What to expect from the EPA's final Clean Power Plan

Compliance with the plan will push the power industry to rethink the way it does business

Thanks to agency leaks and sleuthing reporters, the finer points of the EPA’s finalized Clean Power Plan are quickly coming into focus. But in the days leading up to the release of the highly anticipated carbon regulations — widely expected to be finalized early next week — a number of critical issues for the power sector remain up in the air.

On Tuesday evening, the New York Times and Washington Post cited unnamed agency sources in revealing that the agency would push back the start date for the compliance period of the regulations by two years — from 2020 to 2022 — giving states more time to comply. The next morning, EnergyWire bolstered the case for that theory, revealing an internal EPA timeline it obtained indicating the final rule would be released on Aug. 3 and that states would be given the two additional years to comply:

EPA officials declined interviews with EnergyWire on the timeline, saying it is not final.

While additional compliance time has been the top request of many power sector stakeholders for the revised plan, those revelations have set off alarm bells for many environmentalists, who are concerned that emissions reductions would be weakened by a longer compliance timeframe.

“If the EPA does decide to delay compliance timelines, I’ll be looking for assurance that the overall emission reductions achieved by the rule stay strong, early action by states is incentivized, and any delay won’t jeopardize the U.S.’s 2025 international commitment of a 26 to 28 percent reduction in economy-wide emissions,” Ken Kimmell, president of the Union of Concerned Scientists wrote in a statement soon after the extension became public.

The White House responded quickly, dispatching Chief of Staff Denis McDonough to a climate change forum in Washington to reassure the plan’s backers. The finalized plan, McDonough insisted, will be “stronger in many ways than the proposed rule put forward by EPA” due to enhanced incentives for clean energy.

That same afternoon, there was another agency leak — this time picked up by Bloomberg. The final carbon regulations, the unnamed EPA source said, will include enhanced incentives for solar and wind energy, compensating for the longer implementation timeframe.

Officially, the agency has distanced itself from each of the leaks, with a spokesperson telling Bloomberg that the timeline obtained by EnergyWire was only a “web design mockup,” and refusing to comment on the details or release date of the regulatory package.

Through all the leaks and rumors, though, one thing appears certain: the release of the final regulatory package will be greeted with hostility from fossil fuel producers, coal generators and their legislative allies. After news of the impending extension broke, the American Coalition for Clean Coal Electricity called the changes “irrelevant.” Republican leadership in congress echoed the coal lobby group:

“They ought to get rid of the entire rule,” Sen. John Barrasso (R-WY) told The Hill. “They’ve gone way beyond their authority under current law. It’s going to hurt jobs, hurt the economy and make energy more expensive for American families.”

Persisting timeline questions

In its draft regulations released last year, the EPA proposed to give states until 2016 to submit implementation plans on how they would meet emissions goals set by the agency. The compliance period — when states would have to begin showing significant pollution cuts — was set to begin in 2020.

Many states and utilities reliant on coal generation took special exception to that part of the rule, arguing that the proposed timeframe doesn’t give states enough time to put together plans, allow utilities to retire coal plants, build new renewables and gas capacity, and support the new sources with transmission infrastructure.

Those concerns were central in last minute lobbying efforts by the power industry when its representatives met with White House staffers last week, and the administration appears to have listened. In addition to extending the start of the compliance period to 2022, the EPA is also expected to give states until Sept. 6, 2018 to submit final implementation plans for the rule, although leaks have indicated there may be incentives for states to move faster.

While some legal experts posit that the extended timeline may help the agency beat back court challenges to the plan, many observers in the power industry were unsurprised by the agency’s decision.

“When the rule was released last year, we said right away that we don’t expect to start implementation by 2020, but that it will be two or even four years away,” Olof Bystrom, head of the wholesale energy practice at DNV-GL, a research and advisory firm, told Utility Dive.

The trouble with the original proposal, according to Ken Colburn, a principal at the Regulatory Assistance Project, is that the method the EPA used to determine emissions reductions “led to some steep drops in the very early going for several states.”

“I don’t imagine they intended that,” he told Utility Dive. “Recall that [the agency] was trying to push the proposal out the door, so they got some things wrong, some data corrections are needed, and there’s some issues with baseline and so forth. Ok, that’s why you do proposals — to get feedback on them.”

A reliability safety valve?

Beyond more time to design and implement state pollution plans, a major ask from the electric power industry was for the inclusion of options to safeguard reliability, commonly referred to as a “reliability safety valve.”

