ScottMadden Managing Environmental Regulations in Uncertain Times · Uncertain Times New EPA Rules are Fundamentally Changing the Game for CoaCoa Ge e at ol Generation February 2011

Managing Environmental Regulations in Uncertain Times

New EPA Rules are Fundamentally Changing the Game for Coal GenerationCoa Ge e at o

February 2011February 2011

Contact: [email protected]@ tt [email protected]

Copyright © 2011 by ScottMadden. All rights reserved.

IntroductionIntroductionBusiness is highly uncertain about the future in a way which I have never seen it before and a way in which the data suggestshas never, in fact, been so depressed...Unless or until we are able to lift the pall of regulatory uncertainty, it is very difficult to see people reaching out into the longer term. (Alan Greenspan, Meet the Press, 11/14/2010)

Though some rules are still taking shape, the EPA goal is to drive more stringent operating requirements and impose greater stringency on environmental regulations

— Environmental constraints are increasing and accelerating— Generation owning utilities will face new and unprecedented challenges in attaining (and maintaining) compliance— The window is very short for considering alternatives, making decisions, and implementing changes; waiting until all the

uncertainty clears is not wise

As expected in a climate with significant uncertainty, there is a wide variety of macroeconomic projections regarding the outcomes of the EPA program implementation

Economic forecasting models are used to examine alternative scenarios, including mothballing, sale, permanent retirement, repowering with different fuels, and continued operations of the units in various combinations

Regardless of varying opinions about projections and timelines for specific rules, there is an emerging consensus of inevitability— The facts are facts; the regulatory environment for coal-fired generation is shifting dramatically— There will be winners and losers in the aftermath of the EPA program implementation— The existing company portfolio of assets will certainly influence the company financial position after the EPA program is

implemented, BUT strategic decisions that companies make will govern the company’s financial position given the constraints imposed by EPA program implementation

Copyright © 2011 by ScottMadden. All rights reserved. 1

The Situation: Environmental Regulatory Timeline for Coal UnitsThe Situation: Environmental Regulatory Timeline for Coal Units

OzoneBeginning SO2 Primary

SO2/NO2 CAIR WaterBeginning CAIR Phase I Seasonal NOx Cap

Revised Ozone NAAQS Next Ozone

NAAQS Revision

SO2 Primary NAAQS

SO2/NO2Secondary

NAAQS

Proposed CAIR Replacement

Rule ExpectedCAIR Vacated

Effluent GuidelinesFinal Rule Expected Effluent Guidelines

Compliance 3-5 yrs After Final RuleFinal CAIR

Replacement Rule Expected

Reconsidered Ozone NAAQS

NAAQS

NO2 Primary NAAQS

Vacated

CAIR Remanded

316(b) Final RuleExpected

316(b) Compliance3-4 yrs After Final RuleEffluent Guidelines

Proposed RuleExpected

Rule Expected

CO2Regulation

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Begin CAIR Beginning CAIR Next PM-

PM-2.5SIPs Due Begin

PM-2.5 SIPs due

HAPs MACT Proposed

Beginning CAIR Phase II Seasonal NOx Cap

CAIR Phase I Annual

SO2 Cap

g gPhase II Annual

SO2 & NOx Caps2.5

NAAQS Revision

New PM-2.5 NAAQS Designations

CAMR & Delisting Rule Vacated

SIPs Due (‘06)

HAPS MACT Final Rule Expected

HAPS MACT Compliance 3 yrs After Final Rule

Begin CAIR

Phase I Annual

NOx Cap

SIPs due (‘97)

Begin Compliance Requirements

Under Final CCB R l ( d t

Proposed R le for CCBs

Final Rule for CCBs Mgmt

Compliance With CAIR

R l t

PM2.5

pRule

Hg/HAPS

Final EPA Nonattainment Designations316(b) Proposed

Rule Expected

Rule (ground water monitoring, double monitors, closure,

dry ash conversion)

Ash

Rule for CCBs Management

Replacement Rule

CO2


-- adapted from Wegman (EPA 2003)

Sources: Edison Electric Institute

Note: Before December 2010 deferrals and recent court rulings

Environmental Trends and PoliciesEnvironmental Trends and Policies

Environmental constraints on coal-fired power plants have been tightening and will continue to tighten

New regulations on SO2 NOx and mercury emissions water usage and coal combustion products will require utilities to makeNew regulations on SO2, NOx, and mercury emissions, water usage, and coal combustion products will require utilities to make decisions on significant additional capital investment vs. retirement or repowering (to gas or biomass) of existing coal units

