Insight for Industry – FERC’s Push to Incorporate Reliability Safety Mechanism in the Clean Power Plan Increases Certainty for State Compliance Efforts
On May 15, 2015, the Federal Energy Regulatory Commission (FERC) provided the Environmental Protection Agency (EPA) with a letter signed by all five Commissioners that details its role in implementing a Reliability Safety Valve (RSV) in the proposed Clean Power Plan (CPP). The CPP proposal, issued on June 2, 2014, aims to reduce power sector emissions by 30 percent by 2030 relative to 2005 levels. It provides state-specific, rate- or mass-based targets to reduce power plant carbon dioxide emissions and guidelines for state plans to meet the targets.
Concerns have largely been focused on the certainty that coal-fired power plants will be retired prematurely in light of carrying out potentially expensive retrofits to comply with EPA regulations. Coal-fired generation accounted for approximately 39 percent of the U.S. electricity supply in 2014 and is heavily relied upon in many regions of the U.S., especially the Midwest.
The RSV was a key focus during FERC’s February-March technical conferences that focused on projected CPP impacts on electric reliability, energy infrastructure, and wholesale energy markets. At that time, panelists recommended that FERC work with EPA to establish both a RSV – a process to modify compliance obligations to address potential reliability risks from unforeseen delays in reliability efforts; and Reliability Monitoring Assistance – a process to review state plans for interstate impacts on reliability.
The implementation of a RSV would allow FERC to review unforeseen conditions that may require adjustments in compliance obligations to ensure grid reliability. The May 15 FERC letter requests a clear definition of FERC’s role if EPA chooses to adopt a RSV, a role which would likely be similar that of the Mercury and Air Toxics Standards’ (MATS) additional fifth year for reliability critical units. Under MATS, FERC advises the EPA on requests for time extensions to meet compliance standards on a case-by-cases basis. FERC examines system planning and operations studies, system restoration studies, operating procedures, and mitigation plans required by the Reliability Standards to analyze reliability and make recommendations to the EPA.
In a similar way, under the CPP, FERC would review petitions seeking adjustments to compliance obligations to address emergency conditions that may violate reliability standards. FERC stressed that its role would be limited to consider whether a specified set of loads, resources, and grid facilities would result in reliability standard violation or reserve margin deficiency.
The EPA would then consider applicants’ efforts to resolve reliability standard violation within approved emission requirements or compliance timelines and possible ways to resolve violation of reliability standards or reserve margin deficiency.
FERC’s involvement with a Reliability Monitoring Process would be less involved than it would with the RSV. FERC would essentially review state plans for potential reliability concerns. According to the FERC letter, the Reliability Monitoring Assistance process should rely primarily on existing processes to identify and address reliability issues. Moreover, many factors that influence grid reliability fall outside its jurisdiction, such as state authority over local distribution and integrated resource planning. FERC also lacks specific authority to require public utilities to build power plants or transmission lines. In view of these limitations, FERC stated that it does not intend to alter the existing federal-state balance and seeks a role focused on regional aspects of CPP compliance.
FERC’s recommendation explicitly recognizes the need to address reliability during the development and implementation of the CPP. Although there is uncertainty regarding the final CPP provisions, FERC’s action will motivate states to identify compliance options and assess their potential implications. Utilities and states have expressed concern about the proposed CPP’s interim goals and called for increased flexibility in the early years of compliance. EPA’s final rule – expected in July or August of 2015 – should provide sufficient time and flexibility for affected entities to take necessary actions, such as construction of gas or electric infrastructure to support new capacity, thereby ensuring system reliability. An RSV would allow states to continue operating existing – and higher emissions-emitting – generating units to ensure reliability in the event of unforeseen retirements or other circumstances.
States and Utility Regulators Stress Importance of Reliability Assurance in Final CPP
Utilities, systems operators and policymakers have been vocal about the electricity supply associated with the CPP, and stakeholders have noted the need for a well-defined reliability assurance mechanism to mitigate risk. A RSV would ensure that generation resources stay online until a transmission solution can be implemented so that retiring capacity does not affect reliability. The FERC technical conferences and National Association of Regulatory Utility Commissioners (NARUC) CPP meetings held in February 2015 expressed the need for a RSV to mitigate capacity retirement and cross-state network concerns associated with CPP implementation.
Panelists noted that in the absence of a reliability assurance mechanism, the CPP could broadly threaten regional electric reliability by forcing generation retirements in regions with declining reserve margins and by affecting cross-state networks. The EPA projects the regulatory impact of the CPP to result in 108 GW to 134 GW generation capacity reduction by 2020, depending on state or regional implementation options. ISOs/RTOs and NARUC members have long petitioned for a RSV to address CPP risk management, as it could also address reliability issues outside the scope of an approved SIP. Both the American Public Power Association (APPA) and NERC representatives have told FERC Commissioners that FERC must have a strong role in advocating a safety valve. Many of the 1.6 million comments submitted to the EPA on the draft plan addressed the idea of a RSV.
