Today, August 3, 2015, the United States Environmental Protection Agency (U.S.EPA) is issuing the final rule to promulgate the federal Clean Power Plan (CPP). The CPP represents the Obama administration’s cornerstone Climate Change rulemaking.
Key Elements of the CPP
The CPP rule is aimed at certain existing sources of carbon dioxide (CO2) pollution: coal-fired electrical generation units or EGUs (power plants). However, the CPP will directly affect industry and individuals because EGUs will pass the cost of achieving the CO2 reductions on to electrical energy consumers.
Originally proposed in June 2014 (see Godfrey & Kahn Environment & Energy Strategy Flash “Wisconsin businesses should plan now for the Environmental Protection Agency Clean Power Plan” (October 2014)), and with the feedback from approximately 4 million commenters, the CPP provides guidelines for states to develop mandatory plans to reduce CO2 emissions by approximately 32 percent by the year 2030. The CO2 reduction goal identified in the final CPP is actually nine percent more aggressive than had been proposed in the June 2014 rule. The targeted reductions, called CO2 Emission Performance Rates, vary by states, but less so than in the proposed rule.
The CPP identifies “building blocks” that states should use to accomplish the CO2 reductions, including (i) directly reducing EGU CO2 emissions, (ii) increasing the power generation load at existing EGUs fueled by natural gas, (iii) reducing the use of electricity through energy efficiency programs, and (iv) expanding clean renewable energy production. While the proposed CPP had included a fourth building block, reducing the use of electricity though energy efficiency programs, this "best system of emission reduction," or BSER, was dropped by USEPA to anticipate possible legal challenge as being beyond USEPA’s jurisdiction to regulate. The overall goal of the CPP is a shift to a base of 30 percent more renewable energy by 2030. In addition, an inherent objective of these building blocks and the CPP itself is increasing demand side energy efficiency.
Many states, including Wisconsin, have pledged to challenge the CPP. However, many of those that have stated their opposition have also started preparing for how to comply. Moreover, for those states that “just say no” to preparing their own CPP implementation plans, the U.S. EPA has “upped the ante” by direct U.S.EPA oversight, known as a federal implementation plan (FIP). U.S.EPA is also issuing the FIP today, which will serve as a model plan that the states can use as a template for designing their respective plans. The FIP will also be used by U.S.EPA as a backstop enforcement hammer to impose implementation of the final CPP in the event a state fails to meet the state implementation plan requirements under the final rule.
Certain additional elements of the final CPP deserve highlighting:
Clean Energy Incentive Program
- The final CPP includes a concept known as the Clean Energy Incentive program, which provides unique incentives for states that adopt their implementation plans.
- Credits for electricity generated from renewables in 2020 and 2021 will be awarded to projects that begin construction after participating states submit their final implementation plans.
- The program also prioritizes early investment in energy efficiency projects in low-income communities by awarding these projects double the number of credits in 2020 and 2021.
- The final rule affords states more flexibility in implementation by developing “trading ready” plans to participate in an emissions credit trading market with other states taking parallel approaches without the need for interstate agreements.
- While state implementation plans are still due in 2016, states that need more time can make an initial submission and request extensions of up to two years for final plan submissions.
- The compliance averaging period begins in 2022 instead of 2020.
- Emission reductions are phased in on a gradual “glide path” to 2030 (rather than the regulatory cliff that began in 2020 and 2030 under the proposal).
- The new flexible provisions are paired with the Clean Energy Incentive Program to drive early deployment of renewable energy and low-income energy efficiency before 2022.
New Grid Reliability Assurance Provisions
Many comments to the rule criticized the ability of the existing grid to meet the new requirements of the CPP. As a result, the final rule:
- Gives states more time to implement the plan;
- Requires states to address reliability in their state plans;
- Provides a “reliability safety valve” to address reliability challenges that arise on a case-by-case basis; and
- Builds flexibility in the framework since it does not impose plant-specific requirements and allows states to smooth out their emission reductions over the period of the plan and across various and diverse sources.
Between the time that the CPP was promulgated in draft form and today, a growing consensus is that the most efficient means of achieving state compliance with the CPP will be multi-state market-based trading mechanisms. Under the CPP, states also have the ability to adopt market-based trading programs within their state boundaries to meet these CO2 reduction goals.
Important Opportunities as well as costs under the CPP
Pricing carbon through market-based programs will send important signals for innovative energy efficient and renewable energy product and service offerings to meet these CPP goals. Existing regional trading schemes such as the Regional Greenhouse Gas Initiative (RGGI) as well as California’s cap and trade programs provide good examples of how regional programs could be designed to meet the requirements of the CPP. These trading mechanisms could provide additional incentives for customers to install clean renewable and energy efficiency products. Customers should ensure that their investments in these projects are rewarded by compensation for trading these carbon offsets to meet these CPP goals.
In the last analysis, the states are in control of their own destinies by fashioning the appropriate state policies to meet these national goals. The state plans will be crucial to these efforts and electricity customers need to be engaged in this policy formulation process in the implementation stages of the CPP. Further, with proper input by interested parties, there is a good opportunity to design innovative regulatory programs for utility investments that can minimize impacts to customers to meet with CO2 reduction targets (e.g. tax, environmental, reliability and other policies). However, to ensure that these goals are met, interested parties need to organize and be “at the table” when the state implementing agencies (such as state natural resources agencies and public service commissions) design these programs to meet the goals of the CPP.
While observers agree that the CPP will undoubtedly create the potential for increased electrical generation costs, there are also potentially significant financial opportunities for companies that can account for projects undertaken since June 2014 that have resulted or will result in a reduction of CO2 emissions or demand for CO2 emitting energy. The owners of such projects should be able to receive the credit, and arguably the significant monetary benefit, from these measures. States will be turning over every stone to find CO2 emissions reductions to accomplish their 32 percent reduction goal. Companies that lead the way into these energy efficiency efforts can brand themselves to shareholders and the public as sustainable and efficient businesses.
In addition, this final rule provides enormous marketing opportunities for manufacturers of the following products: (1) devices that are incorporated into clean renewable energy systems; and (2) products that are designed to be very efficient for the use of electricity. For these manufacturers, the CPP can be used as a marketing tool with customers, especially those customers located in states that have a high percentage of their baseload provided by coal-fired EGUs. A more efficient product will serve as a hedge against much higher energy prices and may be the source of potential CO2 reduction credits for customers. Similarly, the final CPP provides increased marketing incentives for companies engaged in research and development in the energy efficiency and renewable energy product development arena.
What the CPP Means for You
There are certain practical steps that a company should take now to both reduce costs and increase revenue opportunities under the CPP:
- Document efficiency gains and establish baseline calculations of energy usage/CO2 emissions;
- Consider on-site energy generation, including through solar, which has an available 30 percent investment tax credit for projects delivering energy by the end of 2016; and
- Clearly document ownership rights of environmental attributes and CO2 reduction credits, even with contractors who provide energy efficiency services.
Ready or not, the CPP has arrived. Those who embrace the challenges and opportunities it presents will minimize the impact and may even come out ahead. While it is almost certain that coal-exporting and coal energy-dependent states, as well as certain utilities, will lawyer up to fight the implementation of the CPP, the threat of litigation should NOT cause parties to fail to plan for implementation. The timelines for CPP implementation are still relatively short and the potential for U.S.EPA supplanting a state program through the proposed FIP is a powerful incentive for parties to prepare for state implementation as soon as possible.
Godfrey & Kahn has helped many clients address CPP and energy efficiency challenges. We would be pleased to meet with you to consider how your company can realize the maximum benefits available under the CPP.