3 May 2024 Ron Erlichman  -  Andrew Compton  -  Lauren Bachtel Energy and Infrastructure - Environment and Climate Change

U.S. EPA Finalizes Power Plant GHG Emissions Rule

On April 25, 2024, the U.S. Environmental Protection Agency (“EPA”) released a pre-publication of its final rule to regulate greenhouse gas (“GHG”) emissions from fossil fuel-fired power plants (the “Final Rule”), which includes robust emission standards for certain subcategories of facilities based on implementation of carbon capture and sequestration (“CCS”). The Final Rule will be effective 60 days after publication in the Federal Register. However, several companies and industry groups are expected to immediately challenge the Final Rule in federal court. 

The Final Rule includes four major components:

  1. Repealed the Affordable Clean Energy (“ACE”) Rule. The Final Rule repealed the ACE rule which was promulgated under the Trump administration and relied on heat rate improvements at existing fossil fuel-fired power plants;
  2. Finalized GHG Emission Guidelines for Existing Steam Facilities (Primarily Coal). The Final Rule finalized GHG emission guidelines for existing fossil fuel-fired steam generating units (primarily coal-fired) that rely on CCS for long-term operating units and includes subcategories of facilities that rely on co-fired or emission guideline exemptions based on facility retirement dates;
  3. Updated GHG Emission Standards for New or Reconstructed Stationary Combustion Turbine Facilities (Primarily Natural Gas). The Final Rule updated current GHG emissions standards for new or reconstructed1 stationary combustion turbines (primarily natural gas-fired), that vary based on the facilities’ capacity factor (base load, intermediate load, and low load), with base load units required to implement a 90 percent CCS standard by January 1, 2032; and
  4. Updated GHG Emission Standards for Modified Steam Facilities (Primarily Coal-Fired). The Final Rule updated current GHG emission standards for modified fossil fuel-fired steam-generating facilities (primarily coal-fired) to mirror the guidelines for existing facilities.

In general, fossil fuel-fired power plants are considered to be “new” if construction commenced or they were significantly modified after May 23, 2023. If constructed or modified prior to May 23, 2023, the facilities are considered to be “existing.”

Background

The Final Rule represents the EPA’s latest effort to regulate GHG emissions from fossil fuel-fired power plants under the Clean Air Action (“CAA”) following its 2009 finding that such emissions endanger public health and welfare. In 2015, the EPA promulgated the Clean Power Plan, which was intended to reduce GHG emissions from existing fossil fuel-fired power plants. For the Clean Power Plant, the EPA determined the best system of emission reduction (“BSER”)2 included three types of measures: (1) improving heat rate at coal-fired steam plants; (2) substituting increased generation from lower emitting plants; and (3) substituting increased generation from new renewable energy sources, which is known as “generation shifting.” Due to significant legal challenges and a change in administration, the Clean Power Plan was never implemented. In 2019, under the Trump administration, the EPA formally repealed the Clean Power Plan and promulgated the ACE rule, which rejected the generation shifting approach and focused on efficiency improvements at generating stations and directed states to take the initiative on how they choose to regulate power plant emissions. In January 2021, the D.C. Circuit vacated the ACE rule. 

Against this background, the EPA has now formally repealed the ACE rule and finalized a new rule to implement GHG emission limits and guidelines for fossil fuel-fired power plants based on what has been deemed cost-effective and available control technologies. Specifically, the EPA is imposing new source performance standards and emission guidelines that reflect the application of the BSER that, taking into consideration various criteria (e.g., costs, energy requirements, and statutory factors) is adequately demonstrated for the purpose of improving the emissions performance of the covered facilities. Consistent with the EPA’s traditional approach to establishing pollution standards for power plants under section 111 of the CAA, the standards are based on technologies that can be applied directly to fossil fuel-fired power plants. 

Key Takeaways from the Final Rule 

In the roughly 1,000-page Final Rule, EPA finalized multiple actions under Section 111 of the CAA that address GHG emissions from fossil fuel-fired power plants. Here are the key takeaways from the Final Rule: 

1) Repealed the Affordable Clean Energy rule. The Final Rule officially repealed the ACE rule and the EPA concluded that the suite of heat rate improvements that were identified in the ACE rule as the BSER were not appropriate for existing coal-fired steam power plants. EPA also concluded that the ACE rule conflicted with CAA Section 111 and EPA’s implementing regulations because it did not provide sufficient specificity as to the BSER EPA had identified or the degree of emission limitation achievable through application of the BSER.

2) Finalized emission guidelines for GHG emissions from existing coal-fired steam generating power plants. For coal-fired steam generating power plants that will continue operating past January 1, 2039, the EPA finalized the CCS requirement with 90 percent capture as the BSER. The EPA also set a presumptive standard of an 88.4 percent reduction in annual emission rate with a compliance date of January 1, 2032, which is two years longer than the initially proposed compliance date of January 1, 2030. 

