The Environmental Protection Agency (EPA) is essentially attempting to create a national energy policy for one industrial sector without the legislative process through the introduction of its Clean Power Plan, which aims to reduce CO2 emissions by 30% from 2005 levels by 2030. This plan was undertaken as part of the Climate Action Plan that President Barack Obama introduced last summer, which in itself was designed as a broad energy policy.

Federal agencies flexing their muscle through regulations designed to skirt legislation isn’t unique, but this plan has a distinctive approach due to its designed flexibility. Rather than institute a single federal standard for emission levels, the plan provides a single national goal along with guidelines for individual states to create their own policies designed to meet this federal goal.

The rule requires states to submit proposals for reducing emissions along with plans for enforcement of these proposals.

“States can choose the right mix of generation using diverse fuels, energy efficiency and demand-side management to meet the goals and their own needs. It allows them to work alone to develop individual plans or to work together with other states to develop multi-state plans,” the EPA said in a release. The agency is taking comments on the proposal until mid-October with the final rule scheduled for implementation in June 2015. The initial plans from states will be due in 2016 with final plans for individual states scheduled to be submitted in 2017 and plans for multi-state compliance groups in 2018.

While this approach does allow for more diversity based on the individual state’s unique circumstances, it has the capability to create new challenges for utilities as there is the likelihood of a patchwork of requirements throughout the country.

“This degree of flexibility offers states tremendous opportunity in shaping their plans. However, it also means that states will need to undertake sophisticated analysis to assess the relative costs and benefits of a wide range of options,” ICF International said in a white paper titled, “EPA’s Clean Power Plan: Challenges Ahead for Sources and States.”

“The requirements, according to EPA, could lead to a doubling in coal unit retirements and trebling of energy efficiency, accelerating supply and demand trends that are already reshaping the sector,” ICF International said.

In order to mitigate the impact of this proposal, ICF International advises utilities to have input in all phases of the development of all of the attached regulations to ensure that the final plans are achievable and cost-effective.

Utilities that own or manage generation sources in multiple states will face increased challenges as they may be required to keep up with a number of different policies. Even if they only operate in just one state, if a neighboring state has different policies then it could create “inconsistent market signals at the borders, or along the seams of state and regional programs, that are equally important in driving market outcomes,” the paper said. An example cited was if neighboring states had different CO2 price signals they could face shifts in transmission flows and electricity prices.

The paper added that there are potential benefits for states that get their policies correct as they will be well-positioned compared to regional neighbors by having more economic efficiency through lower energy costs and more business-friendly rules.

ICF International advises utilities and other affected entities such as pipeline operators and gas producers to familiarize themselves with the “best system of emission reduction” (BSER) aspect of the proposal. This system requires EPA to identify the BSER, based on costs of benefits of each potential reduction in CO2 emission rates.

This system’s building blocks are:

  • Heat rate improvement to reduce emission rates of coal generating facilities;
  • Fuel switching, or system re-dispatch from coal to gas;
  • Increasing generation from renewables and preserved generation from nuclear; and
  • Growth in end-use energy efficiency to displace emitting generation.

According to the report, EPA used 2012 generation and CO2 emissions data to calculate the average fossil emission rate for existing units and then used these building blocks to adjust each rate downward to calculate the emission standard to be met in each state by 2030.

“The building blocks are not requirements by EPA as to how states must meet their standards, so it is not necessary that states and sources achieve each of them individually. However, stakeholders must understand the building blocks and evaluate EPA’s assumptions for each because together they determine the ultimate emission rate standard for each state,” the report said.

Since the EPA plan did not include a model rule, states have tremendous flexibility for achieving emission reduction. According to ICF International, these pathways should focus on technology, form, and geographic scope.

The report said that states will have multiple pathways from a technological point of view to achieving emission reductions. This includes heat rate improvements, renewable and energy efficiency measures, unit-level fuel switching and co-firing and carbon capture. “The challenge will be identifying the viable options. … Each state will have to evaluate what options are best suited for its generators and make sure that sufficient options qualify under its plan for generators to achieve their reduction potential.”

Just as important as which technology options are selected will be how emission reductions are calculated and verified. States will be required by EPA to measure reductions so they can be counted in compliance calculations or receive credits to be sold as part of a market-based scheme. Alternatively, states will be given the option to translate their rate standard to an emissions mass cap. This will need to be equivalent to the rate standard given projected future demand and generation growth.

“The mass cap approach will avoid the need for evaluation, management and verification and crediting because efficiency efforts and non-emitting generation sources will lower absolute emissions, reducing pressure on the cap and contributing to compliance. However, submitting a plan with a mass cap will require that a state perform careful analysis to determine the cap to the satisfaction of EPA. Should the mass cap not correctly account for future demand growth, it may make compliance difficult and more costly,” the paper said.

In this case, rate standards provide more flexibility as they provide for growth in absolute emissions over time. The paper cited Louisiana as a state that may choose a rate standard over a mass cap as its status as a high growth state for emissions could prove beneficial to the state with increased flexibility rather than regulatory benefits. Once a system is decided upon, states must then choose where the compliance obligation will be placed.

Similar to the rate standards vs. mass cap decision, states face a difficult decision in whether they’ll administer their own plans or join regional compliance groups. Each option has trade-offs between improved economics and shared regulatory requirements vs. more complications.

“Collaborating with an existing program, such as the Regional Greenhouse Gas Initiative (RGGI), may ease the rulemaking burden, although even RGGI may require some changes to meet EPA’s requirements,” the paper. Perhaps most important to utilities and other associated parties is the fact that the implementation of portions of these plans may fall on them as de facto operators of these programs.

“There is a high likelihood of a transition towards a power market where there is a penalty for CO2 emissions—whatever form that policy might take. Given that reality, utilities and generators would be prudent to account for a carbon price in their strategy and planning, and to determine what form of enforcement and regulation scheme would work best for them,” the paper said.