1. 1 Regulatory Concepts Related to the Control of NOx and SOx From Fossil- fired Electric Generating Units Air Quality Technical Advisory Committee Meeting September 11, 2006 Wick Havens and James Stoner Bureau of Air Quality PA Dept. Of Environmental Protection Harrisburg, PA

2. 2 CAIR Rule Concepts

3. 3 General Principles Related to Draft CAIR Rule Concepts Participate fully in the EPA Cap and Trade Program. Achieve reductions at least equivalent to EPA's CAIR. Phase 1 and Phase 2 compliance dates identical in order to maximize the co-benefits for reducing mercury emissions. Support Energy Efficiency and Renewable Energy (EE/RE). Support waste coal and co-generation. Support new clean energy development.

4. 4 Draft Concepts Follow the federal CAIR requirements except that the proposal: Allows sources to opt-in as per the required CAIR language. Continues the FIP decision to no longer include non-EGUs in the Ozone Season Budget. Replaces the EPA NOx allowance allocation methodology.

5. 5 Non-EGUs Non-EGUs are not subject to CAIR. EPA requires states to continue to meet the NOx limitations of the Interstate Ozone SIP Call. States can either bring the non-EGU units into CAIR or restrict their emissions in another way.

6. 6 Non-EGUs The NOx SIP Call applies to 26 units at 14 non-EGU facilities in Pennsylvania. The 2005 ozone season NOx emissions were 2,700 tons for these units. The 2008 NOx SIP Call allocations are 3,290 tons. NOx allowances allocated under CAIR would be reduced for natural gas and oil units.

7. 7 NOx Allowance Allocations: Potential Changes from FIP Methods Corrections to issued allowance allocations. Perpetual vs. updated. Post-2000 units treated as new. New unit allocations. Heat-input vs Output. Credit for efficiency and renewable energy. Waste coal and cogeneration support.

8. 8 Corrections Corrections would be made during subsequent NOx allocation rounds using an annual allocation cycle.

9. 9 Perpetual or Updating  Chapter 145 uses an updating NOx allocation system based on recent operations.  In development of Chapter 145 it was determined that fixed perpetual allocations have adverse consequences in states have de-regulated electric generation.  The Chapter 145 updating methodology could be retained with annual rather than 5-year updates (blocks).

10. 10 Post-2000 Units The FIP policy choice was to hold newer units to lower allocation rates than older units. Newer units installed state of the art controls. The FIP method rewards older units by providing more generous allowance allocations than to new, cleaner units.

11. 11 Options for Post-2000 Units Follow the federal model. Start with the federal model and phase-in the federal new source allocation rate for all units.

12. 12 New Unit Allocations EPA requires NOx allocations to existing units to be four years in advance of the allowance year. This delays incorporation of new units. Options: Follow the federal model but with allocations made 4 years in advance not the full 6 years. Provide new units with future allowances that they can sell or trade for current year allowances. Establish a set-aside for new units.

13. 13 New Unit Allocations The FIP allocates NOx allowances from a 5% set-aside based on emissions during the previous compliance period. The FIP method does not cover the first compliance period emissions. The first compliance period could be “refunded” in the first allocation. Allowances could be issued from the general pool.

14. 14 Heat-input vs. Output FIP NOx allowance allocation options: Pre-2000 sources on heat input basis. Post-2000 sources on a modified heat- output basis. Analysis of allocations for existing EGU owners in Pennsylvania shows little net difference.

15. 15 Credit for Efficiency and Renewable Energy NOx allocations to EE/RE projects can maximize useful output and reduce impacts on long term energy market decisions. Benefits all units in the program. High emitting peaking and less efficient units would not consume as many allowances. More allowances would be available at lower prices.

16. 16 Energy Efficiency and Renewable Energy Options Provide NOx allocations for EE/RE projects. A set-aside (up to 5%) may be established for this purpose. Consider direct allocation option for EE/RE projects. NOx allocations could be made for all Pennsylvania Renewable Portfolio Standard qualifying generation/measures.

17. 17 Credit for Energy Efficiency and Renewable Energy EE/RE allocations help to provide reductions in peak day emissions. Allocating to AEPS REC generation supports the EDGE concept—one of the Tier II resources is IGCC.

18. 18 Waste Coal/Co-generation Waste coal units without SO2 allocations may be rendered uneconomic under CAIR. Consider providing extra NOx allowances to these units.