EPA Proposes Carbon Limits for New US Power Plants

EPA Sets Ambitious Carbon Limits for New Power Plants

The Environmental Protection Agency (EPA)'s proposed carbon pollution standard, issued under a December 2010 court-approved settlement that resolves a lawsuit filed by states and environmental groups, would require new power plants to emit no more than 1,000 pounds of carbon dioxide (CO2) per MWh—the same amount of CO2 emitted by a modern, natural gas combined-cycle power plant. EPA administrator Lisa Jackson said the new standards are necessary because the utility sector is responsible for about 33% of total greenhouse gas emissions in the United States. By establishing a "new source performance standard" (NSPS) for all new electric generating units, the proposal effectively would ban new coal-fired generation not equipped with carbon capture and storage (CCS) technology that can strip CO2 out of power plant emissions and safely store it in geologic formations or pipe it to drillers for enhanced oil recovery. Three states—California, Washington, and Oregon—have similar standards in place, while Montana and Illinois have rules prohibiting the construction of new coal plants unless they are equipped with CCS.

Limitations of the Proposed Rule

Importantly, the proposed rule does not affect existing power plants, and would not apply to plants that undertake major modifications to meet other air pollution standards, such as the EPA's recently finalised Mercury and Air Toxics Standards (MATS) and Cross-State Air Pollution Rule. In addition, new plants that begin construction within 12 months of the 27 March proposal, as well as plants that are part of Energy Department demonstration projects that also begin construction within 12 months, will be exempt from the proposal. These exemptions are important because the Clean Air Act stipulates that when the EPA proposes a new NSPS, the proposed standard takes effect upon its publication in the Federal Register. This is to prevent companies from rushing to complete plants before a new NSPS is finalised and thereby elude more stringent emission limits in a new NSPS. The EPA identified 15 "transitional" projects that have or are close to receiving necessary permits but have not begun construction. Six of these projects have said they intend to install CCS.

In an effort to accommodate utilities that want to build new coal plants, the EPA is proposing to give plants the option to use a 30-year average of CO2 emissions to meet the proposed standard, rather than meeting the annual standard every year. This provision would immediately give plants that install and operate CCS technology the flexibility to emit more CO2 in the early years as they learn how to optimise the controls. Alternatively, a company could build a coal-fired plant and add CCS later. For example, a new coal plant could emit more CO2 for the first 10 years of its life, then install CCS and emit less CO2 for the next 20 years, as long as the average of those emissions over 30 years meets the standard.

Fuel-Switching Under Way in US

The effective ban on new coal-fired generation would accelerate the ongoing move by US utilities towards using gas for new baseload generation, a trend driven by rock-bottom gas prices, with the Henry Hub spot price down to USD2.08/mmBtu yesterday (27 March) due to astonishing levels of shale gas production, as well as increasingly stringent pollution limits on coal-fired generation. A recent study by Bernstein Research suggests that the price of natural gas in the US could rise by 50% over the next year as electricity producers dramatically accelerate a switch from coal-fired to gas-fuelled generation to capitalise on current low-cost gas. The Wall Street study said that depressed gas prices give utilities substantial economic incentive to vastly increase output of their underutilised gas-fired plants—which now operate at only 45% of capacity—and that such large-scale switching would "radically change" the gas industry's supply/demand fundamentals. Given the record-low natural gas price environment in the US—which might not even have reached the floor yet at the outset of the injection season—IHS CERA also expects that natural gas-fired generation is likely to erode coal-fired generation's long-dominant market share, even without a major new federal policy.

In issuing the emissions plan, the EPA said its integrated planning model projects that for economic reasons, natural gas-fired units will be the generation technology choice for utilities until at least 2020, and that no new coal plants with CCS will be built by 2030 even without the proposed carbon standard. Critics of the EPA proposal, however, argue that utilities are turning to natural gas instead of coal because gas prices are extremely low, but as more generators begin using gas for environmental reasons, gas prices will increase steadily and drive up electricity prices as well. The EPA said, however, that it examined a scenario in which gas prices and electricity demand are far higher than the reference case and found only small amounts of coal-fired generation would be built by 2030.

Responses and Legal Questions

Although the rule will have virtually no immediate impact on utilities that are not planning new coal plants, industry officials were decidedly mixed in their response to the proposal. While some in the industry have welcomed the new rule as a modest framework that will provide planning certainty for future investments in the country's power generation fleet build-out, others have criticised the regulation's effect of pushing coal out of the US energy mix in the long term, particularly as President Barack Obama has just proclaimed an "all-of-the-above" energy strategy for the country in his State of the Union address in January (see United States: 25 January 2012: US President's State of the Union Address Remains Vague in Election Year).

The rule is a departure from prior NSPS rulemakings, which for three decades have established different emission rates based on the type of fuel used at a power plant. This proposal, however, establishes one emission rate for CO2 regardless of fuel type—a construct that could face legal challenge, according to industry and environmental lawyers. In addition, the Clean Air Act requires a NSPS to encourage the use of the best system of emission reduction that—after taking cost and other factors into account—has been "adequately demonstrated". CCS has not yet been adequately demonstrated, however, and utilities could therefore argue in court that the proposal is illegal. The EPA would counter that utilities have a variety of non-coal-generation options available—gas, renewables, and nuclear—and that the rule's flexibility provisions will allow utilities to use CCS at new coal-fired plants.

Outlook and Implications

It remains unclear what the EPA intends to do to address CO2 emissions from existing plants, as the agency is mandated under the Clean Air Act to address these as well. Lisa Jackson told reporters yesterday that the EPA has no plans to propose an NSPS for existing plants, despite the fact that the December 2010 settlement required the EPA to propose NSPS for new, modified, and existing plants at the same time. Industry sources are sceptical of Jackson's assertions, especially looking ahead to this year's presidential election. Should Obama be confirmed for a second term in office, more aggressive climate change regulation can be expected from the EPA as the current US administration has given the agency greater weight in addressing emissions after similar legislative efforts have failed in Congress in light of stubborn Republican opposition. If a Republican candidate prevails in the November election, however, the EPA emissions regulation can be expected to slow down markedly. In that case, the US power industry might face less stringent emissions regulations in the medium term, but individual states are powering ahead with similar provisions and these issues are unlikely to go away given a strong US environmental lobby and continued Democratic support for a comprehensive US climate change mitigation strategy.

Chris Holly, of The Energy Daily, contributed to this report..