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Power Generation Initiative Updates

Summary of the Environmental Protection Agency’s Clean Power Plan

Published on 10 May 2016  |   Written by    |  

Summary of the Environmental Protection Agency’s Clean Power Plan, Emissions Trading and Clean Energy Incentive Program

Overview

The Environmental Protection Agency’s (EPA) Clean Power Plan (CPP) sets state-specific CO2 emission reduction standards on existing fossil-fuel generating units (EGUs) to be achieved by 2030. The final CPP sets uniform national standards for EGUs based on averaging the emissions rates within the three interconnections (Eastern, Western and Texas) and sets performance standards for EGUs based on the “best system of emission reduction,” or BSER, Building Blocks 1-3. Building Blocks 1 and 2 account for efficiency improvements and increased dispatch (peaking) of existing power plants. Building Block 3 accounts for new renewable generation and estimates total penetration of domestic renewable capacity at 28% by 2030.

State Implementation Plans

In order to provide states flexibility in achieving their respective emissions targets, each state must submit a State Implementation Plan (SIP) to EPA for approval. States have the option to choose between a rate-based or mass-based plan, as well as, the flexibility to adopt the BSER and/or other policy measures, such as Renewable Portfolio Standards (RPSs). A potentially more restrictive Federal Implementation Plan (FIP) will be imposed on states whose plans are unaccepted or that choose not to comply with the rule. The compliance period begins in 2022 and phases in emission reductions over 3 periods before final standards must be met in 2030.  States must submit their “initial” SIPs in September 2016, with final plans due in 2018. EPA is strongly encouraging the use of multi-state emissions trading programs and has introduced a special incentive program for early action on renewables, the Clean Energy Incentive Program (CEIP). Below is the compliance timeline for the CPP:

CPP


Which Renewables Count Towards Compliance?

The following renewables resources count towards compliance:

  • Included in BSER Building Block 3 are new or incremental generation of wind, utility-scale solar (PV or CSP), geothermal and hydropower (post 2012 facilities)
  • New or incremental off-shore wind, distributed solar, fuel cells, biomass co-firing, waste heat, trash-to-energy and other technologies may be used in SIPs for compliance, subject to meeting eligibility criteria.


Emissions Trading

EPA has developed a Model Trading Rule to encourage states to develop compliance trading programs for either rate-based or mass-based standards. States can also modify existing trading programs and interstate trading is allowed and encouraged by EPA. The design is more complicated than other EPA trading programs since states may set different trading rules and adopt complementary measures (RPSs, etc.). Interstate trading across single-State plans will depend on the structure of individual SIPs; however, multi-state trading may be difficult given that two states trading currencies may not be directly convertible, i.e. rate-based to mass-based trading.

In effect the CPP creates two forms of tradable compliance currency based on the amount of MWh of displaced EGU emissions:

Rate-based States:  Emission Reduction Credits (ERCs) (MWh).

Mass-based States:  CO2 Allowances (tons).

How will renewables industry monetizes the value of CPP Currency will be dependent on several factors within individual SIPs:

  • Eligibility for credits and allocation of allowances
  • Liquidity of trading – Will ERC’s and Allowances provide comparable value to RECs?
  • Location – A single carbon price is unlikely.
  • Interplay of state policy measures, such as RPS, and emissions trading
  • Whether SIPs allow project developers to retain ownership of CPP currency


Clean Energy Incentive Program

In addition to the Model Trading Rule, EPA has created the Clean Energy Incentive Program (CEIP) to provide value for early action directly to eligible renewables developers who commence construction after submission of final SIPs (due on/or before Sept. 6, 2018) and who generate MWh in 2020 and 2021.  Only metered wind and solar projects are eligible.  CEIP also covers new energy efficiency programs located in low-income areas. The incentive currency is a special allocation by a state of emission reduction credits (ERC) or allowances to developers. 

What is an ERC? In a rate-based SIP an ERC is a MWh that an affected EGU may count as its generation in computing its emission rate.  In a mass-based SIP an ERC-equivalent allowance (from a set-aside) can be transferred to an affected EGU to cover its excess emissions. In both cases, ERCs and allowances are fully transferable from projects to affected EGUs. EPA will issue up to 300 million matching ERCs split 50-50 between EE and RE and allocated based on the amount of absolute emission reductions (not percentage) from the 2012 baseline that each State is required to achieve.


Value of the CEIP= $3 – $9 Billion Dollars

In total, EPA will allow 300 million tons of CEIP special allocations per year.  At $10/ ton, this incentive is worth $3 billion, and at $30/ton, the incentive is worth $9 billion, per year.  Renewables and energy efficiency in low-income areas would share these allocations equally. EPA estimates that 19 GW of new renewables can be installed between 2017-2020, for 76 GW eligible for incentives (on a 1 credit for 2 MWh basis), using EPA conversions rates, GW to GWh (at 30% utilization rate) to CO2 saved (at 0.8 short tons of CO2/MWh), 76 GW translates to 50% of the CEIP pool of 300 million allowances. The finalized details of the CEIP will be included in a final rule issued in summer 2016, before initial SIPs are due.  

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