The Environmental Protection Agency (EPA) will today issue a formal notice that it is repealing or withdrawing the Obama Administration’s Clean Power Plan (CPP). EPA will also very soon issue a Notice of Proposed Rulemaking (NOPR) on a replacement regulation and asked for industry and public comment on the path forward.
The Obama CPP was announced in 2015 but legal challenges led to the US Supreme Court issuing a stay on the rule’s implementation until litigation was considered in lower courts. While the rule was billed as a carbon regulation, in reality it was more of stimulus program for renewable energy that offered states extra credit in meeting carbon reduction goals with new renewable power. Zero and low carbon power generation from nuclear and natural gas were given almost no credit to help states meet carbon targets. The rule also called for new hard-to-attain requirements on coal-fired generation that essentially ensured the retirement of existing coal plants and no new coal plants. The rule’s creative approach of focusing on regulation “outside the fence” of the power plant made it vulnerable to legal attacks.
Trump made the repeal of the Obama rule one of the centerpieces of his 2016 campaign. His election not only made a change in regulation possible but his appointment of Justice Neil Gorsuch to the Surpreme Court this year probably ensured that legal attacks on the rule would be successful.
There are many urging EPA and the Trump Administration to not only repeal the rule but to also offer no replacement. This approach would require EPA to nullify its endangerment finding on greenhouse gases threat to public health and we think this is unlikely. Congress could also pass legislation that clarifies the Clean Air Act so that greenhouse gases are not subject to EPA regulation but this is almost impossible with the current make up of the Senate.
Therefore, a prior Supreme Court decision will require EPA to issue an alternative replacement rule. Not doing so is a very risky legal strategy.
In an ideal world, EPA would already have a replacement to propose today along with its notice of repeal. But a lack of Senate-confirmed positions at EPA has likely prevented this from happening. So instead EPA will solicit public comment on a replacement and defer action until then. We think a replacement is likely to be announced next year. Instead of the Obama approach of regulating coal out of existence and incentivizing renewables, a Trump proposal would likely focus on legally safe initiatives like improving efficiency “inside the fence” of the power plant and perhaps offer greater credit for natural gas and nuclear.
DOE Proposed Rule to FERC on Coal & Nuclear
Last week Secretary Perry rattled the power sector by issuing a rarely-used Section 403 Notice of Proposed Rulemaking to request that the Federal Energy Regulatory Commission (FERC) to issue a final rule within 60 days that compensates reliability and “full recovery of costs” in wholesale power markets flowing to generators who maintain 90 days worth of fuel on site.
The rule requires power market operators to “establish just and reasonable rate tariffs for the recovery of costs and a fair rate of return.”
The proposed rule is designed to provide subsidies to coal and nuclear generators. Since most coal operators keep at most 60 days worth of fuel on site, the final rule would encourage coal sales to power companies in the US. Uranium sales would also benefit but it is worth noting that most uranium sales to the US come from imports – an issue the administration may address at a later point.
ICF International, the energy sector consulting firm, said it estimates that the DOE proposal would cost consumers $1 billion and $4 billion a year between 2018 and 2030 to keep coal and nuclear plants open while pushing natural gas plants down by between 4 and 7 percent.
FERC has responded to the DOE proposed rule by fast-tracking its consideration setting a deadline for initial public comments by October 23 and reply comments by November 7 that sets up the possibility that FERC could act within the 60 days requested by DOE.
We think FERC will likely extend consideration of the DOE NOPR as it awaits two additional commissioners expected to be confirmed by the Senate this month including Trump’s designated new FERC Chairman Kevin McIntyre and Democrat Commissioner-nominee Richard Glick. McIntyre may have his own views on the proposed DOE rule that we think could further set back any FERC action on the rule.
In addition, FERC Commissioner Rob Powelson indicated in a speech last week to a PJM association that he “did not sign up to blow up markets.” Powelson, who is one of two Republicans on the commission, could create problems for the DOE policy proposal. His comments are being viewed as a big obstacle but we think he is willing to work with fellow commissioners on the issue. In the same speech, Powelson also said “I’ll give Secretary Perry credit; he’s trying to be thoughtful in the approach but there’s many different approaches on how we can tackle this issue.”
Our view is that FERC is open to the DOE proposed rule but will likely take longer than the prescribed 60 days to consider and certainly to implement any similar policy. We also believe FERC would be moving in a similar direction even without the DOE nudge so while any final action may not look like what DOE proposed, it will likely provide compensation for grid reliability. We think the timeline for such action is closer to March 2018 and very unlikely to happen this year.
