Tim Profeta, Director Nicholas Institute for Environmental Policy Solutions
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U.S. Clean Power Plan
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Tim Profeta, Director Nicholas Institute for Environmental Policy Solutions
- 2. Agenda • Basic Structure of the Clean Power Plan • Sources of Uncertainty in CPP implementation • Possible paths forward
- 3. Agenda • Basic Structure of the Clean Power Plan • Sources of Uncertainty in CPP implementation • Possible paths forward
- 6. Best System of Emission Reduction (BSER) Building Blocks • BB1: Heat rate improvements at existing coal units • BB2: Increasing generation from existing natural gas combined cycle • BB3: Increasing renewable generation 2030 Final rate Fossil steam NGCC lbs/MWh lbs/MWh Eastern 1305 771 Western 360 690 ERCOT 237 697
- 9. State Plan Choices: Key QuestionsThis image cannot currently be displayed. Mass vs. Rate? How to distribute allowances? How to address leakage? Trading Ready? Degree of trading? Trading Partners?Photo: thedailyomivore.net Emissions Standards vs. State Measures? Emission Rate Credit Issuance and Supply?
- 10. Mass or Rate? Mass • Administratively simpler • Allowance supply is pre‐ determined; allocation is a state decision. • Potentially easier to build upon for future policies • Environmental outcomes depend on leakage Rate • ERC administration potentially significant lift, especially for efficiency • ERC supply is uncertain • Allocates financial incentive to ERC developer • More or less stringent than mass?
- 12. Rate‐Based Trading Basics Measure: lbs of CO2 & output (MWh) Lbs/MWh = unadjusted rate Below standard Earn ERCs Above standard owe ERCs $ ERCs Affected Unit ERC Eligible Resources
- 13. Role of Canada and Mexico in CPP • Can generate ERC’s if grid is linked • No provision for trading off allowances • Provision of low‐carbon power to U.S. demand is incentivized
- 14. Agenda • Basic Structure of the Clean Power Plan • Sources of Uncertainty in CPP implementation • Possible paths forward
- 17. What are the Issues? 1. Senate versus House version of Section 111(d) of the Clean Air Act 2. Outside‐the‐fence‐line measures for the best system of emissions reductions 3. New source standard for greenhouse gas emissions emitted from natural gas and coal power plants 4. Constitutional & procedural challenges
- 18. WV v. EPA Status • Stayed by Sup Ct, 5‐4, but then Scalia passed • Under consideration by DC Cir – forewent 6/2 hearing by panel to have Sept. hearing en banc • Opinion possible in late 2016 – but will Sup Ct forego review? • DC Cir #’s favor EPA, but recent precedent has created erosion in deference to executive branch
- 21. Agenda • Basic Structure of the Clean Power Plan • Sources of Uncertainty in CPP implementation • Possible paths forward
- 22. THREE FUTURES?
- 23. Future 1: Regulatory Path • Court upholds 111 authority • EPA expands CPP efforts to other sectors • Possible use of 115 to attack other sectors, or even power sector
- 24. Future 2: Clean Air Act Reform Path • Allow CPP to go forward but amend Act to allow for more effective and efficient regulation – Cross sectoral? International trade? – Clear authority on creation of emissions limits
- 25. Future 3: Grand Bargain Path • Replace regulatory authority with clean carbon pricing regime • With Waxman/Markey failure still in consciousness, cap‐and‐trade legislation unlikely in near term • Carbon tax compromise is possible and oft‐ discussed
- 27. APPENDICES
- 28. Clean Energy Incentive Program (CEIP) Optional early action program in 2020 and 2021 CEIP Eligible Resources: Any wind or solar For every 2 MWh, project receives 1 credit from EPA, 1 credit from state Energy efficiency in ‘low‐income communities’ For every 2 MWh, project receives 2 credits from EPA, 2 credits from state Early action credits/allowances granted certain renewables and energy efficiency that commences construction/operation after the state plan is submitted for MWhs generated/saved in 2020 and 2021 EPA matching credits/allowances Participating states must create own pool of matching credits/allowances
- 30. Leakage Rate‐based plans cannot include new sources for compliance, so EPA is not worried about leakage Mass‐based plans need to demonstrate they have addressed risk of leakage to new sources in state plan 3 options available to states 1. Cover new sources 2. Use an allocation method that counteracts leakage 3. Other methods demonstrated by state to prevent leakage
- 31. Trading‐Ready What is “Trading Ready”? Allows EGUs and others to trade compliance instruments with the same definition and common tracking system with entities in other states without a formal multistate agreement. Mass Subcategorized Rate Allowance representing 1 short ton of CO2 emissions Emission Rate Credit (ERC) representing 1 MWh of zero carbon generation or avoided emissions *Mass can trade with mass and subcategorized rate with subcategorized rate.
