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September 30, 2015 Practice Points

EPA's Clean Power Plan: Challenges to Reducing Carbon Emissions

There is significant uncertainty surrounding implementation of the CPP.

By Jessica Moyeda

On August 3, 2015, the U.S. Environmental Protection Agency (EPA) issued the Clean Power Plan (CPP), establishing carbon dioxide emission guidelines for existing electric utility units (EGUs) under section 111(d) of the Clean Air Act. The CPP requires all states to submit their plans to implement the emission guidelines by September 6, 2016.

EPA’s Proposed Template for Compliance The CPP focuses on the interconnected nature of production and delivery of electricity, noting that EGUs could achieve emission reductions by applying three “building blocks” that meet the statutory standard “best system of emission reduction”:

  • Improving heat rate at existing coal-fired steam EGUs;

  • Shifting electricity generation from high-emitting coal-fired steam EGUs to lower-emitting natural gas combined cycle generation; and

  • Shifting generation from fossil fuel-fired EGUs to new, zero-emitting renewable energy generation, such as onshore wind, photovoltaic solar, geothermal and hydropower.

Promoting Clean Energy Generation The emission guidelines are clearly designed to prompt a movement away from high-emitting EGUs relying on coal toward, lower-emitting generation and even zero-emission renewable generation.

The guidelines also provide for use of “emission rate credits,” allowing states that act to reduce carbon emissions, using either renewable energy generation or energy efficiency efforts, to receive such rate credits. The credits could be used by states to meet their own emission reduction targets or can be sold to other states.

Positive and Negative Implications There is significant uncertainty surrounding implementation of the CPP. Although states have initial authority and flexibility in determining implementation of the emission guidelines, it is clear that renewable energy generation is heavily favored while coal-fired generation is not.

The CPP could benefit developers of clean energy renewables as it will likely be easier to obtain the power purchase agreements necessary for project financing. Utilities that invest and upgrade their facilities, develop lower-emitting generation, or expand transmission and distribution capacity could also benefit.

However, the CPP may force rural energy generation cooperatives relying on coal-fired technologies to prematurely shutter their facilities. This outcome could create a serious multibillion-dollar debt problem for nonprofit electricity providers and the federal agency that made the loans to build such cooperatives.

Indeed, rural co-ops serve close to 42 million people in the U.S., frequently in high-poverty areas that rely on generating the least-expensive energy possible, which are often coal-fired technologies. The National Rural Electric Cooperative Association expects the CPP to cause one-fifth of EGUs operated by co-ops to cease operation.

The U.S. Department of Agriculture’s Rural Utilities Service is the primary financier of such co-ops, investing nearly $7 billion in energy generation assets related to coal. The National Rural Electric Cooperative Association states that co-ops would potentially have $4.5 billion of stranded Rural Utilities Service debt under the CPP.

Until state and federal compliance laws are in effect, it is premature to contemplate whether debt financing or forgiveness will be necessary. The state and federal governments should begin considering exactly how the rural and poorer populations will afford access to renewable energy EGUs, and how depressed states will deal with the demand for cleaner energy generation.

Jessica Moyeda, Snell & Wilmer, Las Vegas, NV

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