Editor’s note: Some aspects of the analysis in the following article have been updated to reflect newly released EPA guidance. The updated analysis can be found here: U.S. EPA Climate Rule Could Affect Twice as Much Gas-Fired Capacity as Agency Projects
This is the second Insight in a series covering the U.S. EPA’s historic carbon emissions standards for the power sector.
The U.S. EPA’s historic proposal in May to establish strict carbon limits on the power sector is centered largely on mandating deployments of carbon capture with utilization or sequestration (CCUS) on existing fossil fuel-fired power plants. Ultimately, however, the proposed regulations are likely to have minimal impact on CCUS adoption, with the Inflation Reduction Act (IRA)-increased 45Q tax credit and other factors proving more consequential.
The U.S. EPA’s new draft guidelines require coal and natural gas plants to pursue one of several emissions-reduction strategies, including CCUS. Specifically, longer-running coal-fired plants with plans to operate past 2040 will need to install the technology by 2030. New and existing baseload gas-fired power plants need to make the deployments by 2035, unless they opt to take alternative compliance measures.
Despite the proposed rule’s emphasis on CCUS deployments, opportunities for retrofits will be significantly limited by the unfavorable characteristics of the coal fleet and the narrow application of the rules for the gas fleet. The U.S. EPA itself does not project that the proposed rule would increase CCUS deployment at natural gas plants, while deployments at coal plants under the rule are only incremental to a baseline scenario that lacks the standards.
As shown in the chart above, an estimated 176 GW of coal capacity will likely retire in lieu of installing CCUS. This total consists of facilities that plan to shutter either before or during the compliance period and older units at risk of ending operations before fully amortizing the cost of the pollution controls. That leaves just 22 GW of capacity that is younger and in a better position to reap the full benefits of the 45Q tax credit to amortize the costs of the controls. But even among this subset of the coal fleet, many are smaller and have lower capacity factors. These characteristics undermine the economic case for CCUS, as scale and volume are necessary to bring down the cost of CCUS per tonne.
Reflected in previously announced CCUS coal projects, plants selected as candidates for retrofit tend to have higher capacity factors, averaging 58%, and larger sizes, generally at least 500 MW of capacity. If these factors, along with plant age, are used to identify potential future candidates for CCUS, no more than ten coal plants totaling 13 GW of capacity are likely to be considered economic candidates for CCUS.
While emissions reductions would also be required for some natural gas combined cycle (NGCC) plants, the guidelines set thresholds that would exclude most plants. Only NGCC plants with average capacity factors greater than 50% and an average generator size greater than 300 MW would be affected. As shown in the red box below, these parameters exclude all but 22 plants. The proposed EPA rules could promote some incremental applications of CCUS at these 22 plants, as well as future gas plants, but at least 90% of existing NGCC plants will be allowed to continue operating unabated.
With few coal plants positioned to install the technology and few gas plants subject to the compliance requirements, the proposed EPA regulations will drive only marginal growth in adoption of CCUS in the power sector. Instead, the 45Q tax credit, among other incentives, appears to be the main impetus for new investment in the technology. Under the program, CCUS facilities are awarded a tax credit of $85/t CO2 captured and securely stored and can claim this credit for up to 12 years. Up from $50/t pre-IRA, this rise represents a 70% increase in the tax credit’s value.
Thanks in part to the federal incentives, fossil plant capacity under active consideration for CCUS retrofit has reached 20 GW, nearly doubling since 2021. Simultaneously, developers have shifted away from projects at coal plants and are now overwhelmingly favoring gas plants. This suggests a new confidence in the viability of the technology at gas plants, particularly among a handful of developers who have announced projects at multiple plants in their natural gas fleets. As seen in the chart above, the characteristics of announced projects are similar to many other NGCC plants. Many more announcements could come, particularly if these initial projects are successful.
As seen above, the momentum of CCUS project announcements appears to be growing thanks to the IRA, with the proposed regulations from the U.S. EPA providing only a marginal impact. However, the deployment of CCUS still faces abundant risk. With a legal challenge to the regulations looming, the federal incentives provide a much-needed dose of certainty to the nascent industry. Be sure to check back in as BTU Analytics continues this Energy Market Insight series covering the new EPA standards and their effects on power markets going forward.