EPA’s draft guidelines to states for the development of state 111(d) PLANS NORTH DAKOTA ALLIANCE FOR RENEWABLE ENERGY OCTOBER 22, 2014 Franz Litz PROGRAM CONSULTANT

Overview of Presentation 111(d)’s Federal-State Framework Building Blocks “build” state stringency Beyond EPA’s “Building Blocks” Planning under §111(d): the Approaches “No Regrets” Exploration of Options

The Federal-State Framework EPA issues standards for new sources--under §111(b) of the Clean Air Act—and these are federal. For existing sources, EPA issues guidelines to states under 111(d) to “guide” states on 111(d) plans. States develop 111(d) plans—single-state or multi-state. If state fails to submit plan, or the plan is inadequate, EPA imposes federal plan The carbon standards process begins with standards for new sources under section 111(b) of the Clean Air Act. The rule for new sources was proposed last September and noticed in the Federal Register January 8, 2014. This date is important because any plant for which construction was commenced January 8 2014 is an existing plant subject to 111(d) requirements and not 111(b) requirements for new sources. Once the new source standards is finalized—comments have closed and EPA says to expect it by the end of this calendar year—EPA must then issue guidelines to cover existing plants. It issued the draft guidelines on June 2nd. The guidelines establish minimum stringency for existing plants and provide states with “instructions” on what is approvable in a state’s 111(d) plan. One key aspect of the federal-state relationship is that EPA must put a federal plan for existing sources in place in the event that a state fails to submit a state plan or fails to submit an acceptable state plan. EPA’s draft guidelines don’t provide a very good sense of what we might expect if a state fails to meet the requirements of the guideline, though one can bet that the federal approach will be less flexible because EPA will be reluctant to impose a broad federal implementation mechanism in its federal plan.

Summary of EPA 111(d) Guidelines Dubbed EPA’s “Clean Power Plan” Sets minimum stringency for a state—called “state goals” that apply in aggregate to the state’s “affected” electric generating units Establishes a compliance time period of ten years, with an interim target to apply on average between 2020 and 2029, and a final target in 2030 Guidelines give states very broad flexibility to achieve state goals through any “efficacious means”

“Adjusted Output-Weighted Average CO2 Emission Rates” TOTAL CO2 EMISSIONS from Coal-, Oil- & Gas-fired Steam, Natural Gas Combined Cycle & “Other” Units (Affected EGUs) TOTAL NET ENERGY OUTPUT From Affected EGUs + Renewables + New Nuclear + 6% at-risk nuclear + cumulative annual EE savings Lbs MWh One thing to understand is that EPA’s state goals are expressed in terms of “Adjusted Output-Weighted Average Co2 Emission Rates”. This means that the goals are about more than just the emissions that come out of coal- and natural gas-fired power plants. They are also about renewable generation and energy efficiency (and new and at-risk nuclear for states that have nuclear power). States can stick with the rate-based goal or they can convert that goal to a mass budget. The mass budget alternative is supposed to be comparable to the rate—very important. The mass goal takes into account expected growth in the rate to mass conversion and so in theory it should not be any tighter than the rate. In reality it will be tighter or looser depending on how the rate to mass conversion is carried out and that is an issue of great concern to states because EPA has so far not provided adequate guidance on how to make that conversion. Or Convert the Goal to Tons.

BUILDING BLOCKS Heat Rate Improvements at Coal Plants 6% through both O&M and plant upgrades Increased Utilization of Existing Natural Gas Plants Dial up existing NGCC to 70% capacity factor Increased Utilization of Zero Carbon Resources, Including Nuclear and Renewables Operate New Nuclear Plants, Preserve the 6% of Existing Nuclear capacity that EIA projects would retire; & Achieve renewables generation consistent with average regional renewables target EPA “builds” state goals using 4 building blocks: Ability to make heat-rate improvements at coals plants; Ability to ramp up existing natural gas combined cycle plants (and ramp down existing coal); Ability to generate electricity with zero-carbon sources, namely nuclear & renewables energy; and Ability to implement EE programs to achieve 1.5% energy savings per year (following a ramp-up if necessary). EPA notes that these are not the only measures available to improve emissions performance Achieve 1.5% Energy Savings through End-Use Energy Efficiency Starting where a state is, increase energy savings at a rate of 0.2% per year until state reaches 1.5%

