EPA’s long-promised rules for reducing CO2 emissions from fossil fuel-fired power plants have now been published. In the proposal, EPA lays out “performance standards” for new natural gas-fired power plants and “emission guidelines” for states to use in developing standards for existing gas- and coal-fired power plants.

The proposal is based on EPA’s determination that three different control strategies qualify as the “best system of emission reduction” (BSER) for reducing greenhouse gas emissions (GHGs) from power plants: (1) carbon capture and sequestration (CCS), (2) co-firing natural gas in coal boilers, and (3) firing hydrogen in gas turbines. EPA justifies this determination based on its finding that all three technologies are “adequately demonstrated,” despite limited application to date and “highly cost-effective,” based on new tax credits from the Inflation Reduction Act.

While EPA’s BSER determination may sound straightforward, the proposal outlines myriad compliance options, broken down by subcategory, that can make identifying the specific requirements applicable to an individual plant difficult. EPA also gives plants and states very little time to decide which of the available paths to follow — states must submit plans just two years after EPA finalizes the rule to outline how each power plant will comply. If EPA finalizes the rule next year as planned, the utility industry and states will need to decide the long-term fate of their entire existing fleet of fossil fuel-fired generation resources just a few years from now.

The proposal published today is EPA’s third attempt to use Section 111 of the Clean Air Act to regulate greenhouse gas emissions from the power sector. The first two rules — the Clean Power Plan (CPP) and the Affordable Clean Energy (ACE) Rule — were immediately challenged and never took effect. The CPP was first stayed and then ultimately rejected by the Supreme Court, while ACE was first vacated by the D.C. Circuit and is now slated for deletion in this new proposal. Unlike the CPP and ACE, EPA did not give its third Section 111 climate rule for power plants a fancy nickname, preferring instead to characterize it as a more traditional application of the Clean Air Act. In its recent press release, EPA simply refers to the proposal as “New Carbon Pollution Standards.”

Unlike the CPP, which focused on “generation shifting,” and ACE, which relied on “generation efficiency,” the new standards and emission guidelines rely on application of specific technologies, and thus may avoid some the legal issues raised in challenges to the prior rules. However, the proposal raises different legal questions, including whether the proposed options are in fact adequately demonstrated, cost-effective, or even achievable.

In the rule, EPA expresses confidence in the ability of the power sector to utilize CCS, gas co-firing, and hydrogen, at least eventually. But since these technologies cannot be implemented immediately, EPA has grouped all covered gas and coal generating units into “subcategories” based on how quickly EPA believes the relevant technologies for each group can be deployed.

Gas Units

For gas units, EPA divides both new and existing units into three subcategories, based on the operating profile of the unit: (1) low-load “peaking” units that operate less than 20% of annual capacity, (2) intermediate-load units that operate above 20%, but less than a design-based, unit-specific operating level, and (3) base-load units that exceed that unit-specific level.

The requirements for peaking units are the easiest to understand — in addition to staying below 20% annual capacity, these units must meet a relatively straightforward emission limit. In contrast, intermediate and base load units must either add hydrogen or employ CCS. The hydrogen “pathway” consists of two phases, 30% by 2032 and 96% by 2038. The CCS “pathway” requires 90% capture by 2035. The actual standards for each unit will be based on percentage reductions from baseline CO2 emissions reflecting the assumed levels of emission reduction performance for the relevant technology.

Complicating the picture somewhat are two critical differences between the “performance standards” that EPA sets out for new gas units and the “emission guidelines” that states will develop for existing gas units. First, under the Clean Air Act, states have an opportunity to consider remaining useful life and other factors when implementing emission guidelines. As a result, the standards they set for individual existing units may deviate somewhat from EPA’s proposal. Second, unlike the standards set by EPA for new units, EPA’s proposal requires states to implement emission guidelines only for a subset of “large” and “frequently operated” existing gas units — those greater than 300 megawatts in total capacity that operate greater than 50% of capacity in a year.

Coal-Fired Units

For existing coal-fired steam units, EPA’s proposed emission guidelines divide the fleet on an entirely different basis — by retirement date. EPA refers to units planning to operate into the 2040s as “long” term units and requires them to utilize CCS with 90% capture. EPA refers to units planning to retire between 2032 and 2039 as “medium” term units and requires them to co-fire 40% natural gas. Finally, for those units EPA describes as “imminent” and “near” term units — i.e., those expected either to retire before 2032 or limit operations and retire before 2035, respectively — the proposal would merely prohibit emission increases compared to a baseline of performance, but otherwise require only routine operations and maintenance. New coal units are not covered by the proposal at all — they remain subject to the partial CCS standard that EPA adopted in 2015, which remains subject to litigation currently held in abeyance.

Importantly, the various retirement dates laid out in the rule are only used to determine the subcategory to which coal-fired units belong. Somewhat buried within the preamble is a much more significant date — the deadline for compliance, which is January 1, 2030. This means all coal plants not scheduled to retire before 2032 (or before 2035 with an operating cap) must either install CCS or begin co-firing with 40% natural gas no later than January 1, 2030, an aggressive schedule for either option, but particularly for CCS.

Implementation of the emission guidelines for both existing gas and coal-fired units will be completed via state plans that must be approved by EPA. EPA has proposed to allow states to incorporate trading programs or averaging into their plans as long as the emission reductions achieved by the state plan will be equivalent to the reductions that would otherwise occur if the standards were applied to each unit.

Comments on the proposal are due July 24, 2023. For more information, please contact Mack McGuffey or Melissa Horne.