s analysis projects  that, under its proposal, emissions would be 26-27 percent below 2005 levels in 2020, 29 percent below these levels in 2025 and 30 percent below in 2030.

EPA’s October 28 notice acknowledges the criticism and indicates that it is open to relaxing the interim goals.  Moving in this direction would have a number of benefits.  A more gradual glide path toward the 2030 targets would provide a longer planning and investment horizon for states that have limited institutional capacity to reduce emissions. It would also allow states more time to expand pipelines or transmission lines necessary for increasing reliance on natural gas or renewables.  And utilities that cannot easily retire some coal plants without large stranded investments would have more time to continue operating them.

Recalculating the Impact of Increasing Renewable Energy and Energy Efficiency

The notice also highlights a possible error in determining the emission rate reductions associated with Building Blocks 3 and 4 of the Clean Power Plan, which call for increasing renewable energy and energy efficiency. The Agency’s proposal assumes that these increases will not replace but complement existing fossil fuel generation. This assumption would only be correct if overall electricity demand was increasing.  But the reality is that there has been little demand growth in electricity markets for some time. Thus, any increase in renewables and demand reduction would necessarily remove additional fossil units from the power supply mix, resulting in deeper emission reductions and more stringent state goals.   

How the Final Rule May Change

EPA has clearly taken to heart concerns about the more glaring disparities in its state goals. It would thus not be surprising to see deeper reductions by coal states with high carbon intensity. Likewise EPA may lower burdens on large Southeastern and Midwest states that have already significantly reduced  their GHG emissions and dependence on coal.  These states are populous, dominated by large traditional utilities, and politically moderate or conservative.  EPA may not be able to win their overt support, but reducing compliance impacts may soften opposition from these states.

EPA is also likely to relax the rule’s interim goals in order to take immediate pressure off states and to cushion them against near-term grid disruptions and other dislocations caused by unrealistic timelines for implementation This would mean a smoother emission reduction glide path between 2020 and 2029 and more backloading of reductions later in the decade.  However, those who hope all interim milestones will disappear are likely to be disappointed. Some system of accountability for the 2020-2029 period will be necessary so that EPA can demonstrate progress toward the President’s Copenhagen commitment to reduce emissions by 17 percent by 2020.  

Most importantly, EPA is unlikely to lower its overall 2030 emission reduction target – 30 percent below 2005 levels – and may increase it. Any adjustments in Building Block 2 will only reallocate responsibilities among states with fossil fuel power generation; they will probably not change the magnitude of the shift from coal to gas.   Indeed, there will be added pressure to retire coal plants if EPA corrects its goal-setting methodology so that increases in renewable energy and energy efficiency are assumed to replace existing fossil generation.  Moreover, EPA has been criticized for understating the potential penetration of renewable power generation, and could adopt more ambitious renewable energy targets, which would further increase the retirement of coal plants and lower emissions.  While there may be some downsizing of Building Block 1, which has been challenged for overstating the potential to improve coal plant efficiency,  changes in the other Building Blocks will likely be in the opposite direction.

In short, EPA may be heading toward more stringent targets in 2030 but less ambitious goals for the 2020-2029 period. This would ultimately require the power sector to make deeper emission cuts but provide more lead time and greater flexibility to achieve them. Such an approach could not only defuse criticism of the EPA rule but strengthen the U.S. position in the ongoing international negotiations by enabling the President to propose more ambitious post-2020 emission reduction targets.