Proposals to ensure reliability have ranged from calls to implement the plan through a national price on carbon, voluntary carbon pricing in regional electric markets, and temporary waivers for emissions requirements when reliability is threatened by high electric demand or extreme weather events.

Any of those approaches remain possible in the final plan, and states may band together to implement regional solutions like carbon trading or a carbon price even if the EPA includes waivers for extreme events.

Bystrom speculated that the agency may take a page out of ERCOT’s book in Texas and allow utilities to mothball older, dirtier plants instead of retiring them completely. About ten years ago, when Texas’ reserve margins were even slimmer than they are today, Bystrom said, the grid operator allowed generators to temporarily retire their plants, and then pull them out of mothballing in the event of reliability issues.

“It’s not inconceivable that you could see the same provisions in the Clean Power Plan,” Bystrom said, “and maybe also have a provision that would give the states that have these assets some leeway in emissions — that if you were to have some extreme event, you wouldn’t be held accountable to the emissions standards in the Clean Power Plan for those events.”

Colburn said the inclusion of some sort of reliability mechanism is likely in the final plan, but with the deadline extension and utilities already moving toward cleaner fuel mixes, it may end up hardly being used.

“Near as I can tell, a lot of states are not going to have any problem with the Clean Power Plan targets,” he said. “A whole lot of additional ones that have concerns about it are going to find with how rapidly the industry is changing that it’ll turn out not to be a big deal for them.”

Even so, the agency may well include a reliability mechanism in the plan to show they are listening to the concerns of the power sector and coal-heavy states, Colburn said.

“Theres a lot of ways that they could play the mechanism,” he said. “The obvious ones are that you can have an exception from the emissions limits and run some additional coal or run coal longer.”

Resource-specific incentives

How the EPA will account for specific resources has been a sticking point throughout the agency’s last year of listening to comments from stakeholders. In particular, states and utilities with nuclear plants under construction complained that the carbon-free generation the plants offer wasn’t credited correctly under the draft proposal. Nuclear plants currently under construction were accounted for as part of a state’s baseline emissions, meaning their completion and entrance into service could not help states comply with the regulations, even though nuclear provides carbon free electricity.

Bystrom thinks that point will likely change, especially for new nuclear plants.

“It’s likely that we will see better crediting for nuclear power under the Clean Power Plan, including plants that are under development today, rather than being a part of the baseline,” he said. “They are actually getting credit for those new nuclear units as they come in. That is a likely concession in this to address some of the comments.”

“Whether you're a nuclear fan or not, it’s in nobody’s interest to prematurely shut down existing nuke facilities that are cost effective and forestall additional fossil emission reductions that would have come from coal and gas,” Colburn said.

The unnamed sources quoted by Bloomberg this week indicated that the EPA would also include stronger incentives for wind and solar, but Bystrom hopes they keep compliance options as open as possible for utilities and states.

“If you want to reduce carbon emissions at minimum cost, you want to have it as open as possible to any carbon reduction technology. That’s whats going to give you the most bang for the buck,” he said. “Renewables are part of that … but at the same time, there’s no reason to have a policy that locks in wind or solar if you can have, say, efficiency gains from gas plants.”

“If that gives you bigger carbon reductions, why not have that as part of the solution?”

One likely tweak to renewables under the Clean Power Plan is how they will be accounted for when they cross state lines. The draft plan, Colburn said, gave states credit for producing renewables, but also allowed states to claim credit for renewable power when it was bought and imported from another state.

“That creates a double counting situation where I count it because it's in my state, and as a result is in my baseline, and then you count it because you bought it,” he said. “That’s either unfair, untenable, or both, so I suspect EPA will make that apples to apples rather than apples and oranges on renewables.”

On energy efficiency, Colburn said he thinks the agency did a “pretty good job” in corralling the vast resource into workable solutions for states, but it could do more.

Efficiency is notoriously difficult to count toward emissions goals on the federal level, Colburn explained, since it’s difficult to ascertain which plants reduced their output as a result of power saving retrofits, demand side management, or other energy conservation efforts.

One way the agency got around that issue in the Clean Power Plan draft was to tie efficiency gains to the fossil fuel generation in a state. That helps with the logistical issues of measuring conservation, Colburn said, but it also disadvantages certain states.

“You take a state like Washington that does more efficiency and has a lot of hydro, so it doesn’t have much fossil,” Colburn said. “They’ve done a lot of efficiency, more than their fossil, so the other efficiency they do is essentially orphaned? It can't be counted by anyone? Well, that’s not a great incentive for efficiency.”

