Back Again: EPA Issues its Third Iteration of CO2 Reduction Rules for the Power Sector
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Back Again: EPA Issues its Third Iteration of CO2 Reduction Rules for the Power Sector

Brownstein Client Alert, May 3, 2024

On April 24, 2024, the U.S. Environmental Protection Agency (“EPA”) issued a final rule mandating aggressive carbon dioxide (CO2) emissions reductions from existing coal-fired power plants and new natural gas-fired turbines (“Final Rule”; pre-publication version). The Final Rule is EPA’s latest attempt to curb CO2 emissions from the power sector, following unsuccessful attempts by two prior administrations. Although EPA only released the Final Rule last week, it has received substantial criticism and promises of litigation from several states as well as widespread concern about its feasibility, economic consequences and potential impacts to the nation’s grid reliability. In addition to likely litigation, the potential for a presidential administration change this November adds additional uncertainty to the viability of the Final Rule.

Overview of Key Requirements

Existing Coal-Fired Electric Generating Units (“EGU”)

  • Long-term units, which intend to operate beyond 2039, must install carbon capture equipment and capture 90% of CO2 emissions by Jan. 1, 2032.
  • Medium-term units, which will cease operations by Jan. 1, 2039, must reduce CO2 emissions by 40% by installing and using natural gas co-firing equipment by Jan. 1, 2030.
  • Short-term units, which will cease operations by Jan. 1, 2032, have no new obligations under the Final Rule.

New Natural Gas-Fired Turbines Constructed after May 23, 2023

  • Base-load turbines that generate at least 40% of maximum annual capacity are subject to: first, efficiency design/operational standards during Phase 1, and second, carbon capture of at least of 90% CO2 emissions by Jan. 1, 2032 during Phase 2.
  • Intermediate-load turbines that generate between 20% and 40% of maximum annual capacity are subject to efficiency design/operational standards.
  • Low-load (i.e., “peaking”) turbines that generate less than 20% maximum annual capacity subject to a low-emitting fuel standard.

Overview of Changes from the May 2023 Proposed Rule

  • Reduction in number of subcategories of existing coal-fired units (from four to three)
  • Two-year extension of the compliance date for existing coal-fired units to implement carbon capture to 2032
  • Removal of hydrogen co-firing as a compliance pathway
  • Addition of two reliability-related provisions: (1) emissions calculation flexibility for short-term grid emergencies, and (2) compliance flexibility for units with enforceable retirement dates
  • No final rules for existing natural gas-fired turbines at this time

Additional New Fossil-Fired Power Plant Rules from EPA

Further Discussion

Carbon Capture, Utilization, and Sequestration/Storage

The Final Rule imposes different standards for existing gas and coal-fired EGUs and new gas-fired EGUs. Existing coal-fired EGUs will continue to operate beyond 2032 must reduce their CO2 emissions by 90% by Jan. 1, 2032, by using carbon capture and sequestration/storage (“CCS”) technology. The same requirement and deadline applies to new combined-cycle natural gas-fired EGUs that run frequently (i.e., 40% or more of the time).

The Final Rule’s preamble provides a lengthy discussion of CCS, frequently relying on prior industry statements and interviews in favor of the technology. EPA notes there are at least 15 operating CCS projects across the country, and another 121 in advanced stages of development, and specifically notes state-specific incentives including Wyoming’s House Bill 42, which requires utilities to generate a certain percentage of electricity using CCS. Interestingly, the agency also “finalized a determination” that CO2 pipeline infrastructure is adequately demonstrated, “anticipat[ing] that in the coming years, a large-scale interstate pipeline network may develop to transport CO2.” Last year, the Department of Energy released a report stating that the United States must build 30,000 to 96,000 miles of CO2 pipelines (on top of the existing 5,000 miles) to link sources of CO2 emissions with sequestration sites to meet 2050 net-zero goals.

Whether CCS has been “adequately demonstrated” is one of the more contentious pieces of EPA’s proposal and promises to be tested in litigation. In response to the West Virginia v. EPA decision, EPA spent a substantial portion of the preamble justifying its findings related to CCS. EPA framed the language in Section 111 and relevant case law as supporting technologies that have been utilized at test sources or individual sources operating at commercial scale and opined that the agency is not required to show the technology exists at a widespread, commercial scale in order to impose the related requirements. We note that EPA’s statutory interpretation on these issues may be affected by the Supreme Court’s pending decision on the scope of Chevron deference and is certainly an issue to watch closely.

Best System of Emissions Reduction

In the Final Rule, EPA took recent developments into consideration for rules concerning the best system of emissions reduction (“BSER”). There have been new and lower cost developments in CCS technology, which, in EPA’s opinion, would make the technologies both cost effective and feasible.

The Inflation Reduction Act of 2022 also impacted the agency’s determination of BSER because it extended and increased the tax credits available for CO2 sequestration, arguably making it more cost-effective. Coupled with the funding included in the Infrastructure Investment and Jobs Act of 2021, which provided for significant infrastructure upgrades, EPA found CCS to be a reasonable, cost-effective method of emissions reduction. However, by most accounts, IRA funding has been inefficient and ineffective, and it remains to be seen whether it will actually be effective in aiding commercial scale deployment of CCS.

Rules for Existing Natural Gas-Fired Turbines Delayed

The Final Rule acknowledges the significant expansion in the nation’s natural gas-fired generation fleet during the past 20 years and the more recent build out of smaller fleet capacity (75 percent of the gas fleet is between 50 and 500 megawatts per unit). However, in the Final Rule, EPA removed proposed emission guidelines for existing natural gas-fired turbines despite modeling showing that by 2030 these units will represent the largest source of greenhouse gas emissions across the power sector. EPA’s proposed rule relied on CCS and co-firing hydrogen as BSER for existing natural gas-fired EUGs. In the Final Rule, EPA stated in the future, it will issue new and more comprehensive emissions guidelines than it previously proposed for existing sources, focusing on greater emission reductions from these sources.

Concluding Thoughts

The Final Rule has already received unprecedented scrutiny and attention. On one hand, EPA removed some of the more controversial proposed requirements and offered new reliability mechanisms to states and sources to address grid reliability concerns. On the other hand, however, the Final Rule relies heavily on CCS, and EPA will undoubtedly be challenged on its findings that the technological and timeline mandates are adequately demonstrated and technically and economically feasible. Injecting further uncertainty into the long-term viability of the Final Rule is the Supreme Court’s decision in West Virginia v. EPA announcing the “major questions” doctrine, the impending and expected decision narrowing or eliminating Chevron deference and the political uncertainty surrounding the 2024 presidential election. Meanwhile, the Final Rule will significantly affect the short- and longer-term plans and capital allocations of electricity generators across the United States. Moreover, many of EPA’s findings are based on modeling and cost projections that assume Congressional funding sources will be deployed efficiently and effectively to rapidly scale CCS, and that CCS projects will receive the necessary regulatory approvals in a timely manner.

In short, there are a lot of conflicting messages and issues related to this critical and sweeping Final Rule, and its future is anything but certain. Brownstein will be paying close attention to the political and legal developments that may affect the viability of the Final Rule and the many industries it impacts.

This document is intended to provide you with general information regarding EPA's final rule mandating aggressive carbon dioxide emissions reductions from existing coal-fired power plants and new natural gas-fired turbines. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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