United States: EPA's Replacement For The Clean Power Plan (The Proposed Affordable Clean Energy Rule): Potential Impacts To The Oil And Gas Industry

EPA's proposed replacement for the Clean Power Plan, dubbed the "Affordable Clean Energy" rule, or "ACE," is now open for comment. In short, the rule requires states to develop efficiency standards for fossil fuel-fired power plants with the intent of reducing greenhouse gas emissions. Coal-fired power plants, and those involved in the production of coal, have a keen interest in the rule for obvious reasons—ACE targets them directly and could require capital projects costing millions.

Although gas-fired combustion turbines are expressly excluded from the rule, there are at least three reasons why the natural gas industry should monitor the ACE rulemaking process as well as consider proactive engagement with EPA. Further, there are similar reasons that oil pipeline and terminal facilities should pay attention to the proposed rule, with EPA's methodology for evaluating climate change impacts perhaps topping the list. Comments are currently due on October 31, 2018.

ACE Excludes Gas ... for Now

ACE expressly excludes existing "stationary combustion turbines," a term defined to include both simple-cycle and combined-cycle units. As a result, the vast majority of "existing" gas-fired power plants will not be covered by ACE, even though the prerequisite "new source" rule is already in place. That means states will skip over gas-fired turbines in crafting the unit-specific efficiency standards that ACE requires.

While EPA's decision to exclude gas turbines may be good news for the natural gas industry, the reason for that decision might be a bit less comforting. EPA's primary justification for excluding gas turbines is that it simply did not have enough information to propose a similar rule for them at this time, although EPA has expressly asked for that information in ACE. Implied in that reasoning is the risk that EPA may be pressured into developing a similar program for gas turbines in the future, if EPA receives new information on the efficiency improvements available for such units.

Although EPA's ACE proposal does not go into detail on why gas turbines are different from coal boilers from an efficiency perspective, perhaps it should have. The efficiency with which a gas turbine generates electricity is far more sensitive to ambient conditions (temperature, humidity, etc.) than that of a coal boiler. Thus, any not-to-exceed efficiency limit for a gas turbine, like those ACE will require for coal boilers, would have to account for the influence of ambient conditions. Otherwise, a mere change in weather could cause a violation.

Gas industry representatives should consider participating in the comment process to better explain why the approach EPA has proposed in ACE for coal will not work well for gas.

Proposed New Source Review Reform Applies to Gas

As proposed, the New Source Review (NSR) portion of ACE would apply directly to gas turbines even though they are excluded from ACE. EPA's stated concern is that the efficiency projects required by ACE could trigger NSR permitting—arguably the most controversial and heavily litigated program under the Clean Air Act.

In ACE, EPA has resurrected a proposal from 2007 for a new "preliminary" emissions test based on hourly emissions to precede the current annual test. An hourly test would avoid discouraging desirable efficiency projects that might otherwise trigger NSR under the annual test. It would also dovetail well with EPA's health-based ambient air quality standards, some of which are also based on a one-hour metric.

However, as with most NSR issues, the details are critical. Determining whether a unit's maximum hourly emission rate is expected to, or actually does, go up after a project can be extremely complicated. Recognizing the challenge, ACE includes three options (its 2007 proposal had twelve), but unfortunately none of them work. As proposed, EPA's rule would falsely predict emission increases in nearly every case. With a few key changes to one of those options, the reform could nevertheless be transformative and finally provide the level of clarity that EPA, states, and regulated sources have sought for decades.

Gas interests should respond by encouraging EPA to fix and then finalize the reforms to minimize the risk that NSR might in the future become the same quagmire for gas that it has long been for coal.

EPA's Method for Evaluating Climate Benefits

As with all major rules, EPA included in ACE an analysis of the projected costs and benefits. Notably, that analysis covers two types of benefits that have been hotly contested in the past—the climate benefits targeted by the rule, and the "co-benefits" resulting from ancillary reductions of other pollutants. At first glance, EPA's analysis of these benefits in ACE appears similar to its past evaluations, but there are two important differences worth noting.

First, in evaluating climate benefits targeted in ACE, EPA used the controversial social cost of carbon, but only a portion of it. Instead of the "global" value utilized by the Obama Administration, the Trump Administration has used only the "domestic" value, reflecting the potential benefits only within U.S. borders. The result cuts the value of a ton of carbon to about a fifth of what it was, depending on the specific metric. Second, in evaluating the "co-benefits" associated with reducing fine particulate matter (PM) emissions, EPA included a new step in its analysis. Even though EPA calculated the co-benefit of reduced premature mortality due to the expected reductions in PM the same way as it always has before, it also evaluated the percentage of the PM reductions likely to occur in areas that already meet EPA's health-based ambient standards. That extra step demonstrates that almost all of the PM benefits EPA has calculated will occur in areas with the level of PM that EPA has already deemed sufficient to "protect the public health" with "an adequate margin of safety."

Though quietly stated in ACE, these two key points are likely to reverberate into other contexts: (1) only domestic climate benefits should be compared to domestic costs, and (2) any analysis of "co-benefits" should consider the PM standards already set and met. Indeed, they may be even more important for the gas industry than for coal, since evaluating climate benefits often arises in the context of building new facilities, and the only new power plants expected in the foreseeable future will be fired with gas.

These new precedents could also be important for new oil and gas pipeline construction projects, which typically trigger a review of environmental impacts under the National Environmental Policy Act (NEPA). NEPA reviews take years and must include full consideration of potential climate and air quality impacts associated with new pipeline projects and the facilities they serve. This Administration's most high-profile evaluation of climate and air quality impacts is likely to serve as a model going forward for the similar evaluations required under NEPA.

* * *

All told, there are a number of ACE rule elements for oil and gas interests to consider, contrary to its coal-focused appearance. We encourage oil and gas interests to engage on these issues as they provide significant opportunity to provide their perspectives and potentially impact key precedents that may be established in a final rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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