- 32. Proposed Model Rules • The EPA has proposed mass‐ and rate‐based model rules and federal plans • EPA aims to finalize model rules before the first state submission in Sept 2016 • Both mass‐ and rate‐ are trading ready • Both include Clean Energy Incentive Program
- 35. Mass Allowance Allocations • The plans create allowances equal to a state’s mass goal • EPA wants states to determine the allowance distributions • If EPA is distributing allowances, they propose to do this based on historical 2010‐2012 generation data • EPA is taking comment on other distribution options.
- 36. Allocation Set‐asides EPA is proposing three set‐asides for the federal plan and model rule 1. Clean Energy Incentive Program 2. Output‐based allocation to existing natural gas set‐aside to address leakage 3. RE set‐aside of 5% to address leakage
- 37. Key Points in Mass‐Based Model Rule • Existing Sources Only, Uses Allowance Allocation to Address Leakage • Trading Ready • EPA will track allowances using the Allowance Tracking and Compliance System (ATCS)* • Allowances can be banked with no restrictions*
- 40. Emission Rate Credits (ERCs) There are three categories that can generate ERCs: 1. Affected EGUs operating below subcategory emission performance rate 2. Existing NGCC earns Gas Shift ERCs (GS‐ERCs) to sell to fossil steam units (cannot use for NGCC compliance) 3. Zero emitting resources: Post 2012 renewable energy, energy efficiency, nuclear generating or avoiding MWh during compliance period
- 41. Zero‐Emitting ERCs Model Rule proposal • All wind • All solar (including distributed) • Geothermal • Hydropower • Qualified biomass • Wave • Tidal • Waste‐to‐energy • New/uprate nuclear • Non‐affected combined heat and power • Demand‐side energy efficiency/ demand‐side management Federal Plan proposal* • On‐shore utility scale wind • Utility scale solar PV • Concentrated solar • Geothermal power • New/uprate nuclear • Utility scale hydro
- 43. Key Points in Rate‐Based Model Rule • Uses subcategorized rates • Trading ready • Uses EPA tracking system • ERCs can be banked without limit • Includes Clean Energy Incentive Program*
- 45. Emissions Standards or State Measures Plan? • Emissions Standards: Compliance obligation entirely on affected units. • State Measures: All or part of compliance obligation on state or other entities. – Accommodates existing programs in California and to a lesser extent RGGI – For states without existing programs, essentially requires creation of two plans (state measures plus backstop)
- 46. Mass or Rate? Mass • Administratively simpler • Allowance supply is pre‐ determined; allocation is a state decision. • Potentially easier to build upon for future policies • Environmental outcomes depend on leakage Rate • ERC administration potentially significant lift, especially for efficiency • ERC supply is uncertain • Allocates financial incentive to ERC developer • More or less stringent than mass?
- 48. Mass‐Based Plans and Leakage 3 options available to states 1. Cover new sources 2. Use an allocation method that counteracts leakage (presumptively approvable model rule method) 3. Other methods demonstrated by state to prevent leakage
- 49. New Source Complements Cumulative National Increase in Interim Goal Budget National Increase in Final Goal Budget 1.8% 2.5% 49 0 20 40 60 80 100 120 Million Tons Final Goal New Source Complement Final Mass‐Based Goals Plus New Source Complements by State
- 50. Mass‐Based Plans and Leakage Cover New Sources • Covering new sources does not limit load growth. • Does limit emissions. • May make it harder or easier to comply depending on assumptions about future demand and emissions Existing Sources Only • No limit on new NGCC • Must adequately address the risk of leakage through allowance allocation or other mechanism(s) • No forward going requirement to show leakage did not occur 50
- 51. Allowance Distribution in Mass‐Based Plans States have discretion to distribute allowances, so long as leakage is adequately addressed. Some possible goals for allowance distribution: • Protect or benefit ratepayers/consumers • Fairly distribute regulatory obligation • Encourage specific outcomes or activities (e.g. encouraging certain plants to run or investments in energy efficiency, renewable energy)
- 52. Mass: Alternative Ways to Distribute Allowances Common Options Rationale Examples ALLOCATE FOR FREE * “Grandfathering”: Given to all emitters based on historic emissions (or generation) Political buy‐in for owners of initial emitting assets Early yrs of EU ETS Other pollutant ETS (acid rain) Nox (heat input) * Output‐based (updating): Given free to emitters in proportion to their ongoing generation levels Mitigate leakage to uncapped sources NOx trading program California C&T for (trade‐explosed) industrial sectors * Setasides for targeted activities (e.g., renewables, energy efficiency) or populations (rate‐payers), price containment Way to finance, e.g., low carbon investment, lessen burden on rate‐payers Waxman‐Markey bill provisions Cal. Set aside for LSE’s on behalf of ratepayers CA and RGGI cost containment reserves COMPETITIVE AUCTION Government auction with targeted proceeds to types of households, investments,… Address disproportionate impacts Finance low carbon investment RGGI poor household EE VA NOx Government auction with use of revenues to reduce taxes Fiscal reform Political buy‐in British Columbia (carbon tax, not ETS) * CPP proposed federal plan has dimensions of these options
- 53. Rate: Emission Rate Credits • What types of resources can earn credits? – State discretion other than new sources, offsets, and energy storage. – What resources actually get built is still a utility commission decision. • EM&V requirements for each qualifying resource – EPA draft guidance available – Tension between costs and accuracy of estimating energy savings from energy efficiency measures.