A RSV will Enhance CPP Compliance through Regional Cooperation with Demonstrated Potential to Increase Economic Benefits
Interstate coordination in meeting emissions reduction goals has been successfully demonstrated in at least one regional initiative with flexibility mechanisms, and similar coordination has been promoted by regulatory commissioners and state utilities. The Regional Greenhouse Gas Initiative (RGGI), a regional emissions reduction effort of nine Northeast and Mid-Atlantic states, has been implemented without any significant reliability issues and has been implemented using a number of flexibility mechanisms. RGGI’s initial design established mechanisms that could extend program compliance periods; temporarily expand allowances; and offset allowance pools to mitigate allowance prices. RGGI also allocates allowances through quarterly auctions over a three-year compliance period.
Its Compliance Period Safety Valve was designed to extend the three-year period under certain conditions. The RGGI design also allows additional compliance flexibility through the use of offsets—emissions reductions outside of the capped electric sector. Though offsets can be used for three percent of an entity’s reported emissions, RGGI included a safety mechanism allowing offsets from a broader geographic scope and increased offset use under certain circumstances. RGGI’s 2013 Updated Model Rule includes a Cost Containment Reserve that provides for the addition of allowances to the market if allowance prices exceed predefined price levels. Since its launch in 2005, RGGI states achieved 40 percent emissions reduction and the $1.4B in auction proceeds invested to date is projected to return more than $2.9B in lifetime energy bill savings.
The RGGI emissions cap extends only until 2020, and it will need to be extended in order to be consistent with the proposed CPP. RGGI’s emissions reduction trajectory and Cost Containment Reserve would also require revisions to ensure long-term emissions reductions.
Regulatory Utility Commissioners and state officials have similarly noted the benefit of inter-state coordination in achieving emissions reductions goals. The NARUC and the Eastern Interconnection States Planning Council have released a resource guide to help states overcome institutional barriers and coordinate on CPP compliance. NARUC emphasizes that multistate coordination for CPP compliance would increase economic benefits due to the interstate nature of the grid and the fact that greenhouse gas reductions lead to benefits everywhere, unlike EPA-regulated criteria pollutants that address the impact of upwind states’ pollution on downwind states. The NARUC guidance aims to help states create institutional bridges between public utility commissions, governors, energy advisors, and lead agencies responsible for the creation and filing of state implementation plans. Despite the success of RGGI, NARUC notes that states need not enter into multi-state compliance plans with joint targets or sophisticated interdependent agreement structures such as the RGGI, as interstate cooperation can range from simple awareness of each other’s compliance plans to mutually-dependent plans.
The NARUC suggests processes such interstate conversations on transmission planning, like in the Regional State Committees in Eastern RTO areas and CREPC in the West; interagency siting boards and councils like in Massachusetts and Oregon; and national organizations like NARUC, National Association of Clean Air Agencies (NACAA), and the National Council on Electricity Policy. It also suggests a state “SIP-Swap” to enable elements of one state’s SIP to be incorporated in another through individual bilateral agreements, assuming mutual agreements. Existing multi-state trading programs such as the RGGI could also fit CPP compliance strategies.
The NARUC also examines Kentucky’s CPP compliance options to explore system-wide approaches. Kentucky’s proposed structure calls for a statewide baseline carbon dioxide (CO2) level based on 2005 EGU emissions; statewide baseline CO2 reduction targets for 2020 (17 percent), 2025 (28 percent), and 2030 (38 percent) with state-specific data and energy portfolio trends to set additional reduction beyond 2020; obtaining credit for CO2 reductions from the 2005 baseline allowing states comply with baseline targets; and allowing compliance options to implement the least-cost method of meeting targets with a monitoring mechanism to approve options. States could apply Kentucky’s example to reduce CO2 emissions by establishing an economy-wide carbon trading system with interim targets reflecting state-specific energy trends.
Increasing Number of States and Utility Regulators are Considering Interstate CPP Compliance Plans
Despite ongoing challenges to the proposed CPP, air and electric regulators are engaged in efforts to coordinate with neighboring states. Several entities are engaged in developing tools for state compliance plans. For example, the Midcontinent States Environmental and Energy Regulators (MSEER) and the Nicholas Institute at Duke University are modeling multistate compliance pathways, and NACAA is developing a model compliance plan that can be customized to meet state needs. Several states involved in the Midwestern Power Sector Collaborative — Illinois, Michigan, Minnesota, Missouri, Kentucky, and Wisconsin — have requested EPA to establish a voluntary carbon credit trading system to enable states and generators deficient of their goals to purchase credits from those that exceed their goals. Thirteen western states participated in a recent CPP meeting convened by the Center for the New Energy Economy.
