Resolution on Clean Power Plan Years Away

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The EPA’s Clean Power Plan is considered something that should enhance the value of renewable generation and hopefully increase the price we are seeing on some Renewable Energy Credits (RECs). As I learned years ago from studying the then proposed Pennsylvania RPS to the final version (complete with final rule making), nothing is certain until the lawyers have left and the dust has settled.  What may be a valuable asset in one draft, can be completely worthless in the final published (and ruled upon) document.

A number of Clear Energy clients have sited the Clean Power Plan as the reason behind not engaging in forward transactions due to the uncertainty it poses.  There is no question that this legislation creates significant uncertainty in the power markets, especially renewables, but given that we are at best a few years away, if at all, sellers should feel comfortable in taking advantage of short term forward transactions when they arise.

The below article from SNL reflects my thinking on the timing of the plan and details nicely the challenges that the plan faces.

Ryan Cook
Clear Energy Brokerage & Consulting, LLC

From the website. Reposted with permission, highlights and bolding by Clear Energy, special thanks to Peter Marrin.

Tuesday, June 23, 2015 5:26 PM ET

Former EPA official: Clarity on Clean Power Plan another 3-4 years away

By Molly Christian

Legal challenges and state responses to the U.S. EPA’s proposed Clean Power Plan will extend through the next several years, making it nearly impossible to determine if and how the program will be implemented, a former agency official said June 23.

“When you see these sort of simple… solutions that are thrown up there as to how this is going to play out, I think they’re all wrong. I think this is going to take some time,” Bob Meyers, a Washington, D.C.-based attorney with Crowell & Moring and former acting assistant administrator for EPA’s Office of Air and Radiation, said at the Energy & Mineral Law Foundation’s annual institute in Amelia Island, Fla.

EPA’s final Clean Power Plan rule for cutting greenhouse gas emissions from existing power plants is expected in August, as is a rule for modified/reconstructed sources. State Implementation Plans are due a year later, but the near certainty of legal challenges and the complexity of crafting compliance plans are likely to cause delays.

“The first wave of litigation occurs on the rule [release], second wave occurs when the state plans come in. I don’t think that’s going to occur on schedule,” Meyers said. “I think that’s going to take some time. And this is going to play out across the country in the next three to four years I think before we really have some idea.”

The rule, which is being promulgated under Section 111(d) of the Clean Air Act, is projected to cut emissions by 30% from 2005 levels by 2030, according to EPA. The cuts can be achieved through four so-called building blocks: a 6% improvement in coal unit efficiency rates, increased dispatch of natural gas-fired generation, higher utilization of renewable energy resources and maintenance of the existing nuclear fleet, and a 1.5% improvement in demand-side energy efficiency.

The proposal has drawn the ire of coal producers and some utility industry representatives, with the U.S. Energy Information Administration estimating U.S. coal production under the rule could fall by up to 38% by 2040 compared with business as usual.

Although an initial challenge was thrown out because the rule is not final, plan opponents could raise a number of legal issues down the road.

Meyers said possible legal arguments include that the plan is unconstitutional because it violates the fifth amendment/takings clause by upsetting “settled investment expectations” and likely eliminating coal use in a dozen states. Opponents could also argue EPA’s determination of the “best system of emission reduction” cannot be stretched to include the entire electric grid and has no precedent in the Clean Air Act’s 40-year history. Challengers may also say EPA is precluded from regulating source categories under Section 111 of the Clean Air Act that are already being regulated under the agency’s new Mercury and Air Toxics Standards through Section 112.

But EPA and its supporters have an equally robust list of potential counterarguments. On the constitutional level, supporters could say the plan does not explicitly require the retirement of coal units or the adoption of a specific energy mix, undercutting the takings argument. They could also say business investments are not shielded from future regulation and that states can decline to form their own implementation plans and adopt a federal implementation plan, thereby avoiding violation of the Tenth Amendment and principles of federalism.

EPA can also argue the structure of the rule “allows broad state flexibility” in meeting emissions rate targets and is consistent with current EPA regulations, Meyers said.

There could be changes to proposed regulations for new power units to bolster the chances of the existing plant rule surviving. EPA is proposing a new rule under section 111(b) of the Clean Air Act that would require partial carbon capture for new coal units. Section 111(b) regulations are necessary to promulgate the 111(d) existing plant rule, but concerns about the feasibility of commercial-scale carbon capture could make EPA rethink those requirements.

“We expect them to dial back [111](b) and take away that vulnerability,” Meyers said.