On August 21, 2018, the U.S. Environmental Protection Agency (EPA) proposed the Affordable Clean Energy (ACE) rule to establish guidelines for states to develop plans to address greenhouse gas emissions from certain existing fossil-fuel-fired power plants.  ACE would replace the Obama Administration’s 2015 Clean Power Plan (CPP), which EPA has proposed to repeal on the basis that it exceeded EPA’s authority.  In particular, the current Administration does not believe it has authority under Section 111 of the Clean Air Act to require regulated entities to take actions “outside the fenceline,” as contemplated by the CPP.  Accordingly, the ACE plan would impose only “inside the fenceline” requirements on electric generating units (EGUs).

The proposed ACE rule contains several key components:

• A revised determination of the best system of emission reduction (BSER) for greenhouse gas emissions from steam-generating EGUs;
• A list of “candidate technologies” states can use when developing their implementation plans;
• A new preliminary applicability test for determining whether a physical or operational change made to an affected EGU may be a “major modification” triggering New Source Review (NSR); and
• New implementation regulations for emission guidelines under Clean Air Act section 111(d).

“Best System of Emission Reduction”

Consistent with the interpretation described in the proposed repeal of the CPP, the proposed ACE rule would change EPA’s legal interpretation of BSER under Section 111(d) of the CAA.  EPA proposes to read the clause to only include measures “applied to, or at an individual stationary source” (so-called “inside the fenceline” measures).  Accordingly, EPA proposes to determine that heat rate improvement (HRI) measures alone constitute BSER for existing steam-generating EGUs (which are largely coal-fired EGUs). 

By contrast, the CPP would have effectively required electricity providers to switch from coal to natural gas generation or renewable energy sources (so-called “outside the fenceline” measures) to meet emissions reductions targets, or employ trading mechanisms if adopted by the state in which they are located.  By contrast, the proposed ACE rule would adopt a narrower interpretation of BSER restricting it to “inside the fenceline” measures, largely focused on actions that would improve the heat rate of an EGU, thereby boosting its efficiency and lowering its carbon intensity on a megawatt-hour basis. 

Revisions to New Source Review

ACE also proposes to modify NSR program requirements for steam-generating EGUs by creating a new preliminary applicability test for determining when a change is a “major modification.”  EPA proposes these changes to address what it perceived as a “Catch-22” under the CPP whereby EGUs seeking to make modifications to improve efficiency risked triggering NSR, along with the increased compliance costs associated with NSR. 

EPA proposes to allow states to adopt an hourly emissions increase test for efficiency improvement projects.  According to EPA, “[u]nder this approach, only projects that increase a plant’s hourly rate of pollutant emissions would need to undergo a full NSR analysis. This proposal would ensure that coal-fired power plants can appropriately and efficiently reduce their CO₂emissions without undue burden or disruption.”

While this particular change to the NSR program is aimed specifically at coal-fired and other EGUs affected by the proposed ACE plan, it is consistent with EPA’s current focus on NSR reform in general.  Over the past 12 months, EPA has taken several measures to reduce NSR permitting burdens.

Timing for State Plans

In line with the Trump Administration’s emphasis on cooperative federalism, the proposed ACE rule contains “emission guidelines” for states to develop and submit to EPA plans to establish standards of performance for existing plants based on this BSER.  States will have the ability to determine appropriate heat rate improvements on a unit-by-unit basis.  EPA is proposing to provide states three years to develop state plans.  EPA would then have 12 months to approve or reject a state plan submittal.  If EPA rejects a state plan or finds that a state has failed to submit a complete plan, EPA will have two years to issue a federal plan.

Cost and Impact on Emissions

EPA projects small increases in emissions of CO₂, sulfur dioxide (SO₂) and nitrogen oxides (NO_X) under all scenarios compared to the CPP.  EPA projects that, compared to a no CPP scenario, the ACE rule will reduce CO₂emissions in 2025 by between 13 and 30 million short tons, resulting in $1.6 billion in monetized domestic climate benefits.  Additionally, EPA projects that replacing the CPP with the ACE rule will result in $3.4 billion in net benefits.  EPA anticipates that the ACE rule will apply to approximately 600 coal-fired EGUs at 300 facilities. 

Applicability

The proposed ACE rule has a narrower applicability than the CPP.  Notably, the proposed ACE rule would apply only to utility boilers (primarily coal-fired) and, unlike the CPP, would not apply to stationary combustion turbines and integrated gasification combined cycle (IGCC) units.  Specifically, the proposed ACE rule would apply to any fossil-fuel-fired electric utility steam generating units (utility boilers) that are not IGCC units and that: (i) were in operation or commenced construction prior to the date of the rule; (ii) are 25 MW or greater; and (iii) have a base load heat input rating greater than 250 MMBtu/h. 

Like the CPP, the proposed rule would exclude various types of EGUs, including: (i) modified or reconstructed units subject to subpart TTTT, (ii) certain smaller sources, (iii) municipal waste combustor units subject to 40 CFR 60 subpart Eb; and (iv) commercial or industrial solid waste incineration units subject to 40 CFR 60 subpart CCCC.  However, EPA is taking comments on whether it should define “EGU” differently for purposes of the proposed ACE rule.

Outlook

As with the CPP, the ACE rule will inevitably spark an intense legal battle.  Environmental groups have already signaled their intent to challenge the rule, citing a number of alleged defects.  Comments on the proposed rule will be due 60 days after publication in the Federal Register.  Additional information about the proposal is available here.