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U.S. EPA Sets Carbon Emissions Standards for the Power Sector

The U.S. EPA in May unveiled sweeping plans to curb carbon emissions from the nation’s electric power sector through 2040, in a move that promises to fundamentally alter the composition of the nation’s electric generator fleet. The proposal seeks to avoid up to 1 billion metric tons of CO2 through 2042, putting the Biden administration on a path to fulfilling its Paris Agreement pledge to slash greenhouse gases by half at the turn of the decade. This Energy Market Insight is the first in a series that will explore in greater detail the impacts of the new carbon standards to the power sector.

To achieve those deep cuts set forth in the Paris Agreement, the U.S. EPA proposes to set carbon emission limits, anchored in the Clean Air Act, that reflect the installation of what’s called “best system of emissions reductions” at new and existing coal- and gas-fired power plants, principally consisting of carbon capture and storage, co-firing with low-greenhouse gas hydrogen, and co-firing natural gas. The level of stringency of the standards are tailored by a plant’s fuel type, size, capacity factor, and age, to account for project costs and technical feasibility.

Vast deployments of the low-carbon technologies are at the heart of the U.S. EPA’s climate plan. Starting in 2030, existing coal plants that seek to operate up until 2040 will need to co-fire with natural gas, while those that operate beyond that time will need to install carbon capture and storage. Existing, larger gas plants are required to either install carbon capture or co-fire low-greenhouse gas hydrogen by 2032. New gas plants must operate at higher efficiencies, and then either install CCS, or co-fire with hydrogen.

The installation of the carbon control technologies is cost prohibitive for much of the U.S. coal fleet, given the older age and smaller size of many of the facilities, and is expected to lead to at least 45 GW of capacity subject to federally enforceable retirements before 2035, according to the U.S. EPA. Nearly half the coal fleet has been in service for more than 40 years, while ~40% of all coal units are under 250 MW of capacity, agency data shows. By contrast, about 50% of the natural gas capacity has been in service less than 15 years.

Biden’s proposal marks the third straight attempt in as many administrations to successfully implement carbon standards. In crafting the regulations, the administration is forced to walk a fine line as it looks to pack more substantive cuts than former-President Donald Trump’s Affordable Clean Energy rule, which it repeals and replaces, while avoiding the legal risks posed by a conservative-led Supreme Court skeptical of the agency’s authority to enact broad changes to the sector.

Chief among the risks are the technical challenges of scaling up deployments of technologies that currently have few, if any, commercial-scale applications in the power sector and to-date have proven cost prohibitive without major subsidies. In the case of CCS, notable project failures, including Southern Company’s Kemper County facility in Mississippi and NRG’s Petra Nova CCS demonstration project out of Texas, point to the hurdles that lay ahead for developing the technology. The U.S. EPA anticipates that federal support, especially in the form of tax credits in the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, will drive costs lower, helping to accelerate deployments. However, the infrastructure requirements needed to support CCS, hydrogen co-firing, and natural gas co-firing, especially the siting of costly new pipeline networks, presents an additional layer of challenges for complying with the rules.

Biden’s plan also raises grid reliability risks through the accelerated retirement of dispatchable, baseload generating capacity, which is growing in importance to balance the wave of intermittent renewable resources added to the grid. Coal retirements through 2035 are projected to total 126 GW, or 18 GW annually, leaving just 12 GW of capacity fitted with CCS in operation, according to the U.S. EPA. Even without the rules, threats to reliability are growing more acute in regions such as the coal-heavy MISO grid, where reserve margins for meeting peak power demand are projected to disappear by 2030.

The U.S. EPA’s plan also poses additional risks by driving greater reliance on gas-fired power generation, as the ability to site more pipeline capacity for delivering fuel supplies to the new plants is uncertain at best. A ramp up in gas-fired generating capacity without additional pipeline capacity threatens to leave more plants at greater risk of price spikes from supply constraints or fuel shortages. Heavily gas-dependent regions with limited pipeline networks, especially in the Northeast, are already grappling with these risks.

The U.S. EPA’s carbon standards will have deep and long-lasting ramifications for the nation’s power sector for decades to come. Look for our continuing coverage of the administration’s roll out of the regulations in future Energy Market Insights.

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Jonathan is a Senior Research Analyst with BTU Analytics, a FactSet Company, specializing in power markets. Before joining BTU Analytics, Jonathan was an editor and a director of product for Carbon Pulse and reported on energy markets and regulations for Bloomberg LP and S&P Global Market Intelligence. He received his master’s in journalism from the University of Maryland.

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