On May 11, 2023, the US Environmental Protection Agency (EPA) announced proposed new Carbon Dioxide (CO₂) emissions standards, under Section 111 of the Clean Air Act (CAA), for coal and gas-fired power plants. EPA proposed CO₂ limits on various subset of new and existing power plants including: new gas-fired combustion turbines; existing coal, oil and gas-fired steam generating units; and certain existing gas-fired combustion turbines. The draft rules constitute the most significant climate rule that EPA has ever issued for CO₂ emissions from the electricity sector.

If finalized, the regulations will complement recent Congressional investments in the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law (BIL), along with other CAA regulations on ambient and toxic air emissions and would assist the Biden administration meet their climate change objectives. EPA’s proposal, though, is provoking significant pushback from Republicans and some Democrats, and any final rule will face legal challenges that could come before the US Supreme Court.

The proposed new source performance standards (NSPS) and emission guidelines reflect EPA’s determination of what constitutes as the “best system of emission reduction” (BSER) for these different subsets of power plants. BSER must be adequately demonstrated taking into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirements. The proposed rule finds that BSER is carbon capture and storage (CCS) and hydrogen co-firing, though states, in developing implementation plans, are able to require other means of compliance so long as they ensure the same level of emissions reduction.

The proposed rule comes as the electricity sector is shifting to cleaner generation. Many utilities are pursuing net-zero plans and now ratcheting up investments in clean energy with the federal tax certainty under the IRA. Yet, challenges remain on the path to net-zero, such as grid reliability concerns, particularly as more base load power plants retire. EPA, in anticipating potential concerns, recently entered into a joint Memorandum of Understanding (MOU) with the US Department of Energy to coordinate on ensuring grid reliability as the Agency issues new Clean Air Act regulations. Notwithstanding this MOU, grid reliability concerns are likely to persist among critics of EPA’s CO₂ rule.

Background

Almost 11 months ago, the US Supreme Court, in West Virginia v. EPA, ruled 6-3 that EPA exceeded its statutory authority under the CAA in promulgating the Obama-era Clean Power Plan. West Virginia v. EPA involved an appeal of an US Court of Appeals for the DC Circuit decision from January 2021 that had struck down the Affordable Clean Energy Rule, a Trump-era rule that replaced the Clean Power Plan, thereby reinstating the Obama-era rule.

With respect to EPA’s authority, the Court used the “major questions” doctrine in concluding that section 111(d) did not confer to the Agency the authority to require “beyond the fence line” measures as envisioned in the Clean Power Plan. The “major questions” doctrine states that for regulatory matters of “economic or political significance,” federal agencies must “point to clear Congressional authorization for the authority it claims.” The majority of the Court held that EPA failed to demonstrate clear Congressional authority to undertake generation shifting, as required by the Clean Power Plan, that would have reshaped the US electric grid. The proposed rule, as described in greater detail below, no longer relies on generation shifting, focusing instead on efficiency and technology improvements on-site at power plants.

Best System of Emission Reduction Standard for New and Existing Facilities

The standards in the proposed rule are flexible and vary according to a number of factors, including whether the plants are new or existing under CAA; whether the plants are fueled by coal or natural gas; how frequently the plants operate; and whether they are scheduled to retire in the coming years. Requirements at existing plants would not take effect until 2030, and hydrogen-based limits would be phased in starting in 2032 and CCS-based standards for gas plants would phase in by 2035.

The proposed rule also repeals the Trump-era Affordable Clean Energy (ACE) rule, which had been vacated and remanded through October 26, 2022, and was then reinstated on October 27, 2022.

New Plants

For new gas plants, EPA is proposing to update New Source Performance Standards (NSPS) for CO₂ emissions from new and rebuilt fossil-fuel fired stationary combustion Electric Generating Units (EGUs). Specifically, EPA proposes to create the following subcategories based on the function the combustion turbine serves and its capacity.

• Low load “peaking” units used during high demand (at or below 20% capacity) would be subject to a BSER-based use of lower-emitting fuels like natural gas with standards of performance ranging from 120 lb CO₂/MMBtu to 160 lb CO₂/MMBtu, depending on the type of fuel combusted.