The EPA’s new Transport Rule will likely require most, if not all, sources to have flue gas desulfurization equipment by 2014

Uncertainty about climate legislation—timing, severity of restriction, impacted sources, pace of reduction—together with the EPA’s endangerment finding and related rulemaking is causing some utilities to scrap and regulators to reject proposed newEPA s endangerment finding and related rulemaking, is causing some utilities to scrap and regulators to reject proposed new coal-fired capacity or deny needed permits

Proposed new coal plants continue to see their construction start dates pushed back or perhaps even cancelled as a result of these challenges

All of these headwinds will likely continue or intensifyAll of these headwinds will likely continue or intensify


Regulatory Cost Impacts − Roughly Equivalent to the Cost of a New CCGT or Two Used CCGTs of a New CCGT or Two Used CCGTs

Many Moving Parts:Many Moving Parts:New Rules Under DevelopmentNew Rules Under Development

Cl Ai Uncertain CAIR replacement rule timeline $1 000

Illustrative Incremental Environmental Costsfor a 500 MW Coal Plant ($/kW)

Clean Air Interstate Rule (CAIR)

Uncertain CAIR replacement rule timelinePhase II SO2 and NOx by 2015

SO2/NO2

One-hour primary National Ambient Air Quality Standards (NAAQS) of 75 parts per billion (PPB) in June 2010 reduced

100 $785$750

$1,000At $785/kW, an additional $12 per MWh is

required to recover investment over 20 years* (compare PJM 2009 average: $55.30/MWh)

CO2?NSR?Hg?Particulates?

per billion (PPB) in June 2010, reduced from 140 PPB

Mercury

Mercury and hazardous air pollutants (HAPs) clampdownMaximum available control technology (MACT) required

$200

$185

$500

(MACT) requiredInformation collection on air toxins

Particulate Matter

Fine PM (≤2.5 microns diameter) NAAQS

Ozone Eight-hour ozone NAAQS

$300$250

AshCoal combustion by-product (dry ash) (CCB) containment, disposal, and lining requirements

Water§316(b) Phase II (power plant cooling water intake rule delayed – fine

$0Flue Gas

DesulfurizatonSelected Catalytic

Reduction

Cooling Tower Retofit

CCB Impoundment

Total

Regulatory Requirement

Retrofit

Water (Clean Water Act)

water intake rule delayed fine screens/cooling towers)Possible closed-loop cooling system requirements

CO

Kerry-Lieberman proposed, but its future uncertain

CAIR SO2/NO2 Mercury Particulates Ozone Ash Water CO2


CO2 EPA endangerment finding triggering rulemaking

Other

Note: *Capital cost only; excludes incremental O&M. Assumes monthly amortization; 55%-45% debt-equity ratio; 12% required ROE, 7% cost of debt (9.25% WACC); 80% capacity factor; estimated $50 million per facility for impoundment enclosuresSources: EEI Environment Executive Advisory Committee; U.S. EPA; PJM

Potential Retirements and Capacity ImpactsPotential Retirements and Capacity ImpactsCoal Retirements

EPA’s new proposed Transport Rule—successor p p pto the Bush Administration’s proposed CAIR—will require generators to ratchet down SO2 and NOx emissions by 2014

Generators will have to make significant retrofit vs. retire decisions, but most expect that many

Timing

2030

2020

2015

2015 retire decisions, but most expect that many smaller units with higher heat rates will be retired

Some estimate that up to 15% of U.S. coal generation is at risk

Other regulations—mercury, water, coal

2015

2015

Not indicated

2020

* PJM only g y, ,combustion products—also loom over existing and new coal-fired generation

New Build

Historically, actual coal capacity coming on line

y**Estimate based upon RFC, MRO, SERC, and WECC regions

y, p y ghas been significantly less than proposed

Further, many jurisdictions have stymied construction of new coal capacity

Uncertainty about climate legislation—timing, y g gseverity of restriction, impacted sources, pace of reduction—together with the EPA’s endangerment finding and related rulemaking, is causing some utilities to scrap, and regulators to reject, proposed new coal-fired capacity or deny needed permits


Sources: NETL; SNL Financial; EEI; investment analysts; PJM; Clean Energy Group; ScottMadden analysis

Some Recent Coal Plant Retirement AnnouncementsSome Recent Coal Plant Retirement Announcements

