Proposed EPA Requirements for Existing Power Plants under FCAA 111(d) Erik Hendrickson Air Permits Division Texas Commission on Environmental Quality Advanced Air Permitting Seminar 2014

Disclaimer and Acknowledgements Disclaimer Any opinions expressed during this presentation are the sole opinions of the presenter and not necessarily the TCEQ. Agency comments related to the proposed rule will be available on the TCEQ website after they have been filed with EPA. Acknowledgements Roger Martella of Sidley Austin LLP Terry Salem of TCEQ OLS Mac McFarland of Luminant

Introduction 111(b) and 111(d) CO 2 Standards for EGUs. Four Building Blocks used as BSER & Texas’ Goal Established by EPA. Disparity in State Goals. Problems with Proposed 111(d). Why 111(d) EGU Proposal is Important to non-EGUs.

111(b) Addressing New Sources Section 111(b) applies to new, modified, or reconstructed sources. Requires EPA to issue NSPS for categories of sources that are determined to cause, or contribute significantly to, air pollution which can reasonably be anticipated to endanger public health or welfare. EPA may distinguish among classes, types, and sizes within categories of sources. Performance-based standards based on Best System of Emission Reduction (BSER). Apply to any affected source constructed, reconstructed, or modified after the date of proposal (beginning upon promulgation). Standards effective upon promulgation.

111(d) Addressing Existing Sources Section 111(d) applies to source categories that EPA first regulated if new: Directs EPA to establish a SIP approval procedure similar to NAAQS SIPs; states must submit a plan to EPA to establish standards of performance for any existing source for any air pollutant: (1) for which there is no NAAQS; and (2) is not emitted from a source category regulated under Section 112. If a state does not develop a plan, EPA has the same authority as it does for SIPs to impose a plan on the state. Standards of performance must take into consideration “among other factors, the remaining useful life of the existing source to which such standard applies.” EPA has used 111(d) for municipal solid waste landfills, municipal waste combustors, sulfuric acid plants, primary aluminum reduction plants and the phosphate fertilizer manufacturing plants, manufacturing.

Best System of Emission Reduction (BSER) For New Sources: Reasonableness standard. Costs considered. Requirement for “adequately demonstrated.” Allows EPA/state plans to distinguish among types of sources. For Existing Sources: Regulations allow states/EPA to set less stringent standards or longer compliance schedule for existing sources considering: Cost of control; Useful life of the facilities; Location or process design at a particular facility; Physical impossibility of installing necessary control equipment; or Other factors make less stringent limits or longer compliance schedules appropriate.

111(b) and (d) Standards FCAA, §111(b) – New, Modified/Reconstructed Sources: EPA must review and revise (if appropriate) every 8 years. When revising, EPA must consider emission limitations and percent reductions achieved in practice beyond what was required under standard. EPA may distinguish among classes, types and sizes within categories. Does not provide authority for EPA to require installation or operation of any particular system of continuous emission reduction. States must develop procedure to implement and enforce. FCAA, §111(d) – Existing Sources: Requires EPA to develop process similar to §110 SIPs. Requires states to submit state plans to establish the standard of performance and implementation and enforcement of the standard. States must be allowed, when applying a standard, to consider among other factors, the remaining useful life of the existing source.

111(b) and (d) EGU CO 2 Rule Timelines 111(b) – New, Modified/Reconstructed Sources: New Source Standard: Originally proposed April 13, 2012; withdrawn. January 8, 2014: New proposal published 79 Fed. Reg Comment closed. Final rule anticipated. Modified/Reconstructed Sources: June 18, 2014: Proposal. published 79 Fed. Reg October 16, 2014: Comment Closes. June, 2015: Final Rule anticipated. 111(d) – Existing Sources: June 18, 2014: Proposal published 79 Fed. Reg December 1, 2014: Comment Closes June, 2015: Final rule anticipated June 30, 2016: State plans due unless extension granted: June 30, 2017: single-state plans. June 30, 2018: multi-state plans.

111(d) Proposed Carbon Pollution Emission Guideline for Existing EGUs State Plans: May demonstrate compliance with state goal either individually or with a multi-state approach. May adopt rate-based standard or mass-based standard. May demonstrate compliance through site-specific emission standards or portfolio approach (statewide caps or lb/MWh levels). May incorporate renewable energy and energy efficiency into plans. Compliance with Interim and Final Goals: Applies to all sources that commenced construction prior to January 8, Proposed state-specific performance goals for CO 2 emissions from power sector that each state must develop a plan to meet. EPA also proposed plan content requirements, including recordkeeping and reporting obligations. Demonstrated on an average basis. Interim Goal for Texas: 853 lbs CO 2 /MWh based on ten year avg for proposed goals; five year avg for alternate goal: 957 lbs CO 2 /MWh. Final Goal for Texas: 791 lbs CO 2 /MWh based on rolling three-year avg; alternate goal: 924 lbs CO 2 /MWh.