The EPA recognized that while the use of CCS may result in significant emissions reductions from fossil fuel-fired sources, it requires substantial up-front capital expenditures, and it is not a cost-reasonable emission reduction technology for units that intend to cease operation before they would amortize its costs. With this understanding, the EPA finalized subcategories of coal-fired steam generating power plants that have separate emission guideline requirements.

  • Existing Coal-Fired Steam Generating Power Plants to Retire by January 1, 2039 - Due to the significant capital expenditures involved in deploying CCS technology and the large percentage of regulated units that have announced retirement dates, the EPA finalized a separate subcategory for existing coal-fired steam generating power plants that demonstrate that they plan to permanently cease operations before January 1, 2039. For this subcategory, the BSER is co-firing with natural gas at a level of 40 percent of the unit’s annual heat input. These units have a presumptive standard of 16 percent reduction in annual emission rate corresponding to the BSER, with a compliance deadline of January 1, 2030
  • Existing Coal-Fired Steam Generating Power Plants to Retire by January 1, 2032 – The EPA finalized an exemption to the emission guidelines for coal-fired steam generating power plants that demonstrate they plan to permanently cease operation prior to January 1, 2032, based on the determination that units retiring by this date generally do not have cost-reasonable options for improving their GHG emission performance. The EPA did not finalize the BSER it proposed for the imminent-term operating horizon subcategory (i.e., elected to commit to permanently cease operations before January 1, 2032, and to make that commitment federally enforceable and continuing by including it in the State plan) or the near-term operating horizon subcategory (i.e., elected to commit to permanently cease operations by December 31, 2034, as well as to adopt an annual capacity factor limit of 20 percent, and elected to make both of these conditions federally enforceable by including them in the State plan).

A coal-fired steam generating power plant significantly modified after May 23, 2023, is considered “new”, but if modified prior to that date is considered an existing source subject to the GHG emission guidelines.

3) Finalized emission guidelines for GHG emissions from existing oil- and gas-fired steam generating power plants. For existing gas- and oil-fired steam generating power plants, the EPA finalized subcategories based on load level (i.e., base load, intermediate load, and low load). For intermediate and base load units, the EPA finalized routine methods of operation and maintenance as the BSER, which will not achieve emission reductions but will prevent increases in emission rates. For low load units, the EPA finalized a uniform fuels BSER. For all load levels, compliance is required by January 1, 2030.

The EPA finalized presumptive standards for natural gas- and oil-fired steam generating units that are higher than originally proposed: base load sources (i.e., annual capacity factors greater than 45 percent) have a presumptive standard of 1,400 lb CO2/MWh-gross; intermediate load sources (i.e., annual capacity factors greater than 8 percent and less than or equal to 45 percent) have a presumptive standard of 1,600 lb CO2/MWh-gross; and low load sources (i.e., annual capacity factors less than 8 percent), have a presumptive input-based standard of 170 lb CO2/MMBtu for oil-fired sources and a presumptive standard of 130 lb CO2/MMBtu for natural gas-fired sources. 

An oil- or gas-fired stream generating power plant significantly modified after May 23, 2023, is considered “new,” but modified prior to that date is considered an existing source subject to the emission guidelines. 

4) Finalized revisions to the GHG emissions standards for new and reconstructed fossil fuel-fired stationary combustion turbine units. For new or reconstructed fossil fuel-fired stationary combustion turbine units, which are generally natural-gas fired, that commence construction or reconstruction after May 23, 2023, the EPA finalized emission standards for three subcategories based on load (i.e., base load, intermediate load, and low load).

  • Base load combustion turbine – The BSER for base load combustion turbines, which have a capacity factor above 40 percent, includes two components and two phases.
    • First Component – The BSER for base load combustion turbines is highly efficient generation based on the emission rates that the best performing units are achieving, and the compliance deadline is the Effective Date of the Final Rule or unit startup, whichever is later. The presumptive standard is 800 lb. CO2/MWh-gross for units with a base load rating of 2,000 MMBtu/h or more and 800 lb. to 900 lb. CO2/MWh-gross for combustion turbines with a base load rating of less than 2,000 MMBtu/h.
    • Second Component – The BSER requires utilization of CCS with 90 percent capture, and the compliance deadline is January 1, 2032, which is three years earlier than initially proposed. The presumptive standard is 100 lb. CO2/MWh-gross, and the EPA noted that compliance may be obtained through co-firing hydrogen.
  • Intermediate load combustion turbine – The BSER for intermediate load combustion turbines, which have a capacity ranging from 20 percent to 40 percent, is highly efficient generation and best operating and maintenance practices. Compliance is required by the Effective Date of the Final Rule or unit startup, whichever is later. The presumptive standard is 1,170 lb. CO2/MWh-gross.
  • Low load combustion turbine – The BSER for low load combustion turbines, which have a capacity of less than 20 percent, is use of lower emitting fuels (e.g., natural gas), and the compliance deadline the Effective Date of the Final Rule or unit startup, whichever is later.