- 57. Rate Based State Plans – (Non‐Exhaustive) Rate Based Model Rule Rate Based Federal Plan Clean Energy Incentive Program Onshore wind* Utility‐scale solar PV* Concentrating solar power* Geothermal* Hydropower* Qualified Biomass Energy Efficiency including water system efficiency Waste to Energy DSM T&D Nuclear Energy CHP WHP/”bottom cycling CHP units” Distributed Renewables Wind (all) Solar (all) Geothermal Hydropower Wave Tidal Qualified Biomass Waste‐to‐Energy Nuclear Energy Non‐affected CHP Demand Side EE/DSM On‐shore utility scale wind Utility scale solar PV Concentrated solar power Geothermal power Nuclear Energy Utility scale hydropower Any type of wind* Any type of solar Energy Efficiency in Low Income Communities *Under the proposed model rule, in federal plan states eligible wind is limited to on‐ shore. *Part of the BSER (utility scale only) Sources: Section VII K &V E Source: § 62.16435 Source: § 62.16435 Source: § 62.16235
- 58. Biomass in the Clean Power Plan Mass Based Plan • EPA seeking comment on inclusion of biomass as an eligible measure in the Proposed Federal Plan • Proposed Model Rule includes “qualified biomass” – Must justify qualified biomass – Must include methods for emission measurements and feedstock verification Rate Based Plan • EPA seeking comment on Emission Rate Credit (ERC) eligibility for biomass in Proposed Federal Plan • Qualified biomass eligible for ERCs in Model Rule ‐ Must justify qualified biomass ‐ Must include methods for emission measurements and feedstock verification
- 59. Requirements for Biomass in State Plans To include biogenic feedstocks in plans*, states must: • Address types of biogenic feedstocks used • Justify why proposed feedstocks can be determined qualified biomass • Address valuation of biogenic CO2 emissions • Explain evaluation and monitoring systems to properly account for biogenic CO2 emissions • Include third party verification of qualified biomass * The SAB Panel process and updated 2014 Framework is expected to inform how states should best address these requirements in their plans.