111(d) BSER Blocks Used to Calculate Proposed CO 2 Guidelines for Existing EGUs State specific goals were determined through EPA’s evaluation of emission reductions that were achievable from 4 categories: Block 1-Heat Rate Improvement 6% or 4%. Block 2-Electricity generation redispatch from coal to existing natural gas combined cycle (NGCC) 70% or 65% capacity factor ceiling. Block 3-Renewable Energy & Nuclear Energy improvements: Texas final target is 20% of generation by 2029; or 86 million MWh; or 15% by 2029 or 65 million MWh. Goals adjusted for nuclear units under construction and for units at risk of retirement using 5.8% of state’s nuclear capacity. Estimated at-risk for TX is 290 MW; but smallest nuclear unit is 1200 MW. Block 4-Increased Demand-Side Energy Efficiency (set increase rate/year up to max target rate): Texas – incremental rate of 0.20% per year, 1.5% target rate; final cumulative savings target is 9.9% of retail sales by Alternatively, incremental rate of 0.15% per year, 1.0% target rate, final cumulative savings target 4.4% of retail sales by 2024.

Emissions Rate Formula (NGCC gen. x NGCC em. Rate) + (coal gen. x coal em. rate) + (OG gen. x OG em. Rate) + “other” emissions NGCC gen. + Coal gen. + OG gen. + “other” gen. + Nuclear gen. + Renewable gen. + Energy efficiency gen.

Texas Electricity Generation: 2012 Coal generation: MMWh Emissions rate: 2,239 lbs CO 2 /MWh NGCC generation: MMWh Emissions rate: 837 lbs CO 2 /MWh OG steam generation: 20.9 MMWh Emissions rate: 1,377 lbs CO 2 /MWh 2012 fossil fuel emissions rate: 1,420 lbs CO 2 /MWh

Texas Emissions Rate: Block 1 6% reduction in coal emissions rate 2,239 lbs CO 2 /MWh x 0.94 = 2,104 lbs CO 2 /MWh Emissions Rate: 1,420 lbs CO 2 /MWh  1,366 lbs CO 2 /MWh

Texas Emissions Rate: Block NGCC Capacity Factor: 45% Adjustment to 70% Capacity Factor: NGCC generation: MMWh  MMWh Coal generation: MMWh  66.7 MMWh OG steam generation: 20.9 MMWh  10.1 MMWh Adjustment for NGCC under construction: 0 MW Emissions Rate: 1,366 lbs CO 2 /MWh  1,083 lbs CO 2 /MWh

Texas Emissions Rate: Block 3a Nuclear Capacity: New capacity: 0 MW At risk capacity: 290 MW Projected generation at 90% capacity: 2.29 MMWh

Texas Emissions Rate: Block 3b Renewable Capacity: 2012 generation: 34.0 MMWh Texas RPS: 5,880 MW (2015); 10,000 MW (2020) Average regional RPS: 20% Projected 2030 renewable generation: 86.0 MMWh (20% total generation) Emissions Rate: 1,083 lbs CO 2 /MWh  861 lbs CO 2 /MWh

Texas Emissions Rate: Block 4 Demand side energy efficiency: 2012 adjusted sales: MMWh State generation as percent of sales: 98.12% 2030 energy efficiency potential: 9.91% Emissions rate: 861 lbs CO 2 /MWh  791 lbs CO 2 /MWh Overall emissions rate change: 1,420 lbs CO 2 /MWh  791 lbs CO 2 /MWh

Proposed Standards for Newly Constructed, Modified, and Reconstructed Sources Unit Type Additional Description of Unit Proposed StandardBasis of BSER Coal-Fired Boiler or IGCC 12 operating months 84 operating months (7 years) 1,100 (lb CO 2 /MWh-net) 1,000 – 1,050 (lb CO 2 /MWh-net) Partial Carbon Capture and Sequestration Natural Gas-Fired Combined Cycle Turbines Large (> 850 MMBtu/hr) Small (<850 MMBtu/hr) 1,000 (lb CO 2 /MWh- gross) 1,100 (lb CO 2 /MWh- gross) Combined Cycle Efficiency Unit Type Additional Description of Unit Proposed StandardBasis of BSER Modified Utility Boiler and IGCC Large (> 2,000 MMBtu/hr) Small (<2,000 MMBTu/hr) Alternative #1 Unit specific emission limit based upon unit’s best CO 2 emission rate (from 2002 to date of modification) plus 2 % reduction; Emission limit will be no lower than: 1,900 (lb CO 2 /MWh-net) 2,100 (lb CO 2 /MWh-net) Operating Practices and Equipment Upgrades Modified Utility Boiler and IGCC Same as Above Alternative #2 Same as Above for source modified Prior to becoming subject to 111(d). Sources modified After becoming subject to 111(d) would be required to meet a unit specific emission limit determined by the 111(b) implementing authority from results of an energy improvement audit. Energy Audit and 111(d) Building Blocks Modified or Reconstructed Natural Gas-Fired Turbine Large (> 850 MMBtu/hr) Small (<850 MMBtu/hr) The standard is the same for modified or reconstructed Natural Gas-Fired Turbines. 1,000 (lb CO 2 /MWh-gross) 1,100 (lb CO 2 /MWh-gross) Combined Cycle Efficiency Reconstructed Utility Boilers and IGCC Units Large (> 2,000 MMBtu/hr) Small (<2,000 MMBTu/hr) 1,900 (lb CO 2 /MWh-net) 2,100 (lb CO 2 /MWh-net) Supercritical Steam Cycle Subcritical Steam Cycle