“I think EPA will try to come up with some other treatment about efficiency that will make efficiency both easy for states, because it is new ground,” he said.

Colburn added that he hopes the agency will “open the doors” to efficiency retrofits in other sectors counting toward Clean Power Plan goals.

“You have all of these energy service companies, often large companies, doing major retrofits that are saving a lot of energy, particularly in the MUSH [municipalities, universities, schools, and hospitals] market, but a lot on the industrial side too,” he observed. “It’s a lot of efficiency that’s reducing a lot of electric load, which has lots of emissions savings. Well, how are those going to get counted? That’s an open question too.”

The new opportunity for utilities

The past year of debate over the Clean Power Plan has seen some dire predictions from the utility sector, including AEP CEO Nick Akins at one point claiming the plan could cause “cascading outages” due to the pace of coal plant retirements.

With an extended compliance timeline and likely reliability safety valve, many of the most pressing concerns are being addressed, but Colburn, a former New Hampshire air regulator whose organization assists states in regulatory compliance, says the smart utilities are already looking past the challenges and seeing the Clean Power Plan as a chance for growth.

Most power companies make the majority of their money off their rate based assets, Colburn said, and fuel costs are largely passed through to the end consumer without a markup. As the EPA works to decarbonize the energy sector, that presents a huge growth opportunity for many utilities. NERC predicts hundreds of gigawatts of new natural gas and renewable generation, along with thousands of miles of transmission to support it, will be needed to comply with the regulations.

Based on the draft proposal, NERC estimates that the U.S. will need nearly 100 GW more gas generation and 23 GW more wind by 2030 to comply with the CPP, along with the pipeline and transmission infrastructure to serve it. 

“Dealing with carbon is going to be the next wave of utility capital expenditure,” Colburn said. “Smart management should already be in front of their regulators with their capacity expenditure plans to address the Clean Power Plan.”

Colburn offered Southern Co., the regulated utility giant that supplies many of the Southeast states, as an example. After getting a number of gas plants approved and built in recent years, the utility is now increasingly turning to solar — in both its regulated and unregulated companies — as a new growth opportunity.

Southern figured out that “you could go and build a whole bunch of solar, get that rate based, and then you can run it during the day instead of gas. Now, you’re getting a return on investment on the thing that runs during the day, and the thing that runs during the night.”

“Storage is the next link in that chain,” Colburn said. “There are ways that utilities can make money in the traditional sense here if they just figure out it's in their interest to go with the flow instead of fighting it. If you're a coal guy, it’s a different story, but if you're a utility, there’s a path.”

The future is ‘a brave new world’ for utilities

The opportunity the Clean Power Plan presents is much bigger than a new round of capital expenditures alone, Colburn said. Utilities need to be thinking about how to use the new opportunities the plan presents to reform their business models for the future.

The entire industry is changing from a one-way grid, from the bulk power level down to customer, to a two-way system where customers are more engaged in the consumption and production of energy through distributed generation and demand side management programs — and that is changing the way utilities do business.

“The utility sector of the future is going to manage demand as much as supply, and that’s a brave new world,” Colburn said. “Most of that from a business model perspective ends up being a marked change from where utilities have been.”

The predictions for what utility business models will look like in the future are “all over the map,” Colburn said. In New York, the REV proceeding is reimagining utilities as distribution system platforms — gatekeepers of the grid that enable seamless integration of distributed resources. Other industry watchers see opportunities for utilities as energy aggregators, and many are entering the renewables industry though unregulated subsidiaries, as well as having their regulated divisions rate base new investments.

The point, Colburn said, isn’t that one business model is best for any utility or is more likely to happen than the others. It’s that this moment of great disruption and capital expenditure in the power industry opens a unique opportunity for utility leaders to revolutionize the way they do business.

“The take home message on this is that the rule gives you an excuse or a further rationale to figure out who you’re going to be when you grow up,” Colburn said. “You have to change anyway, and this is providing a vector, a direction, for you.”

For a century-old industry renowned for its slowness to change, those opportunities may sound more like threats. But Colburn is confident the industry is already moving in the right direction and the Clean Power Plan will only accelerate the transformation of the sector.

“If you [as a utility] want to stick more to your knitting — capital investments, wires and poles, a return on investment — that could probably work. But you’ve got to figure this out, and there’s very little out there on the horizon to better crystallize your thinking on these issues than the Clean Power Plan.”

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Filed Under: Generation Solar & Renewables Regulation & Policy
Top image credit: AEP