Grid Study Resurrects Debate Over Utility Air Pollution Permits

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By Abby Smith and Dean Scott

The Energy Department’s electric grid study is reviving debate over possible changes to Clean Air Act permitting requirements, underscoring industry arguments that the regulations limit coal-fired power plants’ ability to improve efficiency.

The grid study commissioned by Energy Secretary Rick Perry, released Aug. 23, makes a number of suggestions to boost baseload power, including changes to wholesale energy markets to better value the reliability and resiliency that supporters argue coal and nuclear provide. But the study also suggested that environmental regulations are a hurdle for utilities that want to modify their coal-fired plants to boost efficiency, identifying the EPA’s New Source Review (NSR) program as an “important concern.”

That program requires manufacturing facilities, power plants, and other industrial facilities to obtain a permit before beginning construction on new facilities, as well as for “major modifications” to existing plants. The grid study suggests uncertainty over those permitting requirements “discourages” utilities from retrofitting plants with carbon capture equipment or investing in efficiency improvements.

“Ironically, the uncertainty surrounding NSR requirements has led to a significant lack of investment in plant and efficiency upgrades, which would otherwise lead to more efficient power generation, benefits to grid management, and reduced environmental impacts,” Energy Department staff wrote in the study.

Any effort to ease Clean Air Act permitting requirements would be strongly opposed by environmental advocates. But the Trump administration wouldn’t be the first to tackle New Source Review requirements over those objections: the Environmental Protection Agency under President George W. Bush tried to overhaul the permitting regulations, but their changes were ultimately set aside by a federal appeals court.

Several companies, such as Missouri-based utility Ameren Corp. and a coalition that includes BP America and Koch Industries, encouraged the Trump administration to alter New Source Review requirements as a part of a strategy to boost domestic manufacturing.

Ameren Missouri, in an email statement provided to Bloomberg BNA, said the Energy Department’s report “correctly highlights problems” with the permitting program.

“Rather than encourage efficiency projects, which reduce emissions including greenhouse gases, past administrations have targeted boiler and turbine projects that improve efficiency, thereby deterring those beneficial projects,” Ameren said. “The EPA should reaffirm how and when a project triggers NSR review and that emission calculations must account for efficiency improvement.”

Legitimate Hurdles to Efficiency?

There are some obvious reasons why the EPA’s interpretation of its permitting authority raises costs for power plants and delays investments that would improve plant efficiency, according to John Graham, who worked as administrator of the Office of Management and Budget’s Office of Information and Regulatory Affairs under Bush.

“You start with the basic economic theory, that NSR raises the anticipated cost of making energy efficiency investments because, one, delays in the approval processes, and two, the possibility of additional expenditures triggered by NSR,” Graham told Bloomberg BNA in a statement.

A 2005 National Research Council report found that using economic incentives to improve emissions control, rather than a “command and control” regulatory approach, “would cut the costs of compliance by about a third without any compromise in emissions controls,” Graham said.

Jeff Holmstead, who served as the EPA’s assistant administrator for air and radiation from 2001 through 2005, said environmental groups that oppose changes to the permitting program are ignoring the real-world experience of power plants that have tried and failed to negotiate the regulatory hurdles.

“There is no doubt that the threat of NSR discourages plants from making energy efficiency improvements,” Holmstead, who now heads Bracewell LLP’s environmental strategies group, told Bloomberg BNA. “If you look at all the NSR enforcement cases brought against coal-fired power plants, it’s in large part because efficiency was being sought” through improvements by utilities, which were deemed a significant plant modification, he said.

Holmstead and Graham were among the authors of a recent paper suggesting changes that they say would address industry concerns with the permitting program while maintaining the environmental benefits.

Climate Rule Rewrite

One of industry’s solutions is to have the EPA revise its new source requirements in conjunction with what many expect to be a scaled back “replacement rule” for the Obama administration’s Clean Power Plan, Holmstead said.

The EPA under Bush tried a similar fix—opting to exclude pollution control projects from new source requirements—but its revision was struck down in a 2006 ruling by the U.S. Court of Appeals for the District of Columbia, New York v. EPA.

Several labor groups, including the United Mine Workers of America and the AFL-CIO, suggested the EPA couple New Source Review changes with a narrow replacement rule for the Obama-era Clean Power Plan, which sought to curb carbon dioxide emissions from existing power plants.

