Demand-Side Energy Efficiency in the Final Clean Power Plan


Posted on August 4th, 2015 by Jessica Wentz

epa_logoJessica Wentz
Associate Director and Postdoctoral Fellow

Yesterday, President Obama and the Environmental Protection Agency (EPA) unveiled the final version of the Clean Power Plan—the nation’s first ever federal regulatory standards to address carbon dioxide (CO2) emissions from existing power plants. As noted by the President in a press conference on Monday afternoon, this is “the single most important step that America has ever taken in the fight against climate change.”

The final rule establishes interim and final CO2 emission performance rates for fossil fuel-fired power plants that will reduce CO2 emissions from these plants by 32% under 2005 levels by 2030. Although this final target is more ambitious than the proposed rule (which called for a 30% reduction by 2030), the rule also gives states and utilities additional time to submit plans and start making emissions reductions: initial state plans are due in September 2016, with an option to extend the deadline to 2018, and the compliance period for mandatory emissions reductions begins in 2022. During the compliance period, the performance rates will be gradually phased in to provide for a “glide path” of reductions to 2030.

One significant change in the final rule is that EPA is no longer including demand-side energy efficiency as one of the “building blocks” used to determine the CO2 emissions performance rates for existing power plants. The performance rates are now based on the emissions reductions that can be achieved through the deployment of three supply-side measures: (1) heat rate improvements in existing coal plants, (2) increased reliance on combined cycle gas units, and (3) expanded use of renewables as a substitute for fossil fuel-based generation.

Fortunately, energy efficiency can still be used as a compliance measure, and EPA expects that energy efficiency will play a major role in meeting the state targets because it is a “cost-effective and widely-available carbon reduction tool.” EPA will also provide matching funds for early investments in demand-side energy efficiency measures through the newly introduced Clean Energy Incentive Program.

Energy Efficiency is No Longer Part of the “Best System of Emissions Reduction”

Clean Air Act §111(d) calls for the establishment of performance standards for existing sources that reflect the “best system of emission reduction” (BSER) for a particular pollutant. EPA is responsible for determining the BSER and issuing emission guidelines based on its determination. States must then submit plans demonstrating how they will ensure that sources within their jurisdiction will achieve emissions reductions that correspond with EPA’s guidelines.

In its original proposal, EPA determined that the BSER for coal- and natural gas-fired and power plants should be comprised of four different measures (or “building blocks”) that can be implemented to reduce CO2 emissions from fossil fuel-fired power plants:

  1. Increasing the operational efficiency of coal-fired power plants;
  2. Shifting electric generation from higher emitting fossil fuel-fired steam power plants (generally coal-fired) to lower emitting natural gas-fired power plants;
  3. Shifting electric generation to renewable sources like wind and solar; and
  4. Displacing electric generation through demand-side energy efficiency measures.

But in the final rule, EPA has removed the fourth building block from its BSER determination. The final emission performance standards are now based solely on the first three supply-side measures.

This decision was apparently triggered by concern that the inclusion of energy efficiency in the BSER would make the rule more vulnerable to legal challenges.[1] EPA received numerous comments opposing this aspect of the rule, such as those submitted by the Virginia State Corporation Commission and the Nebraska Department Environmental Quality. These comments argued that EPA could not base §111(d) performance standards on utilities’ ability to reduce consumer demand for electricity because utilities cannot directly control consumer behavior.

EPA also had reason to believe that the Supreme Court may have overturned this aspect of the rule. In Utility Air Regulatory Group v. EPA, a 5-4 decision issued the same month that EPA released the draft rule, Justice Scalia discussed some of the “limitations” on EPA’s ability to define “best available control technologies” (BACT) for the purpose of establishing emissions limitations for new stationary sources under §165 of the Clean Air Act. Justice Scalia stated that BACT standards are “based on ‘control technology’ for the applicants ‘proposed facility’” and thus “BACT cannot be used to order a fundamental redesign of the facility.”[2] In addition, Scalia noted that “EPA has long interpreted BACT as required only for pollutants that the source itself emits… accordingly, EPA acknowledges that BACT may not be used to require ‘reductions in a facility’s demand for energy from the electric grid.’”[3]

While the Court ultimately upheld EPA’s utilization of BACT to address GHG emissions, Scalia’s discussion of §165 raises questions about how the Supreme Court would interpret EPA’s authority to include demand-side efficiency in a §111(d) BSER determination. Moreover, as noted in a recent E&E article, there have been other signs that some of the more conservative Supreme Court justices may not grant Chevron deference to EPA’s interpretation of the Clean Air Act. For example, in upholding the Affordable Care Act in King v. Burwell, Chief Justice Roberts declined to apply Chevron, despite his determination that the statute was ambiguous. The Court also showed very little deference to EPA’s interpretation of the phrase “appropriate and necessary” under §112 of the Clean Air Act in Michigan v. EPA.