Based on comments received, the EPA did not finalize its proposed BSER pathway of low-GHG hydrogen co-firing for new or reconstructed base load and intermediate load combustion turbines. The EPA also did not finalize the proposed requirement that only low-GHG hydrogen may be co-fired in a combustion turbine for the purpose of compliance with the standards of performance. The EPA determined that uncertainties prevent the EPA from concluding that low-GHG hydrogen co-firing is a component of the “best” system of emission reduction at this time. Pursuant to the CAA Section 111, the EPA establishes standards of performance but does not mandate use of any particular technology to meet these standards. As such, sources may still elect to co-fire hydrogen for compliance with the final standards of performance even absent the technology being a BSER pathway. 

5) Finalized revisions to current GHG emissions standards for fossil fuel-fired steam generating power plants that undertake a large modification. The EPA finalized revisions of the standards of performance for coal-fired steam generating power plants that undertake a large modification (i.e., modification that increases its hourly emission rate by more than 10 percent) to mirror the emission guidelines for existing coal-fired steam power plants. The EPA determined that units with such large modifications are capable of meeting the same presumptive standards that the EPA finalized for existing units, and it will ensure that there is no unjustified disparity between emission controls for modified and existing coal-fired steam units.

6) Deferred promulgating emission guidelines for existing gas-fired electric generating units. EPA’s proposal included emission guidelines for existing gas-fired electric generating units with a BSER based on CCS and co-firing hydrogen. In the Final Rule, the EPA deferred promulgating emission guidelines for existing gas-fired electric generating units and stated that it plans to “expeditiously issue an additional proposal that more comprehensively addresses GHG emissions from this portion of the fleet.”

7) Finalize reliability-related instruments and adjustments. In response to comments stating that the Final Rule, in combination with other factions, may affect the reliability of the bulk power system, the EPA made adjustments in the Final Rule to support power companies, grid operators, and States in maintaining the reliability of the electric grid during implementation of the Final Rule. These include:

  • A short-term reliability mechanism that can be included in State plans to allow affected facilities to operate at baseline emission rates during grid emergencies;
  • A reliability assurance mechanism that can be included in State plans to allow states to delay cease operation dates by up to one year in cases where the planned cease operation date is forecast to disrupt system reliability;
  • A mechanism to extend compliance timelines by up to one year in the case of unforeseen circumstances, outside of an owner/operator’s control, that delay the ability to apply controls (e.g., supply chain challenges or permitting delays); and
  • Transparent unit-specific compliance information for facilities that will allow grid operators to plan for system changes with greater certainty and precision.
Next steps and actions

States are required to submit their plans to the EPA within 24 months of the Final Rule being published in the Federal Register. Each State plan must include, for each affected fossil fuel-fired power plant: (1) a standard of performance that is at least as strict as the EPA presumptive standard, (2) measures for the implementation and enforcement of that standard, (3) a compliance schedule, and (4) the applicable increments of progress. State plans may provide variances for coal-fired steam generating facilities based on “remaining useful life and other factors,” which can include, among other things, unreasonable cost of control resulting from unit age, location, or process design and physical impossibility, or technical infeasibility of installing necessary control equipment. EPA stated that a variance requires a “fundamental difference” between the circumstances of the affected facility and the information EPA considered in determining the compliance schedule in the emission guidelines. 

As we saw with the Clean Power Plan and ACE rule, once the Final Rule is published in the Federal Register it will be heavily challenged in federal court. The Final Rule is composed of four independent rules, which are outlined in the opening paragraphs above. Opponents will likely try to get the entire Final Rule or specific components of the Final Rule stayed pending the outcome of the litigation. Undoubtedly, the litigation will create significant uncertainty and may continue for years. If there is a change of administration, the incoming administration could, among other things, voluntarily remand the Final Rule to EPA while it undertakes an independent rule or it could move forward with a repeal and replace process, which was heavily used during the Trump administration for various environmental laws. The delay caused by litigation, along with the additional uncertainty created by the upcoming election, will most likely disrupt the debt and equity markets for new or reconstructed natural gas facilities.

1 Reconstructed facilities have replaced components to such an extent that the capital cost of the new components exceeds 50 percent of the capital cost of an entirely new comparable facility. 

2 Section 111(a)(1) of the CAA requires the EPA to identify a standard of performance that “reflects the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements) the Administrator determines has been adequately demonstrated.” 42 U.S>C.