Proposed Challenges to US EPA Power Plant Emissions Standards

Written by Elise Steiner, Principal Analyst, Wood Mackenzie

On May 8, 2023, the US EPA proposed new carbon emission standards for coal and natural gas power plants. The new standards rely on power plants installing carbon capture technology (CCUS) or using hydrogen fuel to reduce their emissions within the fence range. EPA must certify that these technologies are adequately demonstrated for the electric power industry. Moreover, as fossil fuel use declines, the economics of investing in retrofits become more complex. Below, Wood Mackenzie analysts consider some of the economic, technical and legal challenges that EPA must consider in its final rule.

Not all energy markets are alike

In regulated utility markets, the cost of retrofitting is passed directly to ratepayers after the Public Utilities 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 renewable energy, the utility will generally offer to remove those assets to achieve the lowest cost generation mix.

Wholesale markets provide cost recovery through generators offering their capacity to serve the load. In general, thermal blocks will not work at a loss if they do not present their applications in the market. For retrofitting to be economical, market revenue must cover retrofitting costs over the remaining life of the project. Thermal generators are already under pressure for 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 in the energy-only market difficult. A redesign of the capacity market is likely to be necessary to ensure continued operation of thermal units.

To ensure resource adequacy under this plan, markets must develop quickly to compensate for thermal installations that are considered critical to grid reliability. Guaranteed returns are likely to result in more thermal generators continuing to operate in regulated markets than in wholesale markets, given the risk of stranded assets.

Standards based on emerging technologies

IRA 45Q tax credits for CCUS projects brought new hope to fossil fuel generators looking to reduce their emissions by capturing them. Due to declining utilization, the economic feasibility of CCUS for fossil fuel generating plants is generally unattractive, even with a 45Q credit. There are exceptions, perhaps, for plants that may have large scale capture and high power factors. Unfortunately, as grids shift to a greater proportion of renewable energy, usage is projected to decline for most gas and coal plants.

Capture technologies such as improved sorbents, membranes, and the inherent involvement of oxyfuel combustion, known as the Alam-Fetvedt cycle, could be commercial and transformative. Given that the IRA 45Q credit can be applied if construction begins by 2033, the economics may improve by then and CCUS will be heavily featured 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. EPA’s proposed guidelines would be a catalyst for lower greenhouse gas hydrogen emissions, which would accelerate and offset supply investments. Several utilities have begun pilot-scale demonstration projects blending hydrogen into existing gas turbines to achieve low volume percent blending. Under the proposed rule, gas units that choose decarbonization with low-GHG hydrogen would have to fuse at much higher percentages than pilot projects today. A 30% hydrogen mix by 2032 could transform existing infrastructure. A 96% hydrogen mix by 2038 will require new infrastructure, the technology of which is still under development. EPA regulations could accelerate that timeline.

High legal barrier to clean up

Although the EPA has applied a narrower definition of “system” and mended the fence problem, there are still many challenges and issues that the court will likely be asked to address. Opponents of Biden’s new proposed criteria could once again argue that it violates the “fundamental issues” doctrine, which was a compelling argument with the conservative Supreme Court in 2022.

Another requirement is that EPA must demonstrate that the standards are based on measures that have been “adequately demonstrated” for existing sources of air pollution. EPA argues that with the IRA, Congress signaled that these technologies are viable options and that “adequately demonstrated” does not mean commonly used. Utilities will likely counter that CCUS and green hydrogen are expensive, unproven technologies with a mixed track record.

There is still a long, uncharted road to travel before we have more clarity on the final form of the rules and their future. Meanwhile, the transition to cleaner generation is well underway, and emissions from the power sector are already falling as more coal plants are retired or converted to gas. Time will tell if the EPA succeeds in enforcing sustainable carbon emission standards and accelerating the energy transition.

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