• Intermediate plants (with capacity of up to 50%) and base load units operating at more than 50%, EPA proposes an approach in which BSER utilizes: (1) highly efficient generation; and (2) depending on the type of fuel used, use of CCS or co-firing with low-GHG hydrogen.

The basis of the performance standards applies to affected facilities that start construction or reconstruction after the date of publication of this proposed rulemaking in the Federal Register. During Phase 1, all new and reconstructed facilities will have to meet a performance standard based on highly efficient generation by the date the final rule is promulgated or upon initial startup of the facility. During Phase 2 and 3, facilities in the intermediate and base load categories will be required to meet performance standards as follows:

• By 2032, intermediate load facilities (usually natural gas) must meet a Phase 2 standard based on 30% low-GHG hydrogen.

• By 2035, base load facilities that follow CCS must meet a Phase 2 standard based on 90% capture of CO₂.

• By 2032, base load facilities following the low-GHG hydrogen pathway must meet a Phase 2 standard based on co-firing 20% low-GHG hydrogen.

• By 2038, base load facilities following the low-GHG pathway must meet a Phase 3 standard based on co-firing 96% by low-GHG hydrogen.

The rule defines low-GHG hydrogen as fuel that is produced with an overall emissions intensity of less than 0.45 kg CO₂e/kg H2, mirroring the definition in the IRA.

EPA opted against revising NSPS for new coal-fired power plants because the Agency stated that it is not aware of any plans to construct such plants.

Existing plants

For existing natural gas plants which are larger than 300 MW and have a capacity factor greater than 50%, EPA is proposing a BSER consistent with the second and third phase BSER for new base load combustion turbines. The unit could pursue a pathway based on 90% capture of CO₂ using CCS by 2035 or co-firing 30% by volume low-GHG hydrogen starting in 2032 and co-siring 96% by volume low-GHG hydrogen starting in 2038. Notably, EPA is soliciting comments on how to treat “peaker” gas plants that only run during periods of high demand as well as coal plants that have committed to retiring before 2040, which could avoid CCS requirements and only need to co-fire with gas or conduct routine operations to comply.

EPA proposed different standards based on an existing coal facility’s operating horizon recognizing that technologies, like CCS, will require more for a facility to recoup that investment. For existing coal units that will operate in the long-term (e.g., after 2039), the proposed rule would require these units to adopt CCS with 90% capture of CO₂ by 2035. For units that elect to permanently cease operations prior to January 1, 2040, EPA proposes BSER that is co-firing 40% natural gas on a heat input basis. For coal units electing to cease operations prior to January 1, 2035, and commit to operate with an annual capacity limit of 20%, EPA proposes a BSER of routine operation and maintenance. For coal units electing to cease operations prior to January 1, 2032, EPA proposes a BSER of routine operations and maintenance.

State Implementation

With EPA expecting to promulgate final emissions guidelines by June 2024, the Agency is projecting that states will need to submit state implementation plans (SIPs) by June 2026. The draft rules provide states with flexibility in developing SIPs. For instance, such SIPs could allow for covered sources to meet EPA’s emissions guidelines in the aggregate, thereby authorizing states to use averaging and market-based mechanisms. States can also consider remaining useful life and other factors for covered power plants and apply a less stringent standard if a state demonstrates that the facility cannot reasonably meet the emissions limit through applying BSER.

Impacts and Outlook for New CO₂ Rule

EPA aims to finalize the proposed rule by March 2024. Comments on the proposed rule are due 60 days from its publication in the Federal Register. The EPA will hold two webinars on June 6 and 7, 2023, offering an overview of the proposed rule and information on how to effectively engage in the regulatory process.

Like its predecessor, the Clean Power Plan, this rule could end up before the conservative 6-3 Supreme Court. One of the issues likely to be raised in litigation is the application of the BSER under the rule and whether clean hydrogen and carbon capture are “adequately demonstrated” as set forth in Section 111 of the CAA. Some environmental groups have expressed concerns about the rule’s failure to address emissions from “peaker” gas plants that run only during periods of high demand.

In addition to legal challenges, the proposed CO₂ regulations face some political headwinds. If a Republican wins the presidency in 2024, the new CO₂ rule could be overturned, as was the case with the Clean Power Plan under the Trump administration. An overturned rule could yield more litigation and a cycle of uncertainty for power plants trying to operate within the law.