Texas Energy Mix:

Block 3: State Impacts of EPA’s Assumed Increases in Renewable Energy (RE) EPA’s Assumed Changes in RE for Top 10 RE States Million MWh/yr by RE Increase in RE Decrease in RE Texas is assumed to increase from 34 million MWh in 2012 to 86 million MWh in 2030 (+153%); California increases 37%; Iowa and Minnesota decrease

Carbon Emission Reductions, 2020 vs Millions of tons of CO 2 per year (reductions by 2020 relative to 2012 baseline) Texas called upon to provide 18% of total U.S. CO 2 reductions, despite being only 11% of 2012 CO 2 emissions. Majority of annual CO 2 reductions ‘frontloaded’ to 2020 despite 2030 target. Source: From EPA worksheet: “ tsd state goal data computation” reflecting Block 1 and 2 changes to fossil fleet

Carbon Emission Rate Target by State in 2030 Pounds of CO 2 per MWh EPA’s 2030 state targets vary widely; Texas is 20+% more stringent than the proposed average existing unit target and the proposed new unit standard New unit standard = 1,050 1 Average existing unit target = Per EPA’s proposed standards of performance for greenhouse gas emissions from new electric utility generating units (FRL ) Source: From EPA worksheet: “ tsd state goal data computation”

Problems with Proposed 111(d) Rule for Existing EGUs Authority to Regulate Sources under Section 111(d) that Are Subject to Clean Air Act Section 112. Authority to Promulgate Section 111 Rules without “Significant Contribution” Endangerment Determination. Is the Modified and Reconstructed Source 111(b) Rule the necessary predicate for regulation of existing sources? Defining BSER to look “outside the fence” vs. “inside the fence.” Defining BSER to consider renewables, nuclear, and end use energy efficiency. Directing energy policy for states. Defining BSER to include gas and coal collectively. Modified and Reconstructed Source Carve Out from 111(b) Rule –“Once in, Always in.” Authority to differentiate standards by state. Is actual treatment of different states or EPA’s assumptions arbitrary and capricious?

Problems with Proposed 111(d) Rule for Existing EGUs Achievability of Blocks 2, 3 and 4. Some state goals (like Texas) are more stringent than proposed NSPS (1,100 lbs CO 2 /MWh for new coal units and 1,000 lbs CO 2 /MWh for new large NGCC units). Potential impacts to electric reliability and cost of electricity. State Legislative Action Required to Implement. EPA’s approach for setting renewable energy targets for states seems to have little rational basis – South Central Region target is based only on Kansas’ RPS of 20% of generation. Some requirements for state plans are onerous and if upheld, will grant EPA additional authority over energy markets than envisioned by Congress.

Why 111(d) EGU Proposal is Important to non-EGUs Environmental regulations now the chief influencer of energy policy. Effect on price and availability of natural gas. Cost of electricity will increase. Reliability concerns emerging given anticipated coal-fired EGU shutdowns. Could establish a precedent for NSPS for other sectors.

Precedent of Existing EGU CO 2 Standard for Other Sectors Is there an NSPS currently in place for your source category? Is there an NAAQS for CO 2 ? Is the source category regulated under 112? Is there a CO 2 performance standard in existing NSPS? Propose 111(d) standards for the source category. Propose standards based on “Four Blocks” as BSER. Block 1 - Efficiency improvements at site. Block 2 - Switch production to lower emitting or more efficient process. Block 3 - Include Non-emitting production equipment in calculating goals. Block 4 – Decrease emission related to equipment based upon decreased demand for product. States can then propose plans.

Summary Proposed rule has numerous legal and technical issues. Adverse impacts on cost and reliability of electricity and no benefit to environment. Establishes BSER precedent contrary 40 plus years of NSPS. Our recommendation is to withdraw the rule.

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