- 60. States Alabama Arizona Corporation Commission Arkansas Colorado Florida Georgia Indiana Kansas Kentucky Louisiana Louisiana Dep’t of Environmental Quality Michigan Attorney General Mississippi Mississippi Dep’t of Environmental Quality Missouri Montana Nebraska New Jersey North Carolina Dep’t of Environmental Quality North Dakota Ohio Oklahoma Attorney Generall Oklahoma Dep’t of Environmental Quality South Carolina South Dakota Texas Utah West Virginia Wisconsin Wyoming Utilities Industry Co‐Ops Alabama Power Company American Chemistry Council American Coalition for Clean Coal Electricity American Coke & Coal Chemicals Institute American Foundry Society American Forest & Paper Ass’n American Fuel & Petrochemical Manufacturers American Iron & Steel Institute American Public Power Association American Wood Council Arizona Electric Power Coop, Inc. Association of American Railroads Associated Electric Coop, Inc. Basin Electric Power Cooperative Big Brown Power Company LLC Big Brown Lignite Company LLC Big Rivers Electric Corporation Brazos Electric Power Coop, Inc. Brick Industry Association Buckeye Power, Inc. Central Montana Electric Power Coop Central Power Electric Coop, Inc. Chamber of Commerce CO2 Task Force of the Florida Electric Power Coordinating Group, Inc. Corn Belt Power Cooperative Dairyland Power Cooperative Deseret Generation & Transmission Coop Dixon Brothers Inc. East Kentucky Power Cooperative, Inc. East River Electric Power Coop, Inc. East Texas Electric Cooperative, Inc. Electricity Consumers Resource Council Georgia Power Company Georgia Transmission Corporation Golden Spread Electrical Cooperative, Inc. Gulf Coast Lignite Coalition Gulf Power Company Hoosier Energy Rural Electric Coop, Inc. International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers, & Helpers Joy Global Inc. Kansas Electric Power Cooperative, Inc. Lignite Energy Council Luminant Big Brown Mining Company LLC Luminant Generation Company LLC Luminant Mining Company LLC Minnkota Power Cooperative, Inc. Mississippi Power Company Montana‐Dakota Utilities Co. Murray Energy Corporation National Association of Home Builders National Association of Manufacturers National Federation of Independent Business National Lime Association National Mining Association National Oilseed Processors Association National Rural Electric Cooperative Ass’n Nelson Bros. Inc. Norfolk Southern Corp. North Carolina Electric Membership Co. Northeast Texas Electric Cooperative, Inc. Northwest Iowa Power Cooperative NorthWestern Corporation Oak Grove Management Company LLC Oglethorpe Power Corporation Peabody Energy Corp. Portland Cement Association PowerSouth Energy Cooperative Prairie Power, Inc. Rushmore Electric Power Coop, Inc. Sam Rayburn G&T Electric Coop, Inc. San Miguel Electric Cooperative, Inc. Seminole Electric Cooperative, Inc. Sandow Power Company LLC South Mississippi Electric Power Ass’n South Texas Electric Cooperative, Inc. Southern Illinois Power Cooperative Sunflower Electric Power Corporation Tex‐La Electric Cooperative of Texas, Inc. Tri‐State Generation & Transmission Association United Mine Workers of America Upper Missouri G. & T. Electric Cooperative, Inc. Utility Air Regulatory Group Wabash Valley Power Association, Inc. Wesco International Inc. Westar Energy, Inc. Western Farmers Electric Cooperative West Virginia Coal Association Wolverine Power Supply Coop, Inc. Challengers in the CPP Lawsuit
- 63. Output‐based Allocation Set‐Aside • This set‐aside is intended to address leakage by encouraging existing NGCC • EPA has proposed the size of the set‐aside for each state State Interim 2 Goal 2025‐2027 Allowances in output‐ based set‐aside Set‐aside as a percent of allowances Alabama 60,918,973 4,185,496 6.87% Arkansas 32,953,521 2,102,538 6.38% Florida 110,754,683 12,102,688 10.93% Georgia 49,855,082 3,563,104 7.15% Kentucky 69,698,851 288,730 0.41% Louisiana 38,461,163 2,207,879 5.74% Mississippi 26,790,683 3,132,671 11.69% North Carolina 55,749,239 2,120,178 3.80% South Carolina 28,336,836 1,029,366 3.63% Tennessee 31,079,178 632,949 2.04% Virginia 28,990,999 3,011,811 10.39% West Virginia 56,762,771 0 0.00% Proposed set‐aside for output‐based allocation for the second compliance period (short tons)
- 64. Output‐based Allocation Set‐Aside to Address Leakage There is a lagged accounting method • NGCC units earn output‐based allowances in one compliance period (for example 2022‐2024) by operating above 50% CF over entire period • Submits the confirmed generation to state (EPA) • State (EPA) awards the allowances in the next compliance period • If exceed allocation, distribute pro‐rata basis • Unused allowances distributed to affected EGUs Allowance to existing NGCC unit = Net Generation over 50% CF * 1030 lbs/MWh‐net 64
