Clean Power Plan Finalized by Obama Administration and EPA — What's Next?

Background

On August 3, 2015, President Obama and the Environmental Protection Agency (EPA) released a new set of final regulations aimed at reducing carbon output from power plants. The sweeping new Clean Power Plan (CPP) sets limits on carbon output from coal and natural gas-fired power plants while mandating new targets for renewables as a portion of the energy mix. The plan aims to cut carbon output from power plants by 32 percent from 2005 levels by 2030 — an unprecedented move since until now there has been no federal regulation on the carbon output from electricity production in the United States.

Unsurprisingly, the release of CPP has generated significant controversy. States, industry and trade groups are all preparing to launch initiatives to either attack or support the plan. With so much interest in shaping the impact of the CPP, it is crucial for energy organizations to look at what efforts are underway and what opportunities those efforts provide for interested parties to affect CPP outcomes.

State Reactions

The language of the CPP requires states to submit an implementation plan by December 6, 2016, to the EPA as a roadmap for how they intend to reach their emissions goals. By that deadline, either a CPP State Implementation Plan (SIP) must be submitted for approval, or a draft with a request for an extension must be submitted. In submitting a draft, states are not delaying the timeline of their eventual target, but instead only the deadline for the compliance. Failure to produce a SIP will trigger a Federal Implementation Plan (FIP) to be applied to states that are tardy or resistant.

Despite the FIP threat, states like Oklahoma and Indiana have vowed not to submit a CPP SIP, or request for extension, by the deadline. Twenty-two other states are preparing for legal action against the EPA and Obama administration as well, arguing that EPA lacks the authority to regulate their power mix in this way. States such as Massachusetts and New York have vowed to defend the EPA by joining in the litigation on behalf of the administration, along with the major environmental organizations. Some in private industry, and the trade groups representing them, are also preparing for a legal battle to challenge the CPP.

Another complicating factor at the state level will be the reaction of state utility commissions, which will be heavily involved in the development of state plans. The CPP will require each state to re-examine its energy fuel mix, and many states complain that EPA is preempting the fuel mix decision process.

Litigation Certain

While states sue over EPA authority, some in industry will be looking for a stay on the regulation, allowing them to avoid costly modifications and continue business as usual until the litigation efforts close and the rule is either implemented or rejected by the courts. Preparing plants to meet the new standard will be costly, even before physical modifications are made. Therefore, achieving a stay may be paramount to the financial health of certain companies relying on fossil fuels in order to avoid spending money on implementing a plan that may ultimately be dismantled through litigation.

Recently, there has been some precedent that may assist their efforts. Just a few months ago, the Supreme Court ruled against the EPA on its Mercury Air Toxics Standard. Siding with industry, the Court rejected EPA’s rule on the basis that it did not address a Clean Air Act requirement to assess the financial impact it would have on the plants it seeks to regulate. While the court didn’t reject the rule outright, it remanded the matter to a lower court for rehearing on the financial impact to determine next steps. The case is significant in that it continues the trend in recent Clean Air Act cases to step away from the Court’s historic Chevron deference to EPA in its rulemaking. This case will be cited by those companies seeking a stay on the CPP since by the time the Supreme Court rendered their decision, most utilities had already complied. Furthermore, the House of Representatives has passed legislation that would grant industry protection from compliance until the legal challenges to the CPP have run their course.

Impact on Renewables

The implementation of a Renewable Power Standard (RPS) is one of the more intriguing aspects of the Clean Power Plan. With the RPS in place, solar and wind technology have been mandated to make up a specific percentage of the national energy mix. This represents a new paradigm for renewables as the technology matures into a more dependable source of power. Until now, wind and solar have been incentivized by tax credits to spur investment — now they will need to be added to the mix no matter what.

This raises an interesting question about the future of the tax incentives associated with renewable energy sources: will Congress maintain its appetite for tax credits for a technology that is now mandated? In the past, legislators have turned away from providing incentives once a mandate has been put in place. For example, in 2012 the Senate did away with the volumetric ethanol excise tax credit for ethanol producers, arguing that after 30 years of subsidy and a federal requirement that gasoline is blended with at least 10 percent ethanol, the subsidy was no longer essential to the prosperity of the industry.

At the end of this year, production tax credits for wind and solar will expire unless they are extended by Congress. Requiring states to meet a certain threshold for renewable use could pique the interest of anti-subsidy legislators who will argue that a tax break is no longer necessary to encourage investment in renewables. How Congress will act on these taxes is anything but certain, but it is worth noting that legislators have been skeptical of redundancies in programs like this in the past. This could be a game changer for the renewables industry as it shifts from Wall Street investment to utility-driven investment. Under the CPP, renewables are reaching the point of being considered a mature and proven technology, much like the ethanol industry several years ago.

Next Steps

As the CPP moves toward publishing in the Federal Register and implementation, Faegre Baker Daniels and FaegreBD Consulting will be monitoring its development and identifying opportunities and threats to stakeholders. The administration has launched a new initiative to drastically change the energy economy in the U.S., and the uncertainty that comes with a shift of this magnitude cannot be ignored. While the early stages of litigation shake out and a clearer picture of the results of the plan comes into focus, we will be looking forward to working within this sphere to advise our clients on what is ahead.