AmerenReliant Resources• New Castle• Niles• Titus

FirstEnergy• Lake Shore• R.E. Burger

Ameren• About 2,500 MWs between 2022 and 2038

Allegheny Energy• R. Paul Smith

Exelon• Cromby 1‐2• Eddystone 1‐2

NRG• Indian River

Constellation• C.P. Crane• Wagner 2‐3

Mirant• Potomac River

Progress Energy• 1 500 MWs• 1,500 MWs(1/3 of coal fleet)


Sources: Industry news; ScottMadden analysis

EPA Transport Rule Impacts on Coal-Fired GenerationEPA Transport Rule Impacts on Coal Fired GenerationOn July 6, EPA issued a proposed Transport Rule, intended to replace the Bush Administration CAIR which was struck down by the U.S. Court of Appeals in D.C.

States Covered Under the RecentlyProposed EPA Transport Rule

Under the Transport Rule, additional reductions in SO2 and NOx are required in two phases

Less stringent than CAIR in first phase (2012); more stringent than CAIR in second phase

2.5 million ton cap by 2014 (vs. 2.6 million ton cap by 2015 under CAIR)

Phase 2 reductions of 71% in SO2, 52% of NOx over 2005 levels (vs. 57% of SO2 and 61% of NOx over 2003 levels)

The Transport Rule also looks at upwind sources

Some initial analyst comments:

“May give the Administration more near-term leverage over utilities’ fuel choices”utilities fuel choices

“It will be necessary (i) to cease generation at all unscrubbed coal-fired power plants that produce…15% of U.S. coal-fired generation, and (ii) to install SO2 scrubbers that today generate…a further 6%”

Estimated Capital Cost (% of Rate Base) for Selected Estimated Capital Cost (% of Rate Base) for Selected Utilities Where Utilities Where ““Makes SenseMakes Sense”” (source: Sanford C. (source: Sanford C.

Bernstein)Bernstein)“More than three-quarters [of generating units without scrubbers affected by the rule] are of less than 200 MW of capacity…Some 41% are smaller than 50 MWs, the point at which installing SO2 scrubbers becomes comparable to the cost of building a new [gas] combined cycle…”

Bernstein)Bernstein)

AEP $2.17B (8%)

Empire Dist. Electric $154M (12%)

Great Plains Energy $465M (8%)


CMS Energy $351M (4%)Sources: U.S. Environmental Protection Agency; SNL Financial; industry news

EPA Implementation ScenariosEPA Implementation Scenarios

Re-RegulatedAs-Regulated

Scenario 1 “The Train Wreck ”: • Regulatory requirement timeline outstrips ability of many

companies to adequately respond • Coal generation capacity is significantly reduced and

combined-cycle gas generation rushes to replace retired baseload capacity

Scenario 1 “The Moderation ”: • The EPA agenda is curtailed by congressional actions• Existing regulatory mandates are moderated • Retirement of coal plants is much lower than under the

“ Train Wreck ” scenario

Scenario 2 “Bump and Grind ”:

• Alternative energy is deployed to replace retired coal generation

• Energy costs rapidly rise placing pressure on utilities to manage delivered cost to customers

• Many companies are not convinced that the regulatory moderation is permanent and investment is cautious and low

p• There is a proliferation of lawsuits from a variety of

stakeholders• There are many starts and stops to specific facets of the

EPA program, creating a “ wait and see – roll with the flow” environment for utilities

• Utility costs increase due to premature or improper expenditures

Implementation of EPA

Agenda:As-Regulated

Trajectory

Scenario 2 “The Stalemate ”:• Some EPA regulations are moderated, but others

proceed as planned, creating an uneven and uncoordinated advancement of regulations

• Decisions regarding coal plant disposition are not clear and many plants are in “ limbo” and waiting for

Implementation of EPA

Agenda:Re-Regulated

Trajectory expenditures• Capital investments slow down in many utilities as “ wait

and see” attitudes dominate

Scenario 3 “Regret and Correction ”:• Regulatory requirement timeline outstrips ability of many

j y y p gresolution of planned regulation

Scenario 3 “The Confusion ”:• Disappointed by the lack of a federal standard

j y

Regulatory requirement timeline outstrips ability of many companies to adequately respond

• Energy costs rise rapidly coupled with a reconsideration of the validity of “ global warming ” causing a public groundswell against the EPA agenda

• EPA regulations are moderated or rolled back to previous standards

• Disappointed by the lack of a federal standard, environmental groups push hard in states for tough regulations

