Early movers fret EPA climate rule won’t fully credit early investments

Source: Jean Chemnick and Hannah Northey, E&E reporters • Posted: Wednesday, June 11, 2014

Utilities that led the march to clean energy sources and efficiency are assessing whether they’ll get full credit for their efforts under U.S. EPA’s proposed climate change rule for existing power plants.

At issue is EPA’s apparent use of 2012 as the cutoff year for states to claim credit for early emission-reduction measures.EPA’s proposal would allow states to take credit for projects, measures and policies that will lower carbon dioxide emissions for the life of the rule — through 2030. Spokeswoman Liz Purchia said that provision ensures that states with renewable energy standards and existing clean power infrastructure will be better-positioned to meet emission goals.

But a number of utilities have raised concerns EPA isn’t fully crediting existing nuclear plants and have raised questions about clean energy investments before 2012. Others have questioned why hydropower isn’t a bigger part of the picture.

An attorney who works with low-carbon energy clients said the proposal seems to penalize companies for having picked the “low-hanging fruits” of renewable power and energy efficiency. “I think they’re going to have to make a lot of changes to make this palatable to a lot of people who were hoping to support the rule,” the lawyer said.

The lawyer said there were “major disconnects” between the written rule proposal and assurances from EPA Administrator Gina McCarthy and acting air chief Janet McCabe that the proposal would reward early action on emissions.

One of those disconnects is EPA’s insistence that there’s no base-line year for state action, the lawyer said. The rule proposes rate-based standards for each state based on assumptions about what they can be expected to achieve in four areas: heat-rate improvements at coal-burning power plants, reduced outputs from higher-emitting facilities, zero-carbon nuclear and renewable projects, and demand-side efficiency.

The carbon intensity standard, the rule’s preamble says, can be converted to a mass-based one, “as long as the translated goal achieves the same degree of emission limitation.”

But to reach the rate-based standard, EPA uses data about each state’s utility-sector carbon intensity circa 2012. Measures that were in place before 2012 are simply part of EPA’s starting snapshot of each state’s utility portfolio and cannot be counted as improvement to that rate-based average unless they lead to new and additional carbon reductions in later years.

“I don’t see where they have given any benefit, for example, to all of the wind generation that has been built in the last 10 years,” the lawyer said. “It is at best a wash, and appears to be a penalty.”

Nick Akins, president and CEO of American Electric Power, said in an interview with Greenwire in Las Vegas at the Edison Electric Institute’s annual meeting that the proposal appeared to have “absorbed” all the benefits of emissions reduction measures that were put in place before 2012.

“So everybody’s trying to figure out how does each state do more; they can only work with what they have,” said Akins, who chairs EEI. “So we have to figure out from the perspective of each state we do business in what the opportunities may be.”

Joe Nipper, senior vice president for regulatory affairs and communications for the American Public Power Association, said his group is concerned about EPA’s handling of hydropower and nuclear power and that the rule proposal won’t fully recognize investments in clean energy and efficiency before 2012. APPA is also concerned that EPA uses data from 2012 only as the starting point for the rule — a departure from the multi-year base line used in a carbon dioxide cap-and-trade bill that cleared the House in 2009.

“It’s very difficult to pick a year that’s equitable and representative,” he said. “A lot of things happen in a given year that can affect what your emissions profile is or the generation you run.”

Some clean energy advocates say it’s a matter of clarification.

The American Wind Energy Association, for example, said it has received assurances that early investments in wind farms will be recognized “on the front end” in state-by-state calculations for what emissions reductions will be required, said Tom Vinson, AWEA’s senior director of federal regulatory affairs. Wind generators will also be recognized “on the back end” as they generate clean power and help states meet their future compliance obligations, he said.

But Vinson acknowledged the rule is complex — and EPA should clarify the issue for all stakeholders.

“It’s complex and can potentially be read different ways and is being read different ways,” Vinson said. “It’s in all of the stakeholders’ interest, including EPA’s interest, to clarify it sooner rather than later because everybody’s interested in understanding how previous investments are recognized in the rule.”

‘Pretty serious legal problem’

The single-year base line of 2012 appears to have already led to at least one glaring inaccuracy.

Minnesota’s largest coal-fired power unit was down for repairs throughout 2012, leading EPA to assume much lower base-line emissions than it has in an average year. But the Minnesota Pollution Control Agency’s Assistant Commissioner David Thornton said he assumes that’s something the state can easily fix with EPA.

“I chalk this up as something that could have significant impact, but it’s probably not an intended thing and it’s an example of a thing we’ll work out with them in comment,” he said.

APPA’s Nipper also questioned why EPA excluded hydropower from counting as a renewable energy source for the purposes of the rule, when it is prevalent in many states and does not emit CO2.

EPA in its rule said hydroelectric facilities provide a large percentage of renewable power in a few states, but including the power source in current and future calculations for all states would “distort the proposed approach by presuming future development potential of large hydroelectric capacity in other states.”

And while EPA has provided states with flexibility on how they implement the rules, Nipper said the Clean Air Act’s principle of “cooperative federalism” requires the agency to defer to the states in setting emissions reduction targets as well, which it has not done.

“That’s a pretty serious legal problem in our view,” he said.

Nipper said APPA reached out to EPA for clarification about its concerns, but the calculations didn’t ease the group’s worries.

Top officials from EEI met yesterday with McCarthy at the Western Governors Association conference in Colorado Springs, Colo., to discuss the proposal.

McCarthy said the breakfast meeting showed takeholders were still grappling with the provisions of the rule — including the fact that it does not cap emissions, but rather lays out a glide path for future reductions by states.

“So that states, and the utilities in the states, need to get out of the cap and trade framework and into the Clean Air Act framework, which is where we were,” she said. “Which is every state gets to be looked at in terms of where the state is and what’s reasonable and affordable for them.”

The 2005 baseline for overall emissions reductions “was an attempt just to put it into perspective,” she said. “It wasn’t the goal, and it wasn’t what was driving the process or the reductions,” she said.

Nipper said APPA would request a meeting of its own after its members wrap up their conference in Denver this week.

Clean energy experts are still sifting through the proposal, and not all of them agree that EPA’s proposal denies credit to early actors.

One industry analyst said he had been assured by McCarthy and McCabe that existing and new renewable energy would be treated identically for purposes of demonstrating compliance with the rule.

A bigger problem would be persuading states to write implementation plans for the rule that take full advantage of their existing low-carbon assets, the analyst said. The rule allows so much flexibility that if a state decides to collect tax revenue and build a new nuclear plant with it instead, it could — leaving renewable energy generators high and dry.

“Those companies that have acted early,” he said, “need to be extremely engaged in the development of the state plans to ensure recognition for early investors.”