What Would a Clean Power Plan FIP Look Like?

This is part 3 of a 3 part series on EPA’s announcement last week that it will propose a model federal implementation for the Clean Power Plan. For Part 1, “Context of EPA’s Bombshell Announcement That It Will propose a Model FIP for the Clean Power Plan,” click here. For Part 2, “Why EPA Is Proposing a Clean Power Plan Model FIP (Because Otherwise It Can’t Impose Highway Sanctions),” click here.

In the first two parts of this series, I explained why EPA last week announced it would propose a model federal implementation plan (“FIP”) for the Clean Power Plan, the Obama administration’s marquee climate initiative. In a nutshell, the agency’s motive is to increase its bargaining leverage vis a vis States that don’t want to cooperate on the regulation. To be precise, the model FIP would enhance the constitutionality of financial penalties that the agency could impose on a recalcitrant State, in order to compel compliance, during a two-year window after EPA disapproved that state’s plan. Read all about it here and here.

In this post, I want to explore what this model FIP could look like.

If you’re reading this, you’re no doubt aware that the Clean Power Plan establishes State-by-State greenhouse gas reduction targets, based on 4 building blocks:

• Building Block 1: A 6 percent efficiency improvement to each existing coal-fired power plant

• Building Block 2: Operating combined cycle natural gas plants at 70 percent capacity utilization

• Building Block 3: A green energy production mandate calculated regionally

• Building Block 4: A 1.5 percent annual reduction in electricity demand

Below, I address EPA’s range of (federally imposed) compliance options for each building block, based on the agency’s demonstrated capabilities.

Building Block 1: A 6 percent efficiency improvement to each existing coal-fired power plant

This is the only one of the four building blocks that falls within EPA’s traditional authority pursuant to the Clean Air Act. It’s a plant-specific (i.e., “inside the fence line”) numerical target that the agency could readily incorporate into a federally enforceable emissions limit. This limit, in turn, could be incorporated within a permitting regime. (Nota Bene: This discussion in no way impinges on the feasibility of the 6% target, which I understand to be impossible).

Building Block 2: Operating combined cycle natural gas plants at 70 percent capacity utilization

Now we’re getting into the hard stuff. The national average for capacity utilization at combined cycle gas power plants in 2012 was 46 percent, so we’re talking about a substantial change to get these plants operating 70% of the time. Moreover, most States participate in multistate, regional transmission grids. On these systems, an independent grid operator decides which power plants to utilize at any given moment (a process known as “economic dispatch”). Via FERC-approved tariff agreements, these independent grid operators are legally bound to act pursuant to certain conditions, including affordability and reliability concerns. It’s wholly unclear how EPA could interject itself into this process.

That said, there is a precedent for EPA ordering individual power plants to operate at a given capacity factor. In a 2013 settlement agreement with Public Service Operator of Oklahoma (a subsidiary of American Electric Power), EPA bound the utility to a stipulation that established a cap for utilization of a coal-fired power plant in the northeastern part of the Sooner State. The plant was capped at 70 percent capacity utilization by 2021; 60 percent by 2023; and 50 percent by 2025. (see 78 FR 51686 at 51691)

I don’t think this is a widely used strategy, and I don’t know of any other examples. Moreover, there’s an obvious difference between imposing a ceiling on a power plant’s utilization, and imposing a floor. In multistate grids (Public Service Company of Oklahoma operates in the 8-State Southwest Power Pool), utilities offer their power on a dynamic market. As a result, it’s relative easy for a power plant to “cap” what it voluntarily offers. On the other hand, a 70 percent capacity utilization “floor” well exceeds the market demand for gas combined cycle plants (again, the 2012 average was 46 percent). It follows that such a floor could only be determined by the multistate grid operator. Again, it’s wholly unclear how the agency can somehow deputize the grid operator to do its bidding, in seeming contravention of FERC’s authority. Simply put, I don’t see a plausible way forward.

Building Block 3: A green energy production mandate calculated regionally

Building Block 4: A 1.5 percent annual reduction in electricity demand

I’ve combined these building blocks, which are both well “outside the fence” of fossil fuel plants, the regulated entity under the Clean Power Plan. Energy efficiency mandates, for example, are executed by the electricity end-user. Green energy sources like wind and solar energy, obviously, are independent of fossil fuel plants.

Again, it’s unclear how EPA could proceed. For starters, the task is an administrative conundrum. EPA’s model FIP must establish emissions limitations that are federally enforceable. Perhaps the agency could establish a quantitative association between green energy/energy efficiency mandates and emissions reductions at individual power plants within a State.

In addition to being difficult, such a strategy would engender severe federalism issues. Each of the 29 States that have mandatory green energy production quotas, and each of the 18 States that have mandatory energy efficiency programs, did so by laws passed by the legislature. Presumably, EPA won’t demand that state legislatures enact new energy policies. But could it achieve the same by ordering coal plants to operate less? Yet again, this would conflict with the integrated nature of interstate electricity systems, operated by independent entities pursuant to FERC-approved contracts. I don’t see a ready path forward.

Thus, I’m skeptical of EPA’s ability to execute building blocks 2, 3, and 4. Taken individually, each of these building blocks exceeds the agency’s demonstrated capabilities. Perhaps EPA has something up its sleeve, but I doubt it. Operationally speaking, it’s impossible (from what I can tell) for the agency to implement a FIP that implements the four building blocks on which were based any given state’s Clean Power Plan targets.

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Alas, I do see a way forward for EPA, and, unfortunately, it’s probably the easiest option for the agency to propose. For although EPA lacks the capability to execute building blocks 2, 3, and 4, it does have a long history of operating…a federal cap-and-trade that incorporates multiple States.

For more than 2 decades, the agency has operated an emissions trading program to mitigate “acid rain.” And for more than a decade, the agency has operated an emissions trading program to mitigate interstate ozone and particulate matter pollution. In order to create a model cap-and-trade FIP, pretty much all the agency has to do is convert a State’s Clean Power Plan target into a mass-based target, and then disburse to utilities the right to permissible greenhouse gas emissions (by the ton). Indeed, EPA is already working on a rule to that end.

To be sure, I don’t think the agency is interested in operating a cap-and-trade scheme for greenhouse gas emissions. As I explained yesterday, such a program, even if it’s conceptually simple, would tax the agency’s limited resources. Also, such a program would be eternally vulnerable to congressional budget limitations.

Rather, a model cap-and-trade FIP would serve the purpose of strengthening the agency’s bargaining position relative to recalcitrant States that refuse to comply with the rule, as I explain in Parts 1 and 2 of this series.