Regulators wrestle with complex metric at heart of EPA rule

Source: Jean Chemnick, E&E reporter • Posted: Friday, June 6, 2014

Reactions to U.S. EPA’s proposed carbon rule for power plants came fast and furious from politicians, industry groups and environmentalists in the wake of — and even ahead of — the rule’s release Monday.

On one end was Washington Gov. Jay Inslee (D) applauding Obama for taking the “bold federal action needed immediately to address this challenge.” And on the other was Texas Gov. Rick Perry (R), who decried the draft rule as “the most direct assault yet on the energy providers that employ thousands of Americans and fuel both our homes and our nation’s economic growth.”But as the sound bites flew all around them, state regulators who are tasked with implementing the EPA rule kept their heads down and crunched numbers, trying to comprehend what proposed near- and long-term emission targets meant to their states.

Theirs was not an easy lift. EPA’s formula at the heart of the proposal is complicated.

To arrive at its top-line goal of slashing electric utilities’ carbon dioxide emissions by 30 percent by 2030, EPA relied on what one analyst called a “bottom-up” approach. It uses assumptions about what each state can do toward four “building blocks” of carbon abatement: heat-rate improvements at coal-fired power plants, shifts in baseload power from coal and oil to combined-cycle natural gas, additional draws of zero-carbon energy from renewables and nuclear, and post-2012 demand-side energy efficiency.

The rule doesn’t require states to implement these changes. EPA, in fact, says it’s ready to approve state plans that use a variety of carbon-slashing strategies — from carbon taxes to regional cap-and-trade programs — an assurance praised by nine Northeastern states in the Regional Greenhouse Gas Initiative, or RGGI.

However the states choose to do the job, EPA will measure their compliance using a “building block” equation.

Inside the rule’s black box

It begins by assuming the entire U.S. coal-fired power fleet can trim its CO2 output by 6 percent through heat-rate improvements onsite at power plants. So all states that have coal units have their coal emissions rates adjusted to reflect that level of reduction.

To assess the potential of states to shift more of their capacity from coal or oil to combined cycle natural gas, EPA looks for underused units within that state’s borders or units that are slated to come online by 2030. At most, the agency assumes that a state can run existing natural gas plants at 70 percent capacity; thus displacing a share of the power from its existing oil- or coal-fired units.

States with substantial idle natural gas capacity and coal generation are assigned the largest targets in this category. But states that either lack coal or the natural gas capacity to offset it are assessed smaller values, or none at all.

Kentucky, for example, has a few gas plants slated for construction but none that are currently operating and that can quickly ramp up to reduce its dependence on coal. The proposal, therefore, assumes that Kentucky will make few reductions by switching from coal to gas — all after the gas plants come online in the next decade. Kentucky’s coal-reliant neighbor, West Virginia is not asked to make any shift to gas.

Washington state, meanwhile, is poised to lose its only coal-fired power plant in 2025, so it doesn’t get full points for fuel switching. Instead, the shutdown account for a hefty chunk of the Evergreen State’s 72 percent reduction target — the highest in the nation.

The third “building block” is non-carbon power — the preservation of “at risk” nuclear, the construction of new nuclear, and incremental increases to renewable energy supply.

Every state is assumed by EPA to have access to some non-hydropower renewable energy by 2030, even if it currently uses none.

How much depends on any renewables that might exist in the state already, and renewable energy standards (RES) that have been enacted in the region. For example, North Carolina is the only state in the Southeast that currently has an RES for utilities — 12.5 percent by 2021. Its neighbors are assumed to have roughly similar resources at their disposal, and a regional target of 10 percent by 2030 is set for the region.

Regions where several states have mandates at different levels — the upper Midwest, for example — are assigned an average based on those standards.

The rule assumes states have the capacity to ramp up renewable energy use until their regional standard is attained, but it also provides certain states with so much extra time to do so that they aren’t expected to get there by 2030. Kentucky, for example, is only assumed to draw 2 percent of its generation from non-hydro renewable energy by that year. It currently uses none.

Finally, EPA assumes that each state can reduce its energy consumption by 1.5 percent each year through demand-side efficiency measures. But the carbon reduction value of this efficiency improvement are assumed to vary by region. States with high electricity demand in industrialized areas of the country are expected to realize greater CO2 reductions than rural states as a result of the same energy savings.

Widely varying state targets

The rule’s complicated emissions-calculating formula had state officials and experts puzzling this week if EPA was handed a good deal or a bad deal.

Virtually every state had submitted comments to EPA in the months before Monday’s released proposing the kind of model they thought would safeguard their states’ interests.

But few of comments appear in the rule proposal.

Gone is the “inside the fence line” approach urged by states heavily invested in coal, that would have protected their coal-fired power plants from fuel switching. Instead the proposal assumes there will be fuel switching.