According to a handout from a June 26 meeting with White House officials on Clean Power Plan repeal, labor groups pitched a replacement rule that would require only heat rate improvements from power plants. The groups argued that EPA also must “streamline” permitting requirements, which they indicated would open the door to “substantial efficiency improvements” and carbon emission reductions.

Allison Watkins Mallick, an environmental attorney with Baker Botts LLP in Washington, D.C., told Bloomberg BNA that revamping New Source Review is “certainly something [EPA] could address simultaneously” with revisions to the Clean Power Plan, though she did not speak to specific proposals.

In terms of New Source Review fixes, Mallick pointed to a shift in how EPA determines whether emissions increase. Generally, a source triggers permitting requirements if it undertakes modifications that result in increased air pollution.

Regulatory Changes Needed

Mallick said the way the EPA currently measures an increase in emissions is by focusing on overall emissions.

“One thing they might consider changing as part of NSR reform is instead of looking at increases in overall tonnage,” the agency could instead look at “emissions rates, similar to how it does in” new source performance standards.

This shift wouldn’t require a change to the Clean Air Act, she said. The Bush EPA proposed to make such a change, but didn’t follow through on that.

“That hasn’t been reviewed by the courts,” Mallick said, adding there is “no case law specifically limiting” that change.

But Mallick also noted a challenge to any reform effort would be the EPA’s bandwidth to undertake such a significant rulemaking effort. She cautioned that while the EPA could link Clean Power Plan revisions and New Source Review changes, that could require more time because of split resources.

The EPA will have to weigh “how this fits in with other competing regulatory priorities,” Mallick said.

Carbon Capture Barriers

Holmstead said there may be comparatively less support for the grid study’s portrayal of permitting requirements as a major hurdle for carbon capture and storage projects.

That issue is “all about cost,” he said, noting that current incentives to capture and store haven’t been enough to spur widespread deployment.

New source requirements are “not one of the top reasons for not moving forward” on carbon capture, Holmstead said, although they could be more of an issue if more projects are built. Because capturing carbon eats into the efficiency of a power plant, utilities could opt to produce more power, and thus emit more pollution, to offset the “parasitic” drain on power from carbon capture, he said.

On whether NSR permitting is an obstacle to deploying carbon capture and storage technologies, Graham said a carbon tax would be the most efficient way to support such efforts.

Mallick noted that any installation of carbon capture equipment constitutes a “physical change” that could potentially put the plant “into the land of NSR applicability.”

Nonetheless, “technological barriers are significant, if not more significant,” than the regulatory hurdle New Source Review poses, she said.

Skepticism of Actual Burdens

Environmental advocates who were involved in the legal fight over the Bush administration’s push to revamp the permitting program are skeptical of the grid study’s arguments.

“It seems as though the Department of Energy has skipped that part of history,” Ann Weeks, legal director for the Clean Air Task Force, told Bloomberg BNA.

The grid study cites several sources that pre-date that court decision, including a 2002 EPA report which proposed New Source Review changes and a 2003 report from the American Enterprise Institute, an industry-funded think tank.

None of the grid study’s arguments over New Source Review are new, Weeks said. But, she suggested the Trump administration felt the need to bring them up again in order to advance the president’s pro-coal agenda.

“What it all boils down to is [industry arguing], ‘We don’t want to clean up our dirty coal plants,’” Weeks said. If the Trump administration tries “to do the same kinds of [reforms to New Source Review] with the same lack of basis that the Bush administration did, I would imagine we will meet them in the same place and have the same conversations.”

Weeks said power plant efficiency improvements generally shouldn’t trigger New Source Review requirements and said the “only thing” easing New Source Review requirements would do is “tell the people who live near these facilities and breathe the pollution that they don’t matter.”

In addition, reducing regulatory requirements wouldn’t “guarantee” an improved outlook for coal, Weeks said.

“The main reason coal has fallen in the last number of years is because natural gas prices are so low,” she said. “Blaming [New Source Review] for all those problems is a little silly.”

To contact the reporters on this story: Abby Smith in Washington at asmith@bna.com; Dean Scott in Washington at dscott@bna.com

To contact the editor responsible for this story: Rachael Daigle at rdaigle@bna.com

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