Targets are Even More Ambitious due to Revised Estimates of Renewable Energy Potential

Although energy efficiency is no longer one of the BSER building blocks, the emissions guidelines issued by EPA are actually more stringent (in aggregate) than the previously proposed standards. This is because EPA increased its estimate of how much generation can be shifted to renewable energy sources, taking into account recent reductions in the cost of clean energy technology as well as recent projections of continuing cost reductions. Whereas EPA previously estimated that renewable energy could displace approximately 524 million MWh from fossil fuel-fired generation in 2029, EPA is now estimating that renewable energy could displace approximately 706 million MWh in 2030.[4]

Energy Efficiency Still Plays a Key Role as a Compliance Measure

States and regulated power plants will still be able to use energy efficiency as a compliance measure under the final rule. As noted by the White House Blog:

EPA did remove energy efficiency from the process of establishing state targets, instead focusing on electricity supply measures. But the Clean Power Plan will still drive significant investment in energy efficiency because energy efficiency is cost-effective, widely available and remains eligible as a compliance tool for inclusion in state plans. Indeed, energy efficiency is expected to play a major role in meeting the state targets as a cost-effective and widely-available carbon reduction tool, saving enough energy to power 30 million homes and putting money back in ratepayers’ pockets.

EPA has also announced that it will provide matching funds for early investments in demand-side energy efficiency measures through the Clean Energy Incentive Program.

In the regulatory impact analysis for the final rule, EPA predicts that demand-side energy efficiency measures could result in a net cumulative demand reduction of 327,092 GWh by 2030 (which corresponds with a 7.83% reduction over business-as-usual demand), at a cost of 8.1 cents per kWh.[5] The EPA thus concludes that demand-side energy efficiency is a “highly cost-effective means for reducing CO2 from the power sector.”[6]

Other stakeholders are even more optimistic about the role of energy efficiency as a compliance mechanism. According to a 2014 study from the American Council for an Energy Efficient Economy (ACEEE), energy efficiency is America’s cheapest energy resource—it is two to three times cheaper than traditional power sources (such as fossil fuels), costing an average of 2.8 cents per kWh. ACEEE also published a report in June 2015 finding that, under the proposed Clean Power Plan, more than 50% of the required emissions reductions could be achieved through energy efficiency measures.

 

Helpful links:

ACEEE 111(d) Portal – provides templates for including building energy codes, energy efficiency financing programs, and combined heat and power in state compliance plans, as well as additional tools and resources for incorporating energy efficiency into Clean Power Plan compliance strategies.

Clean Power Plan Toolbox – provides decision-support resources to help states develop their plans, including a summary of existing demand-side energy efficiency policies and programs, instructions on how such programs can be included for credit in a state plan, and tools for measuring the energy savings and emissions reductions from energy efficiency programs.

Climate Nexus Clean Power Plan Resource Guide – provides links to legal and economic analysis of the Clean Power Plan, as well as resources to help states meet their emissions reduction targets.

Energy Efficiency Program Impact Evaluation Guide – describes the common terminology, structures, and approaches used for determining (evaluating) energy and demand savings as well as avoided emissions and other non-energy benefits resulting from facility energy efficiency programs.

 


 

[1] In the preamble to the final rule, EPA noted that: “Traditional interpretation and implementation of CAA section 111 has allowed regulated entities to produce as much of a particular good as they desire, provided that they do so through an appropriately clean (or low-emitting) process. While building blocks 1, 2, and 3 fall squarely within this paradigm, the proposed building block 4 does not… the final guidelines provide ample latitude for states and utilities to rely on demand-side EE in meeting emission reduction requirements.” Clean Power Plan Final Rule 63 (2015).

[2] Util. Air Regulatory Grp. v. E.P.A., 134 S. Ct. 2427, 2448 (2014) (citing § 7475(a)(4); Sierra Club v. EPA, 499 F.3d 653, 654–655 (C.A.7 2007); In re Pennsauken Cty., N. J., Resource Recovery Facility, 2 E.A.D. 667, 673 (EAB 1988)).

[3] Id. at 2448 (citing 44 Fed. Reg. 51947 (1979); EPA, PSD and Title V Permitting Guidance for Greenhouse Gases 24 (2011)).

[4] Clean Power Plan Final Rule 758 (2015).

[5] Regulatory Impact Analysis for the Clean Power Plan Final Rule 3-14 – 3-15 (2015).

[6] Id. at ES-4.

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