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08.30.2018 Playing the ACE: EPA is Betting on the Affordable Clean Energy Rule Governing Carbon Dioxide Emissions from Power Plants By: John M. Holloway, III (Jay)

Last week, EPA issued its long-awaited proposal to replace the Obama EPA’s Clean Power Plan (CPP).  The Affordable Clean Energy (ACE) proposed rule will use a state-driven approach to setting limits on Carbon Dioxide (CO2) emissions.  The Clean Power Plan used a federally driven approach to set very aggressive CO2 limits.  States had little or no role in that process.

Acting Administrator Wheeler announced that “[t]he ACE Rule would restore the rule of law and empower states to reduce greenhouse gas emissions [CO2 emissions] and provide modern, reliable, and affordable energy for all Americans. . . . Today’s proposal provides the states and regulated community the certainty they need to continue environmental progress while fulfilling President Trump’s goal of energy dominance.”

The proposed rule uses an approach where EPA prepares guidelines on potential projects and best practices that can increase the efficiency of power plants.  More efficient power plants emit less CO2 because they need less fuel to produce electricity.  States then consider these projects and practices on a boiler-by-boiler basis to determine the appropriate CO2 emissions limits.  In setting these limits states can consider future projects and practices that plants can implement and projects and practices that plants have already done.  States will also consider the remaining useful life of the units, the feasibility of implementing projects and practices, and the extraordinary cost impacts among other factors in setting CO2 limits.  The CO2 limits must remain “inside the fence line” of each power plant.  This means that there is the potential for averaging across units at one plant, but it is likely to foreclose system-wide averaging or trading.  

Interestingly, the proposal will also revise the regulations under Clean Air Act (CAA) Section 111(d) (the legal basis for the CPP and ACE rules).  These revisions will ensure that the state-based approach continues as new rules are issued under CAA Section 111(d).

Much of the criticism of the ACE proposal is focused on proposed revisions to EPA’s controversial New Source Review (NSR) program.  The NSR program requires new and modified power plants to install state of the art pollution controls and achieve stringent emissions limits.  The test for what constitutes a major modification of an existing unit is unclear at best.  For more than forty years, EPA, states and owners and operators of power plants have disagreed on the applicability of NSR and continue to do so. 

The ACE proposal will adopt an hourly emissions rate test to evaluate whether projects result in a significant emissions increase.  EPA incorporates this Table to outline the new emissions increase test.

Proposed Major NSR Applicability for an Existing EGU63

Step 1: Physical Change or Change in the Method of Operation

Step 2: Hourly Emissions Increase Test

Alternative 1 – Maximum achieved hourly emissions; statistical approach; input basis

Alternative 2 – Maximum achieved hourly emissions; one-in-5-year baseline; input basis

Alternative 3 – Maximum achievable hourly emissions; input basis

Step 3: Significant Emissions Increase Determined Using the Actual-to-Projected-Actual Emissions Test as in the Current NSR Rules

Step 4: Significant Net Emissions Increase as in the Current NSR Rules

When the proposed ACE rule becomes final, it will be challenged by dozens of interested parties and defended by dozens of others.  Most states will line up on one side or the other.  In anticipation of the intensity of the NSR reform litigation, EPA is taking the position that the proposed revisions to the NSR program will be severed from the remainder of the rule for any legal challenge.  EPA is hoping that the CO2 portions of the rule will survive judicial review even if the NSR revisions do not.

At present, the Obama EPA’s CPP is stalled at the United States Court of Appeals for the District of Columbia.  On Friday, EPA and industry parties requested that the Court continue to hold that appeal in abeyance and not rule on the legality of the CPP.

EPA projects that the ACE rule can provide $400 million in annual net benefits.  When the rule is fully implemented, the projections are that the U.S. power sector CO2 emissions could be reduced 33% to 34% below 2005 levels.  This reduction is higher than the projected CO2 emissions reductions from the CPP. 

The proposed rule should be published in the Federal Register within the next two weeks.  Once published, there will be 60 days to file comments.  Public hearings on the rule also are expected.  EPA anticipates finalizing the ACE rule in early 2019.