The Western Interstate Energy Board involving Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming have held similar meetings. The Georgetown Climate Center has engaged state representatives from California, Colorado, Maryland, Minnesota, Missouri, Montana, New York, Oregon, Pennsylvania, Tennessee, Virginia, and Washington. In the Northeast, the nine RGGI states are involved in discussions. In March, the National Governors Association (NGA) announced the selection of Michigan, Missouri, Pennsylvania and Utah to participate in a Policy Academy on Helping States Prepare for Federal Greenhouse Gas Rules in the Electric Power Sector. The effort aims to help states examine cost-effective strategies for CPP compliance, and provides participating states with tailored modeling of their electricity sector to assess potential compliance options.
State and Federal Legislation are Preemptively Aimed to Delay CPP Implementation in Current Form
While some states are exploring regional cooperation, a number of state legislatures are considering legislative proposals designed to stall implementation of the proposed CPP, and recent federal legislation would roll back the CPP if it would cause reliability issues in specific states.
The majority of state legislative efforts are designed to stall implementation by requiring multiple levels of review. Tennessee House Bill HB 868 and its Senate version SB 1325 – introduced on February 11, 2015 – would require legislative approval of a state plan to implement Section 111(d) of the EPA’s guidelines before the plan can be submitted to the EPA. Virginia Senate Joint Resolution 273 – introduced on February 6, 2015 – would request a study on the projected health benefits of the proposed CPP in comparison with the projected health benefits of existing regulations. Virginia SB 1365 – proposed on February 5, 2015 – would require consideration of certain factors in developing a state plan for CPP compliance, including whether to rely on EPA measures in calculating the CO2 reduction goal; whether to participate in existing multistate programs, create new multistate CO2 reduction program, or partner with other states; whether to invest in energy efficiency programs; expansion of non-emitting sources like nuclear; market-based trading programs; and methods to avoid stranded investments in affected power plants.
Oklahoma SB 676 – introduced on February 2, 2015 – would prohibit adoption of certain state implementation plans regulating emissions from fossil fuel-fired generating units without prior legislative approval. Montana SB 236 would also provide for legislative involvement in developing a state plan to comply with EPA’s proposed CPP. In addition, in August 2014, 12 states (Alabama, Indiana, Kansas, Kentucky, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, South Dakota, West Virginia, and Wyoming) filed suit in the U.S. Court of Appeals in the District of Columbia challenging EPA’s authority to regulate existing coal-fired electric generating plants under CAA Section 111(d).
On the federal side, Republican lawmakers have introduced several measures that specifically address CPP impact on electric reliability. On May 7, Sen. Lisa Murkowski (R-AK) introduced the Bulk-Power System Reliability Impact Statement Act (S. 1221) which would require an assessment of the potential impact of any major federal regulation on the on the bulk power system reliability. On May 13, Sen. Shelley Moore Capito (R-W.Va), Chairman of the Senate Environment and Public Works Committee’s Clean Air and Nuclear Safety Subcommittee, introduced the Affordable Reliable Energy Now Act (ARENA) aimed to roll back the CPP. Under the legislation, states would not be required to implement state or federal plans that the state governor determines would negatively impact electricity system reliability and ratepayers.
The bill includes provisions to prevent EPA mandates for unproven technology, extend CPP compliance dates pending judicial review, hold EPA accountable for state-specific model plans, and prevent EPA from withholding highway funds for CPP non-compliance. The bill is co-sponsored by Sens. Mitch McConnell (R-Ky.), Whip John Cornyn (R-Texas), John Thune (R-S.D.), Jim Inhofe (R-Okla.), Joe Manchin (D-W.Va.), John Barrasso (R-Wyo.), Roy Blunt (R-Mo.), Roger Wicker (R-Miss), Lamar Alexander (R-Tenn.), Pat Roberts (R-Kan.), Rand Paul (R-Ky.), John Hoeven (R-N.D.), Johnny Isakson (R-Ga.), Dan Coats (R-Ind.), Mike Crapo (R-Idaho), Mike Enzi (R-Wyo.), Jim Risch (R-Idaho), Deb Fischer (R-Neb.), Ted Cruz (R-Texas), John Boozman (R-Ark.), David Perdue (R-Ga.), Steve Daines (R-Mont.), Tom Cotton (R-Ark.), Tom Tillis (R-N.C.), Mike Rounds (R-S.D.), and Bill Cassidy (R-La.).
Moving forward, the incorporation of a RSV as specified by FERC and as tentatively considered by EPA could provide a backstop response to a number of reliability concerns expressed at both state and federal levels. The proposed CPP is expected to be finalized in the coming months, and in the interim, FERC’s continued involvement offers stability for states developing individual and inter-state compliance plans.
Originally published by EnerKnol.
EnerKnol provides U.S. energy policy research and data services to support investment decisions across all sectors of the energy industry. Headquartered in New York City, EnerKnol is proud to be a NYC ACRE company.
