Environmental Regulations and the “No Regrets” Approach: A Refresher for Utility Generators
Many of us have a hard time keeping track of where our federal government stands on environmental issues, especially when viewed through a political lens or from the perspective of the popular press. For example, in 2016 we signed on to the Paris Climate Accord. We withdrew in 2020, then rejoined in 2021. The Obama administration put in place numerous environmental regulatory programs. Subsequently, the Trump administration undermined them in court and dismantled them administratively. Then, rather than supporting the Obama administration’s Clean Power Plan, which was replaced by the Trump administration’s Affordable Clean Energy rule, the Biden administration took a different tack through a series of executive orders.
Despite being confusing at times, policy changes should not be an impediment to utility companies. The reason: Electric utilities across the country have always been masters of long-term planning. They know that major infrastructure projects take a long time — up to a decade or more — to conceive, plan and execute. More than half of all states require utilities to develop long-term integrated resource plans, a full range of feasible options on the supply side (utility-scale generation), demand side (customer-sited solutions) and distribution side (customer and community resources), and to assess them against a common set of planning objectives and criteria to meet expected customer service requirements into the future at least cost.
The truth is that utilities routinely make and execute resource plans, whether mandated or not. As illustrated in a blog one of us wrote in 2015, a careful assessment of risk factors will reveal that, in addition to what is immediately before you, utilities face “a host of other rules, initiatives, and market trends that are forcing other changes.”
So, instead of getting caught up in the latest pronouncements, utilities should make sure that they consider a wide range of regulatory scenarios, then develop plans to help them acquire a portfolio of resources capable of serving customers well, given existing trends and the law. In other words, “no regrets” approaches today can dictate what reasonably appear to be a company’s most equitable and economical choices.
What follows are some examples to illustrate that new environmental requirements could arise from federal laws already on the books. Utilities, working with their state regulators and stakeholders, should recognize and make long-term plans for these likely requirements.
Ambient Air Quality Standards (standards reviewed every five years)
The Clean Air Act requires the U.S. Environmental Protection Agency (EPA) to review the National Ambient Air Quality Standards every five years. This requirement includes primary and secondary standards for six of the most common air pollutants, known as criteria pollutants: carbon monoxide, lead, ground-level ozone, particulate matter, nitrogen dioxide, and sulfur dioxide. The purpose of the review is to ensure that these standards reflect the best, current scientific information to ensure the protection of public health and the environment.
These reviews depend on the development and evaluation of scientific information by the EPA, and, in turn, advice from the agency’s independent Clean Air Scientific Advisory Committee. Today’s utility planners should note the ongoing review of the air quality standards for fine particulate matter, for example. A 2021 Advisory Committee report indicates that the current standards may not be adequate to protect public health and welfare, as required. Particulate matter is emitted whenever fossil fuels are burned, so a tighter standard could result in more restrictions on processes and equipment (including power plants) that burn fossil fuels.
Section 110(a)(1) of the Clean Air Act requires states to submit State Implementation Plans to the EPA within three years after the initial development or revision of a national primary ambient air quality standard. State plans provide for the implementation, maintenance and enforcement of these standards. These plans provide an excellent opportunity for utility regulators, utilities and community groups to help states design appropriate plans, consistent with other utility planning efforts.
Interstate Air Pollution (allowable emissions in 12 states are due to decrease through 2024)
In 2011, EPA finalized the Cross-State Air Pollution Rule (CSAPR) to address the emissions of criteria air pollutants that are transported across state lines and affect air quality in downwind states.
Because the interstate transport of emissions affects air quality and public health locally, regionally, and in states hundreds of miles downwind, this rule requires certain states in the eastern half of the United States to regulate and reduce power plant emissions to improve air quality. If a downwind state can demonstrate that upwind emitting sources in neighboring states are affecting its ability to comply with national standards, the “good neighbor” provisions of Section 126 of the Clean Air Act require the upwind source to either cease operation or comply with emissions limitations established by the EPA.
If the EPA determines that states are taking too long to implement changes to their state plans, the agency has the authority to issue a Federal Implementation Plan. In 2021, it issued new or amended plans for these 12 states, revising their emission budgets until air quality projections demonstrate resolution of the link between emissions in these states, allowing downwind states to meet air quality standards.
New Source Performance Standards for GHG Emissions (standards could be revisited any time)
In 2015, using authority from Section 111(b) of the Clean Air Act, the EPA set New Source Performance Standards for greenhouse gas (GHG) emissions from new, modified, and reconstructed fossil fuel-fired power plants. As required, the agency established these emissions standards based on its evaluation of the “best system of emission reduction” for affected sources. For example, the best system for baseload natural gas-fired turbines was determined to be the use of efficient natural gas combined cycle technology. For peaking turbines, however, the EPA determined that using “clean fuels” was the best system of emissions reduction. In neither case did the agency require new gas-fired turbines to match the performance of the lowest-emitting commercially available turbines.
In December 2018, EPA proposed revisions to the new source performance standards for coal-fired electric power plants relaxing the requirements. The primary reason given by the agency, “high costs and limited geographic availability of [carbon capture and storage] CCS.” Using the same authority, the EPA could likewise propose to tighten the standards for baseload and peaking gas plants. If it were to consider current resource information, the agency could revisit its best system of emissions reduction determination for a gas “peaker” and determine, for example, that new plants should not emit more than the very lowest emitting units on the market today.
Hazardous Pollutants (standard reviewed every eight years)
In 2012, the EPA developed the Mercury and Air Toxics Standard (MATS) pursuant to Section 112 of the Clean Air Act. That section gives the agency the authority to regulate hazardous air pollutants from stationary sources like electric generating units. Section 112 also requires periodic review and potential revision “taking into account developments in practices, processes, and control technologies.”
In fact, fossil-fueled electric power plants emit toxic air pollutants and could become subject to further restrictions given the EPA’s recent announcement about the need to enforce the mercury requirements, reversing another decision made during the Trump administration. The agency is taking comments on whether the mercury emissions limits should be made more stringent.
Utilities have the capability and the responsibility to factor all these contingencies and scenarios into their long-term plans and investment decisions. In the foreword to its 2011 publication Preparing for EPA Regulations: Working to Ensure Reliable and Affordable Environmental Compliance, RAP quoted Moody’s Investor Service:
…credit risk factors associated with energy and climate legislation have existed for decades and managing these risks are considered a core competency for all utility operators, whether they are regulated or un-regulated, public, or privately-owned.
This applies as much today as it did 10 years ago when Moody’s made the pronouncement. Staying abreast of changes to environmental and public health laws and their potential effects on the utility sector continues to be an important responsibility of utility owners, operators, and regulators.