Gone is the strategically set state baseline that would have ensured credit for early action on emission cutting, a feature sought by a wide range of states that all wanted credit for plant retirements, renewable energy and carbon mandates, and other activities going back many years.

The proposal all but ignores past action, except to assume that some states may have exhausted some opportunities for reduction. Instead it focuses on future potential for reduction, cementing in place wide discrepancies in states’ utility-sector carbon output for decades to come.

“The basis for setting state standards is very thoughtful, but the resulting range is pretty stark,” said Jason Grumet, president of the Bipartisan Policy Center. “While EPA is clearly seeking to be responsive to each state’s unique situation, there will undoubtedly be arguments once states begin comparing with one another.”

A quick glance at some of the state targets shows just how different state requirements are.

Some states, like North Dakota and Kentucky, would still be allowed to emit 1,783 pounds and 1,763 pounds of CO2 per megawatt hour, respectively, by 2030 — levels that ensure they could still draw most of their power from unregulated coal by the time the rule is fully implemented. Maine, meanwhile, would be held to 378 pounds per MWh, and Washington state 215 pounds per MWh.

The differences in percentage cuts are just as dramatic. Washington, which already relies heavily on non-carbon hydropower, has its 72 percent target. Arizona comes in a distant second at 51.7 percent — a goal that it is expected to achieve in part through the shutdown of the coal-fired Navajo Generating Station near Page. Fossil fuels-heavy Georgia and RGGI-member New York would both face a 44 percent cut.

The states assigned the lightest obligations by percentage appear to have as little in common; North Dakota also has the lowest percentage cut to make; 10.6 percent. Second is RGGI member Rhode Island, which must cut its utility-sector emissions by 13.8 percent.

Maine Utilities Commissioner David Littell said he was still looking at EPA’s modeling.

“It is clear that they’re asking the states that have already done a lot to do more,” he said. “It’s clear that the number for some states, including mine, is substantially more aggressive than some of the heavy coal states. So we’re looking at that to understand whether that’s appropriate or no.”

RGGI states submitted a letter to EPA in December with suggestions for how the agency could achieve maximum, cost-effective reductions and avoid penalizing early movers in the process.

Some of those recommendations are in Monday’s draft. For one, EPA signals that the regional cap-and-trade program will be a compliance option, and it took a “system-wide” approach, not confining reductions to what can be achieved at the power plant.

But the compact members had asked for more parity on state targets.

“If you look at the numbers assigned to each state, it doesn’t seem like the states that have had programs on the books and have acted aggressively are necessarily advantaged over states that are not,” said Vicki Arroyo of the Georgetown Climate Center, who worked with RGGI states on the letter. “It also seems that the states that we think of as cleaner energy states have more ambitious targets than some of the states that are more coal-dependent.”

‘It’s certainly going to be challenging’

The RGGI participants and other early movers like California, the Northwest and the Upper Midwest will be looking to see whether they are assigned proper credit for their renewable energy and other policies, she said.

But Grumet said EPA seems to assume that states set existing state policies based on “rational self-interest,” not because they were jockeying for better treatment under a national policy that did not yet exist.

“EPA is taking the states as they find them,” he said. “The proposal is working hard to avoid unduly advantaging or penalizing states for these prior decisions.”

States on the other end of the spectrum had their own misgivings about what EPA expects of them.

John Lyons, Kentucky’s assistant secretary for climate policy, said he appreciated that EPA had set his state the second lowest carbon intensity goal in the country.

“Obviously, EPA listened to what we had to say about our carbon-intensive energy profile, our low electricity rates and our resultant heavy manufacturing base,” he said.

The proposal asks that Kentucky reduce its emissions 19 percent by 2030, he said, but that could be easier said than done.

Preliminary discussions with Kentucky utilities hinted EPA might have been unrealistic in assuming the state’s coal fleet could shave 6 percent from its emissions simply through heat-rate changes onsite, and Kentucky’s proposed gas plants are not yet operating — injecting uncertainty into the role they can play in reducing emissions.

“Depending on what avenue you take in your plan, it’s certainly going to be challenging one way or the other to get that,” he said.

Kentucky has also enacted legislation in April that will limit what its state government can do to comply with the federal limits — an added challenge that Lyons said his department is still evaluating. While the Bluegrass State’s law is the most restrictive, seven other states have also approved resolutions opposing the EPA rule.

But it is unclear that a state law can relieve Kentucky of the obligation to comply with EPA’s mandates. While she struck a collaborative note on a call Monday with state regulators, EPA acting air chief Janet McCabe noted that if a state fails to submit an implementation plan the agency deems approvable, the Clean Air Act authorizes EPA to impose a federal plan on that state.