Are NOT a Compliance Pathway BUILDING BLOCKS Are NOT a Compliance Pathway EPA has not provided a compliance pathway—not really. That is left to each state, or to states working together. EPA used the building blocks to establish state goals, i.e. the stringency that a state plan must meet. But the building blocks are not the lowest cost way to achieve the reductions; they are not flexible; and in many cases they are not easily implemented by states. EPA used the building block approach as a way to set stringency while giving states very broad flexibility. This is good in the sense that EPA gave states the flexibility they asked for, but it is challenging because states are more or less starting from scratch. And states don’t really have any sense of how much their plan will cost or what the other impacts of the plan will be. Cost and impact depends on what a state chooses to do.

BEYOND THE BUILDING BLOCKS Heat Rate Improvements at Coal Plants Increased Utilization of Existing Natural Gas Plants Increased Utilization of Zero Carbon Resources, Including Nuclear and Renewables Achieve 1.5% Energy Savings through End-Use Energy Efficiency Co-firing lower carbon fuels Retirements New Natural Gas Plants Many states have indicated that they want to capture other sources of emissions reductions—not just the ones reflected in the 4 building blocks. Here we see some of those other sources of reductions that a state might like to capture through its compliance mechanism, especially if these approaches achieve the result at a lower cost and with flexibility that promotes reliability. Distributed Generation, Combined Heat and Power Carbon capture & storage (e.g. EOR-related) Gains from Trade/Regional Compliance

EPA’s Draft Guideline to States EPA says “YES” to broad flexibility for states—“any efficacious means” Too many choices? Maybe not at closer look: Federal enforceability issues make “portfolio” approach undesirable to many states; Fewer regulatory hoops to jump through with direct emissions limitations on affected units; Self-correcting compliance plans do not require milestones or corrective measures; and Direct emissions limitations keep open the option for connecting a state’s plan to other states. Many state folks—those who have managed think beyond the immediate reaction to the building blocks analysis--have looked at the EPA guideline and they have suggested that EPA has given us too many choices! But a closer look at the proposal against what we know about state sensibilities in the energy and environmental arena indicates that there really are fewer choices than one might think.

Possible Approaches Approaches getting most consideration to date include: Traditional plant-level performance standards; Mass-based emissions budget with trading; Rate-based standard with trading; or Mass-based utility budget approach. So these are the “direct emissions limitation” approaches that have been under consideration by states and stakeholders to date. Note, note in this list is the so-called “state portfolio approach” in which states implement multiple measures, each of which is federally enforceable.

Mass-based Budget with Trading The Approach State converts rate-based goals to mass-based emissions budget. State issues allowances (or permits) to emit. (1 ton = 1 allowance) Power plant owners report emissions and must turn in enough allowances to “cover” all of the plant’s emissions on a set date. Value of allowance becomes part of generator’s bid to ISO. Issues to Consider Direct emissions limits on affected units; no need to regulate other entities. EE, RE programs are complementary and remain separate and not federally enforceable. Multi-state cooperation possible by recognizing other states’ allowances. Self-correcting mechanism, meaning no need to specify “corrective measures”.