• Regulations could be more severe in some states than contemplated EPA rules due to pressure from grassroots

• The regulatory patchwork creates winner and loser states


Key Insights in Strategy DevelopmentKey Insights in Strategy DevelopmentThe EPA agenda and the ultimate outcome is not just a generation issue

Markets, as well as wholesale and retail prices of electricity will all be affected

Renewables and alternative energy sources will be affected

Utility strategies will be affected

Distributed generation, smart grid, and behind the grid options will likely be simulated


Options and Approaches to New RegulationsOptions and Approaches to New RegulationsThere are a variety of different approaches a utility can take – each with potential advantages and risks

Least Proactive Selective and Incremental Early and Aggressive

Do Nothing (“Wait and See”) Be Selectively Proactive Move Early and Aggressively

Potential Risks

( )

Labor and material prices for AQCS projects may escalate dramatically if everyone waits for rules to be finalized before taking action

By choosing smaller, incremental options, the risk is that too little action is taken to dd th it d f

Specific decisions based on projected rule making may not result in optimal asset

fi ti h l(-) gIncreasingly harsh penalties could be incurred for non-compliance

address the magnitude of changes in the pipeline

configuration when rules are finalized

By partnering and working closely with regulators utilities

Potential Advantages

(+)

Unneeded projects might be avoided if final rules don’t meet others’ projections and expectations

By focusing on compliance measures in areas of greatest certainty about outcomes, risk of stranded costs is minimized

closely with regulators, utilities can effectively “negotiate for certainty” by making early concessionsLeverages the unique opportunity of the moment to ydifferentiate

An “eyes wide open” approach is needed to avoid taking unnecessary (or unknown) risks with serious consequences. Industry CEOs are already making public statements about insufficient lead times to


q y y g pmeet EPA requirements

Making the Business Case – An Iterative and Ongoing ProcessMaking the Business Case An Iterative and Ongoing Process

Making decisions in the face of significant ambiguity requires diligence and a disciplined process

Highlight areas of regulatory certainty vs. those areas with the least degree of certainty

Run economic forecasting models to examine alternative scenarios, including mothballing, sale, permanent retirement, repowering with different fuels and continued operations of the

‐15 20

NPV

Illustrative Scenario Analysis

Ozonerepowering with different fuels and continued operations of the units in various combinations

Quantify the band of potential business outcomes in light of potential regulations

Stay close to the regulatory process and incorporate new‐10

‐12

‐3

2

0

3SO2/NO2

CAIR

WaterStay close to the regulatory process, and incorporate new information as it becomes available

‐2

‐5

‐1

10

5

7PM 2.5

Ash/CCRs

Hg/HAPS

GHG ‐25 25

‐30 ‐20 ‐10 0 10 20 30

Negative Positive

GHG

More uncertainty

More certainty


How to Prepare For New RegulationsHow to Prepare For New RegulationsManaging the emergent environmental rules will require following a structured approach to strategy development – the abridged ScottMadden methodology is outlined below

Assess Current Assess Current StateState

Prepare Gap Prepare Gap AnalysisAnalysis

Determine Determine Operational, Operational,

O&M, and O&M, and R t I tR t I t

Examine Examine Portfolio Portfolio Options Options

Develop Develop Strategy and Strategy and

Execution Execution T iT i

Identify all facilities impacted by EPA rulings

Rate ImpactsRate Impacts pp TriggersTriggers

Develop compliance gap analysis for each facility

Estimate the operational impacts of installing required compliance technology

Develop an estimate on long-range asset value

Perform a portfolio

Break down strategic asset decisions

Develop implementation plansEstablish pertinent plant operating parameters

Develop existing plant emissions baselines

Prepare variations of compliance implementation and determine appropriate phasing

technology

Estimate the impact to plant O&M

Estimate impact on costs/customer rates

analysis

Analyze regulatory scenarios

Develop contingency plans

For More Information on ScottMadden’s Detailed Methodology, please contact us:

Contact: [email protected]@scottmadden.com


ScottMadden Understands Environmental Regulations…….. ScottMadden Understands Environmental Regulations…….. We know the pending environmental rules and can help you manage them

SO2 d NO2SO2 and NO2The Clean Air Act gives EPA authority to set NAASQ for pollutants considered harmful to public health and the environment. The Clean Air Act established two types of national air quality standards. Primary standards set limits to protect public health, including the health of "sensitive" populations such as asthmatics, children, and the elderly. Secondary standards set limits to protect public welfare, including protection against decreased visibility, damage to animals, crops, vegetation, and buildings.