- 65. RE Set‐Aside to Address Leakage • 5% allowances in model rule • In‐state: utility‐scale wind, solar (any), geothermal and utility‐scale hydro constructed after Jan 1, 2013 • Sources apply to EPA/state with MWh projection • Allocation year prior to generation • True‐up mechanism • All allowances allocated, allowances per MWh depends on total – cannot simultaneously generate ERCs • Set‐aside increases with retirements in model rule 65
- 66. RE Set‐aside • The distribution of the allowances happens at the beginning of each year (before the RE has been generated) as follows: – The EPA approves the eligibility of a RE project, which projects its generation and includes EM&V – The EPA distributes allowances to eligible projects on a pro‐rata basis – At the end of the generation year, the RE project must true‐up with its projected generation • EPA expects this set‐aside to grow, as they propose the allowances from retired EGUs get added to the RE set‐ aside
- 67. CEIP set‐aside • For early‐action EE and RE in 2020 and 2021 • The state‐match allowances are pulled from the first interim compliance period only • For any state that takes over the allowance distributions of a federal plan, they still need a CEIP set‐aside, but they can change the amount of allowances • A state with a model rule can opt out of the CEIP State Set‐aside 2022 through 2024 Alabama 3,122,306 Arkansas 2,187,230 Florida 3,230,248 Georgia 2,755,623 Kentucky 4,952,862 Louisiana 1,497,428 Mississippi 357,307 North Carolina 2,674,590 South Carolina 1,652,802 Tennessee 2,178,084 Virginia 1,386,546 West Virginia 3,506,890 Proposed CEIP Early Action Allowance Set‐Aside in the Mass‐Based Federal Plan (Short Tons)
- 68. Example of all Mass Set‐Asides a RE set‐aside proposed to grow as EGUs retire Example of allowance set‐asides for South Carolina – varies by state Mass Goal CEIP set- aside Output-based allocation RE set- asidea Set-asides as a percentage of the mass budget Interim Phase 1 31,025,518 1,652,802 0 1,551,276 10.33% Interim Phase 2 28,336,836 0 1,029,366 1,416,842 8.63% Interim Phase 3 26,834,962 0 1,029,366 1,341,748 8.84% Final 25,998,968 0 1,029,366 1,299,948 8.96%
- 70. Gas‐Shift ERCs • GS‐ERCs can be created by all existing NGCC • GS‐ERCs are independent of the NGCC standard and can be used for steam generation compliance only • The same NGCC facility might be creating GS‐ERCs and still need to surrender ERCs to meet their rate target GS‐ERC = NGCC Generation * Incremental Generation Factor GS‐ERC Emission Factor *
- 71. Gas Shift‐ERC Equation* *in federal plan proposal The GS‐ERC Emission Factor represents how much lower an individual NGCC’s emission rate is compared against the fossil steam standard GS‐ERC Emission Factor = 1 GS‐ERC = NGCC Generation * Incremental Generation Factor GS‐ERC Emission Factor * 71
- 72. Clean Energy Incentive Program What ERCs to retire? • ERCs must be created • Pull ERCs from CEIP recipient? 2020 2021 2022 20223 2024 2025… Gen (MWh) 262,800 262,800 262,800 262,800 262,800 262,800 EPA ERCs 131,400 131,400 State ERCs 131,400 131,400 131,400 131,400 262,800 262,800 Illustrative example 100 MW wind farm with a 30% capacity factor
- 73. Clean Energy Incentive Program EPA providing credits/allowances from 300 million ton pool State provides matching credits/allowances • EPA matching credits/allowances are additional • State credits/allowances cannot add to supply in compliance periods Where do state matching allowances/credits come from? Mass based model rule: from allowance set‐aside in 1st interim compliance period pulling from future • Change in allocation, supply of allowances unchanged Rate based: EPA requires states to do something analogous • Suggests retiring future ERCs or adjusting the rate targets 73
- 74. Trading Options in State Plan Pathways Multi‐State Plan with Defined Trading Partners and Multi‐State Goal Intra‐state Trading Only “Trading Ready” Plan with Single State Goal • Only trading option for state‐ defined rates • Allowable in all plan types • Required for interstate trading with blended rate • Allowable in all plan types except state‐defined rates • New relative to proposed rule • Allowed for all types of mass based plans and subcategorized‐ rates All Plan Types Certain Plan Types
- 75. Why Trade? 1. Electrons do not stop at state borders • Flexibility to manage grid 2. Cost • Wider markets tend to lower overall cost 3. Growth • Access to markets for additional allowances 4. Reliability • Potential benefits of geographic diversity
- 76. 0 500 1000 1500 2000 WV KY TN SC NC AR LA GA AL MS VA FL Carbon EmissionsRate (lbs/MWh) Proposed Goal Final Goal Decreased Variability Between States (Southeast states blended rate comparison) • The final rate goals are much less variable across the country compared to the proposal • 31 states have less stringent targets (16 have more stringent targets) compared to the proposal Source: EPA Data File Goal Computation Appendix 1‐5. Fossil Steam Final Rate NGCC Final Rate