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EPA and EGUs: Timing is Everything

Last April, EPA proposed CO2 emission standards for new power plants that essentially banned new coal-fired Electricity Generating Units (EGUs) and, although it has missed the 1-year statutory deadline for taking final action on that proposal, it is likely to do so either later this year or next. (Note that because the Clean Air Act makes the eventual standards effective as of April 13, 2012 — the date of the proposed rule — the delay in finalizing them does not create a regulatory window for new coal-fired EGUs.)

Two question loom for utilities, investors and Public Utility Commissions (PUCs): will EPA stick with its proposed ban on new coal plants and – the $64 question — how will EPA then deal with its obligations to regulate CO2 emissions from existing EGUs, and what does that mean for utilities, investors and PUCs?

New Coal-fired EGUs

We believe that the final rule will include the de facto ban on new coal-fired EGUs. (Technically, EPA’s proposal allows for coal-fired EGUs that employ carbon capture and storage, but that is a fig leaf: for both technical and legal reasons we believe that CCS is decades away.) This ban is apparently dramatic, but actually accomplishes nothing in terms of CO2 emissions reductions. As EPA noted, it anticipates virtually no consequences from this action because, for mostly economic reasons, no one is building new coal-fired power plants: “… this proposed rule will have no compliance costs associated with it over a range of likely sensitivity conditions because electric power companies will choose to build new EGUs that comply with the regulatory requirements of this proposal because of existing and expected market conditions.”

Note that despite this lack of real-world impact, EPA may yet withdraw its own proposal because of political optics and internal agency fears about vulnerability to legal challenges; the latter concerns boil down to the bureaucratic logic that “it’s better to not finalize this rule than have the courts strike it down.”

Existing Coal-fired EGUs

Once the new EGU rule is final, the Clean Air Act requires EPA and the states to regulate CO2 emissions from existing EGUs. For those trying to plan for what EPA will do, the good news is that there are only two ways to reduce EGU CO2 emissions: switch fuels or burn less fuel. EPA has made it clear that it will not impose fuel-switching on existing plants, leaving a limited universe of efficiency measures, with well-understood technologies and costs, which they believe can achieve, at most, approximately a 5% reduction in CO2 from these sources.

The most significant problem with regulating existing EGUs is the delay inherent in the applicable Clean Air Act provisions. Existing EGUs are subject to either of two separate regulatory pathways (depending solely on when they added mercury emissions control technology), and ultimately the only difference between them are the applicable compliance dates, which are (a) many years from now and (b) even longer. This in turn means paralysis in investments, as no one will want to finance these measures until they are legally mandated.

Adding to the inertia is the awareness that, between now and the eventual compliance dates, there is room for significant economic, political, or technological changes that could completely alter the regulatory picture. Nor do we believe that this uncertainty about coal will lead utilities and PUCs to abandon it – the other choices have their own risks: PUCs do not wish to become overly dependent on gas, and renewables are still more expensive and harder to employ for baseload generation.

“Modified” EGUs. First, and most pressing, is that unless EPA takes further action in its rule, its ban on new coal-fired EGUs would also apply to any existing EGU that undergoes “modification”. This would apply to hundreds of coal-fired EGUs that will have installed control equipment necessary to meet standards imposed by other recent rules, most notably EPA’s mercury and air toxics standards (MATS). EPA presumably does not want to require all of these plants to switch to gas: if it did, it could far more easily have forced these plants to do so directly under the MATS rule, where EPA turned regulatory summersaults to avoid just that outcome.

The most practical way for EPA to deal with the “modified EGU” subset of existing plants is for the final new plant rule to say that modified EGUs need their own emission standards and include a schedule for setting these. That would effectively exempt the modified EGUs from having to convert to gas. And no matter what schedule EPA lays out, proposing, finalizing, litigating and eventually enforcing compliance with efficiency standards will take many years, and in the interim there is little reason for any EGU to invest in these measures.

(EPA  has mused about exempting modified plants via a regulation that excludes such pollution control projects from the definition of “modification”. This is unlikely; as EPA itself noted, a D.C. Circuit decision that overturned an identical and closely-related “pollution control project” exclusion “may call into question the continued validity” of this regulation as well. Relying on this regulation would be a very dicey proposition.)

Early adapters. The other subset of existing EGUs are those that either already had the necessary technology to meet the MATS standards or began installing it before April 13, 2012. The only significant difference between these early adapters and the “modified” plants is that there is no deadline at all for EPA to promulgate CO2 standards (somewhat misleadingly called “guidance” in the Clean Air Act) for these plants, and even when EPA does so, it will take many more years before those standards actually begin reducing emissions. Presuming that EPA goes with efficiency upgrades – combustion control optimization, cooling system heat loss recovery, flue gas heat recovery, low-rank coal drying, sootblower optimization, steam turbine design — when it does promulgate its guidance, we believe that it might then be implemented within 7-8 years. Unfortunately, this still means years of uncertainty, the possibility of changes in the economic, technological or political landscape, and thus a rational reluctance to invest to reduce emissions before the last possible moment.