Primary Standards Secondary StandardsPollutant Level Averaging Times Level Averaging Times

Carbon Monoxide9 ppm (10/mgm3) 8-hour

None35 ppm (40 mg/m3) 1-hour

Lead0.15 μg/m3 Rolling 3-Month Average Same as Primary

1.5 μg/m3 Quarterly Average Same as Primary

Nit Di id53 ppb Annual (Arithmetic

Average)Same as Primary

Clean Air Interstate Rule (CAIR)2005-2010 – EPA proposed CAIR on May 12, 2005 and Federal Implementation Plans on April 26, 2006

2010 – U.S. Court of Appeals for the District of Columbia Circuit remanded CAIR to the EPA. On April 26, 2010, in keeping with the Court’s judgment, the new and stricter Transport Rule regulations are proposed to the Office of Budget and Management for regulatory review. These new guidelines were signed by EPA Administrator Lisa Jackson on July 6, 2010

— Though the Court temporarily upheld the requirements outlined in CAIR, the ruling required the EPA to address

Clean Air Interstate Rule (CAIR)2005-2010 – EPA proposed CAIR on May 12, 2005 and Federal Implementation Plans on April 26, 2006

2010 – U.S. Court of Appeals for the District of Columbia Circuit remanded CAIR to the EPA. On April 26, 2010, in keeping with the Court’s judgment, the new and stricter Transport Rule regulations are proposed to the Office of Budget and Management for regulatory review. These new guidelines were signed by EPA Administrator Lisa Jackson on July 6, 2010

Th h th C t t il h ld th i t tli d i CAIR th li i d th EPA t ddWater


Source: EPA

Nitrogen Dioxide Average)

100 ppb 1-hour None

Particulate Matter (PM10) 150 μg/m3 24-hour Same as Primary

Particulate Matter (PM2.5)15.0 μg/m3 Annual (Arithmetic Average) Same as Primary

35 μg/m3 24-hour Same as Primary

Ozone

0.075 ppm (2008 std) 8-hour Same as Primary

0.08 ppm (1997 std) 8-hour Same as Primary

0.12 ppm 1-hour Same as Primary

Sulfur Dioxide

0.03 ppm Annual (Arithmetic Average)0.5 ppm 3-hour

0.14 ppm 24-hour

75 ppb 1-hour None

Though the Court temporarily upheld the requirements outlined in CAIR, the ruling required the EPA to address Clean Air Act requirements concerning the transport of air pollution across state boundaries. Under the regulations set forth in the Transport Rule, additional reductions are necessary to attain existing ozone standards and upcoming 2010 ozone standards

2011 – The period for public comment on this new set of regulations ended on November 26, 2010. Emissions reductions will begin to take effect very quickly thereafter

— The EPA plans to address existing standards (including those standards changed in the meantime) with the proposed transport rule in the spring/summer of 2011

2014 – Stricter rules taking effect in 2014 and are expected to curb SO2 and NO2 in 31 states and Washington, D.C— At an estimated annual cost of $2.8 billion, the new guidelines in combination with other EPA actions, will cut

SO2 emissions by 71% over 2005 levels and NO2 emissions by 52%— Part of the new emission regulations require that the EPA now evaluate national ambient air quality standards

every time these standards are changed in order to determine whether new emission reductions will be required from upwind states

Key Elements of the Transport Rule: — States that “significantly contribute”— Use of limited trading

— Though the Court temporarily upheld the requirements outlined in CAIR, the ruling required the EPA to address Clean Air Act requirements concerning the transport of air pollution across state boundaries. Under the regulations set forth in the Transport Rule, additional reductions are necessary to attain existing ozone standards and upcoming 2010 ozone standards

2011 – The period for public comment on this new set of regulations ended on November 26, 2010. Emissions reductions will begin to take effect very quickly thereafter

— The EPA plans to address existing standards (including those standards changed in the meantime) with the proposed transport rule in the spring/summer of 2011

2014 – Stricter rules taking effect in 2014 and are expected to curb SO2 and NO2 in 31 states and Washington, D.C— At an estimated annual cost of $2.8 billion, the new guidelines in combination with other EPA actions, will cut

SO2 emissions by 71% over 2005 levels and NO2 emissions by 52%— Part of the new emission regulations require that the EPA now evaluate national ambient air quality standards

every time these standards are changed in order to determine whether new emission reductions will be required from upwind states

