Challenges Lie Ahead For Proposed US EPA Power Plant Emissions Standards

_{Authored by Elyse Steiner, Principal Analyst, Wood Mackenzie}

On 8 May 2023, the US EPA proposed new carbon emission standards for coal and natural gas power plants. The new standards are based on power plants installing carbon capture technology (CCUS) or using hydrogen fuel to reduce their emissions—inside the fenceline measures. The EPA must make the case that these technologies are adequately demonstrated for the power sector. Further, as fossil-fuel utilization diminishes, the economics of investing in retrofits become more difficult. Below, Wood Mackenzie analysts look at some economic, technical, and legal challenges for the EPA to consider in its final rule.

Not all energy markets are alike

In regulated utility markets, the cost of retrofits is directly passed through to ratepayers after the Public Utility Commission approves an Integrated Resource Plan (IRP). Utilities include all retrofit and conversion costs as part of their IRP proposals. If the cost of compliance is greater than alternative generation such as renewables, the utility will generally propose retiring these assets to achieve the lowest cost generation mix.

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Wholesale markets provide cost recovery through generators bidding their capacity to serve load. Generally, thermal units will not operate at losses if they do not clear their bids into the market. For retrofits to be economic, the market revenue needs to meet the retrofit costs over the remaining life of the project. Thermal generators are already under pressure from low-cost variable generation, operating at lower capacity factors but are relied upon during high-demand, low-variable generation events. The evolving role of thermal generators and their role in reliability is likely to make cost-effective compliance difficult in an energy-only market. It is likely capacity market redesign would be needed to ensure continued operations of thermal units.

To ensure resource adequacy under this plan, markets will need to evolve quickly to compensate thermal facilities deemed critical to grid reliability. The guaranteed return is likely to lead to a greater portion of thermal generators continuing to operate in regulated markets than wholesale markets given the reduced risk of stranded assets.

Standards based on emerging technology

The IRA 45Q tax credits for CCUS projects brought new hope for fossil-fuel generators wanting to reduce their emissions by capturing them. Because of dwindling utilization, the economic feasibility of CCUS for fossil fuel generation plants is mostly not attractive, even with the 45Q credit. Exceptions exist perhaps for plants that can have large-scale capture and high-capacity factors. Unfortunately, as grids shift towards a higher proportion of renewable power, utilization is projected to decrease for most gas and coal plants.

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Capture technologies such as improved sorbents, membranes and the inherent capture of oxy-fuel combustion, known as the Allam-Fetvedt cycle, could be commercial and transformational. Given that the IRA 45Q credit can be applied if construction begins before 2033, economics could improve by then and CCUS becomes highly prominent in the US supply mix.

The low-GHG hydrogen market is also nascent and experiencing roadblocks in bringing projects online due to a lack of demand. The EPA’s proposed guidelines would be a catalyst for low-GHG hydrogen offtake, which would accelerate and de-risk supply investments. Several utilities have begun pilot-scale demonstration projects, blending hydrogen into existing gas turbines to achieve low percent blend by volume. Through the proposed rule, gas units choosing to decarbonize via low-GHG hydrogen would have to blend at percentages much higher than the pilot projects today. Blending hydrogen at 30% by 2032 could repurpose existing infrastructure. Blending hydrogen at 96% by 2038 would require new infrastructure, the technology of which is still being developed. EPA regulations could accelerate that timeline.

A high legal bar to clear

Although the EPA has applied a narrower definition of “system” and remedied the fenceline issue, there are still numerous challenges and issues that the court is likely to be asked to address. Opponents of Biden’s newly proposed standards could once again assert it violates the “major questions” doctrine, which proved to be a persuasive argument with the conservative Supreme Court in 2022.

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Another requirement is that EPA must show that the standards are based on measures that have been “adequately demonstrated” for existing sources of air pollution. EPA contends that, with the IRA, Congress is signaling that these technologies are deployable options and that “adequately demonstrated” does not mean commonly in use. Utilities are likely to counter that CCUS and green hydrogen fuel are costly, unproven technologies with mixed track records.

There is still a long, uncharted road to travel before we have more clarity on the rule’s final form and its future. In the meantime, the shift to cleaner generation is well underway and power sector emissions are already decreasing as more coal plants retire or convert to gas. Time will tell whether or not the EPA manages to implement lasting carbon emission standards and accelerate the energy transition.