Rate-based Standard with Trading The Approach State follows emissions rates imposed by EPA, or some variation designed to meet federal goal: Plants that do better than the rate generate credits that can be sold to other plants; and Plants that do worse than the rate must purchase credits to improve their emissions rate. Can credit EE & RE through crediting mechanism. Issues to Consider To credit EE & RE, a federally enforceable mechanism needed for EM&V and crediting. Can avoid federal enforceability over RE & EE programs. May not capture all improvements to carbon profile that a mass-based standard would—such as retirements. Self-correcting approach, so no need to specify “corrective measures”

Mass-based Utility Budget Approach Issues to Consider As long as this approach places all obligations on utility owner/operator of affected units, this is a direct emissions limitation approach and “corrective measures” not necessary. No need to have EE/RE crediting because reductions appear automatically. Multi-state utilities may want multi-state coordination to allow tons to cross state lines. The Approach State converts rate-based goal to mass-based “budget”. State apportions budget to utilities. To stay under budget, each utility can undertake any measures in its control: Plant-level heat-rate improvements; Fuel switching; Retirements; End-use energy efficiency; Preserve Nuclear; Carbon capture & storage/EOR; and/or Renewables.

State Planning Timeline Comments on Draft Rule due Dec 1st Final Rule Expected June 2015 State plan timing: Initial state “submittal” in June 2016 One-year extension possible for adopting single-state plans Two-year extension possible for adopting regional plans Programs go into effect upon adoption of state plans, unless superseded by federal plan

Quick Summary EPA’s guideline sets stringency based on “building blocks”, does not dictate how states are to comply States will decide on approach for achieving stringency What seems like a case of “too many choices” probably isn’t—states and stakeholders usually end up with a short list of options So these are the “direct emissions limitation” approaches that have been under consideration by states and stakeholders to date. Note, note in this list is the so-called “state portfolio approach” in which states implement multiple measures, each of which is federally enforceable.

Pause Here

Midwestern Power Sector Collaborative Group of coal-based utilities, coops, merchant and municipal generators, plus state officials & advocates Working together to understand and shape a Midwestern response to EPA actions Joint, consensus-based comments filed before the draft, and now working on joint comments to EPA on the draft

Midwestern Collaborative Participants Industry folks: Alliant Basin Electric (observer) DTE Energy Great River Energy MidAmerican NRG WeEnergies Wolverine Power Coop Wisconsin Public Power Inc. Xcel Energy State folks: IL Commerce Commission Kentucky Energy Cabinet Michigan DEQ & PSC Missouri PSC Wisconsin PSC & DNR Wisconsin DNR Advocates: Clean Air Task Force Clean Wisconsin Environmental Defense Fund Iowa Environmental Council Michigan Ecology Center MN Ctr for Energy & Env Ohio Environmental Council Union of Concerned Scientists

Multistate Collaboration Why collaborate? “Gains from trade” make achieving goals easier region-wide. States with excess or lower cost reductions can sell those to other states, making it a “win-win”. Reliability of the electricity system—if something happens in one state to make compliance harder, the state can rely on options in other states. Lessen competitiveness issues between states. Regional wholesale electricity markets/power pools & multi-state utilities The effects of measures to reduce emissions often appear outside the state, as with RE purchased from outside the state. Comparative advantage—each state does what it does best (or most cost-effectively).

Issues for Multi-State Compliance Each state is a sovereign entity There is no regional government, only federal and state— Enforceable obligations between states may trigger the Compact Clause of the US Constitution, requiring congressional approval. Would any state want to make their 111d plan enforceable by another state? Not necessary to create new legal structures—the ones we have can work— Need on-ramps, because different states will have different pathways and timeframes for decision; and May need off-ramps, because a state may change its mind. A state can develop a plan that is “multi-state ready” and keep its options open.

The “No Regrets” Path States can prepare individual state plans while also exploring regional or multi-state cooperation. In devising state plans, states can consider designs that keep the regional/multi-state pathway open. For example, a common currency such as an emissions reduction credit or an emissions allowance. Ultimately linking up with others is a political decision to be made by governors, legislatures— In the meantime, multistate collaboratives allow states to pool resources and better understand options.

Thank You! Franz Litz Program consultant flitz@gpisd.net