Key Elements of the Transport Rule: — States that “significantly contribute”

U f li it d t di

WaterHistory of Regulation

In 2001, the U.S. Environmental Protection Agency (EPA) implemented Section 316(b) of the Clean Water Act— Requires that the location, design, construction, and capacity of cooling water intake structures reflect the

best technology available for minimizing adverse environmental impact— According to the EPA, once-through cooling systems can negatively impact marine life, causing direct kills of

fish and eggs by entrainment and the destruction of aquatic ecosystems, as a result of the elevated water temperatures near plant discharge

Until the new rule (addressing the remanded portions of Phase II) is issued, permit directors continue to issue permits on a case-by-case, Best Professional Judgment basis for Phase II facilities. Public input has been provided and a final ruling is expected 7/2012

Particulate matter (PM) components, defined as particles found in air, has been classified as an air emission by the EPA

— PM is generated when the drift droplets evaporate and leave behind crystallized dissolved solids— PM10 (particles that are 10 micrometers or less) have been determined by the EPA to pose significant health

Hg/Hazardous Air Pollutants (HAPS)2008 – CAMR and Delisting Rule Vacated

— On February 8, 2008, the D.C. Circuit vacated EPA's rule removing power plants from the Clean Air Act list of sources of hazardous air pollutants. At the same time, the Court vacated the Clean Air Mercury Rule

2011 – HAPS MACT Proposed Rule— Proposed rule is intended to set emission standards on any fossil-fuel combustion unit of more than 25

megawatts that serves a generator that produces electricity for saleGreen House Gases (GHGs)


Use of limited trading— Local reductions— Timing

Source: http://www.epa.gov/airtransport/pdfs/WebinarTransportRuleMaterials.pdf


— Use of limited trading— Local reductions— Timing

Source: http://www.epa.gov/airtransport/pdfs/WebinarTransportRuleMaterials.pdf


PM10 (particles that are 10 micrometers or less) have been determined by the EPA to pose significant health risks to humans due to their small size and ability to reach the lower respiratory tract

— Permit requirements in regard to PM10 and other emissions are getting stricter, requiring that lower and lower drift values be achieved from a cooling tower

Existing Technologies

Once-through (open loop) cooling -- cooling water from a large water source (such as an ocean, river, or lake) is “used” to remove heat from the condenser, and then that warmer water is discharged directly back to the source. The cooling takes place naturally in the source

Evaporative (closed loop) cooling – water is “consumed” (via evaporation losses) in the process of cooling condenser water

— Recirculating or closed loop systems, such as wet cooling towers, are likely to become more prevalent should the requirements of Section 316(b) be fully implemented

— In a closed loop configuration, the cooling water used to reject the steam heat is sent from the condenser to the cooling towers, which cool the water primarily through evaporation

Source: Appraising Our Future Cooling Water Options (6/1/2010)

megawatts that serves a generator that produces electricity for sale— No later than March 16, 2011, EPA shall sign for publication a notice of proposed rulemaking and no later than

November 16, 2011, EPA shall sign a notice of final rulemaking setting forth emission standards for coal and oil fired EGUs

2012 – HAPS MACT final rule expected— Because these issues may substantially affect the final rule, EPA is requesting to “repropose” the rules so that

the final rules are logical outgrowths of the proposals— If the Court grants the request, the deadline for the revised proposals will be June 1, 2011 and the deadline for

promulgation of final emissions standards will be April 13, 2012

2014-2016 – HAPS MACT Compliance 3 years after final rule

Green House Gases (GHGs)EPA final rule issued 5/13/2010 – Prevention of Significant Deterioration (PSD) and Title V Greenhouse Gas Tailoring Rule

— “Tailors” the applicability criteria that determine which GHG emission sources become subject to the PSD and Title V programs under the Clean Air Act (CAA)

— Establishes the first two steps of the phase-in for the largest emitters of GHGs

Step 1 (effective 1/2/2011): — Only sources currently subject to the PSD permitting program (i.e., those that are newly-constructed or

modified in a way that significantly increases emissions of a pollutant other than GHGs) would be subject to permitting requirements for their GHG emissions under PSD

— For these projects, only GHG increases of 75,000 tpy or more of total GHG, on a CO2e basis, would need to determine the Best Available Control Technology (BACT) for their GHG emissions

— Similarly for the operating permit program, only sources currently subject to the program (i.e., newly constructed or existing major sources for a pollutant other than GHGs) would be subject to Title V requirements for GHG

PM 2.5EPA final rule issued 6/29/2010 – Prevention of Significant Deterioration (PSD) for Particulate Matter Less Than 2.5 Micrometers (PM2.5) – Increments, Significant Impact Levels (SILs) and Significant Monitoring Concentration (SMC)

— Amends the requirements for particulate matter less than 2.5 micrometers (PM2.5) under the PSD program by adding maximum allowable increases in ambient pollutant concentrations (“increments”) and two screening tools, known as the Significant Impact Levels (SILs) and a Significant Monitoring Concentration (SMC) for

BACT D t i ti t CCCR Regulations


Source: www.epa.gov ,


Step 2 (effective 7/1/2011):— Builds on Step 1. In this phase, PSD permitting requirements will cover for the first time new construction

projects that emit GHG emissions of at least 100,000 tpy, even if they do not exceed the permitting thresholds for any other pollutant. Modifications at existing facilities that increase GHG emissions by at least 75,000 tpy will be subject to permitting requirements, even if they do not significantly increase emissions of any other pollutant

— In Step 2, operating permit requirements will apply to sources based on their GHG emissions, even if they would not apply based on emissions of any other pollutant. Facilities that emit at least 100,000 tpy CO2e will be subject to Title V permitting requirements

— EPA estimates that about 550 sources will need to obtain Title V permits for the first time due to their GHG emissions. The majority of these newly permitted sources will likely be industrial manufacturers. There will be approximately 900 additional PSD permitting actions each year triggered by increases in GHG emissions from new and modified emission sources

On January 12, 2011, EPA announced its plan to defer, for three years, GHG permitting requirements for carbon dioxide (CO2) emissions from biomass-fired and other biogenic sources

Source: www.epa.gov

PM2.5— The SILs for PM2.5 are also being added to two other New Source Review (NSR) rules that regulate the

construction and modification of any major stationary source located in an attainment or unclassifiable area, where the source’s emissions may cause or contribute to a violation of the national ambient air quality standards (NAAQS)

2008 – PM-2.5 SIPs due (‘97)

2011 – Next PM-2.5 NAAQS Revision

2012 – PM-2.5 SIPs Due (’06)

2013-2017 – New PM-2.5 NAAQS Designations

BACT Determinations to ComeContentious aspects of BACT determinations in light of recent EPA guidance on GHG permitting requirements:

— Discretion allowed to states and local permitting agencies— Extent to which permit applicant can be required to change the type of project or switch to a different fuel

• IGCC may be considered BACT for conventional coal plants• Choices about specific coal types may have to be defended (e.g., sub-bituminous vs. bituminous)

— Energy efficiency BACT options which must be considered for coal plants are numerous:• Supercritical and ultra-supercritical boiler designs• Double reheat cycles• Coal drying (to remove moisture from sub-bituminous or other low grade coals)• Oxy-combustion (the use of pure oxygen as combustion air)• Integrated solar thermal energy (for improving feed water heating efficiency)

In May of 2010, the EPA released the two different approaches for regulating coal ash— EPA is currently conducting a public comment period and deliberations on the two options— Industry and environmental groups are intensely divided on which option is best for regulating coal ash

Approach 1:Regulate Coal Ash under Subtitle C of the Resource Conservation and Recovery Act— This revises the rulings EPA made in 1993 and 2000 and rules coal ash as a “special waste” or “hazardous

waste”— This approach would regulate the generation, storage, or treatment of coal ash prior to disposal— Industry analysts believe this approach would require existing coal ash surface impoundments to shut

down within four years of the rule taking effect— Under this approach, the EPA would have authorship of the regulations for controlling the creation,

transportation, storage, and disposal of coal ash— Industry analysts believe “under Subtitle C…what was historically a routine aspect of utility operations

would become the most expensive component of running a facility, a regulatory nightmare with tremendous financial impact for many coal-fired utilities”

Approach 2: Regulate Coal Ash under Subtitle D of the Resource Conservation and Recovery ActThis keeps in place the EPA rulings made in 1993 and 2000

PM 2.5EPA final rule issued 6/29/2010 – Prevention of Significant Deterioration (PSD) for Particulate Matter Less Than 2.5 Micrometers (PM2.5) – Increments, Significant Impact Levels (SILs) and Significant Monitoring Concentration (SMC)

— Amends the requirements for particulate matter less than 2.5 micrometers (PM2.5) under the PSD program by adding maximum allowable increases in ambient pollutant concentrations (“increments”) and two screening tools, known as the Significant Impact Levels (SILs) and a Significant Monitoring Concentration (SMC) for PM2.5

— The SILs for PM2.5 are also being added to two other New Source Review (NSR) rules that regulate the construction and modification of any major stationary source located in an attainment or unclassifiable area, where the source’s emissions may cause or contribute to a violation of the national ambient air quality standards (NAAQS)

IB MACTSmaller sized generators are also not exempt from the emerging EPA rules

On April 29, 2010, the Environmental Protection Agency (EPA) issued a proposed rule regarding emissions of air pollutants from industrial, commercial, and institutional boilers and process heaters

The proposed rule aims to reduce emissions of air pollutants at “major source facilities”A major source facility is defined as a “facility that emits or has the potential to emit 10 or more tons


Source: EPA

C i ht © 2011 b S ttM dd All i ht d

• Combined heat and power alternatives— BACT analysis may inevitably lead states to establish efficiency limits— Beyond energy efficiency, CCS may be the only other control option for reducing GHG emissions

• EPA concedes that CCS has not been demonstrated on a commercial scale and costs are prohibitive• Nearly all sources seeking a GHG permit will need to consider whether or not CCS would be possible• Specifically, EPA notes that CCS must be considered in step 1 of its five step “top down” analysis

Potentially contentious aspects, pending additional clarification from EPA:— Biomass – “Carbon neutrality” of emission can be considered, EPA does little to explain how— “Off-site” of “Lifecycle” Emissions (i.e., GHG emissions of specific mines) – These additional considerations

will likely add further complications (and room for challenges) in future BACT determinations

Source: www.epa.gov; Troutman Sanders, LLP


— This keeps in place the EPA rulings made in 1993 and 2000— This approach would not regulate the generation, storage, or treatment of coal ash prior to disposal— Under this approach, EPA would have an advisory role in regulating coal ash; regulation would mainly

come from the states and citizens— Environmentalists do not believe this approach goes far enough in dealing with coal ash and allows

states to “skirt around regulation in favor of business”

Source: Environmental Protection Agency, www.epa.gov; SNL Interactive, www.snl.com

standards (NAAQS)

2008 – PM-2.5 SIPs due (‘97)

2011 – Next PM-2.5 NAAQS Revision

2012 – PM-2.5 SIPs Due (’06)

2013-2017 – New PM-2.5 NAAQS Designations

— A major source facility is defined as a “facility that emits or has the potential to emit 10 or more tons per year of any single air toxic or 25 tons per year of any combination of air toxics”

— The rule will apply to boilers which burn natural gas, fuel oil, coal, biomass, refinery gas, or other gas to produce steam and process heaters, which heat materials during an industrial process

— These boilers and process heaters are generally used at industrial facilities; EPA will have 11 different subcategories based on the design of the various units; the proposed rule includes specific requirements for each subcategory

— For new and existing units, the proposed rule will establish emission limits on all existing and new boilers and process heaters (minor exceptions) for mercury, dioxin, particulate matter, hydrogen chloride, and carbon monoxide

EPA estimates the total national capital cost for the final rule to be ~$9.5 billion in 2013, and an annual cost of ~$2.9 billion in 2013

Once published, the EPA held a public comment period and was required to issue a final rule by December 16, 2010— During the public comment period, utilities, states, and interest groups pushed back and proposed

that the standards were too stringent— On December 7 2010 EPA formally requested an extension for issuing the final rule from federal




Source: EPA

Copyright © 2011 by ScottMadden. All rights reserved.

On December 7, 2010, EPA formally requested an extension for issuing the final rule from federal District Court of the District of Columbia

— On January 20, the Court denied the EPA's request and ordered that the rules be finalized by February 21, 2011

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Source: www.epa.gov

……As Well As State Implementation Plan (SIPs) Promulgation……As Well As State Implementation Plan (SIPs) PromulgationThe states under section 110 of the Federal Clean Air Act (the Act) must develop air pollution regulations and control strategies to ensure that state air quality meets the National Ambient Air Quality Standards (NAAQS) established by the EPA

Th A t d ti 109 t bli h d bi t t d d hi h tl i it i ll t t b idThe Act under section 109 established ambient standards which currently cover six criteria pollutants: carbon monoxide, nitrogen dioxide, ozone, lead, particulate matter, and sulfur dioxide

Currently, each state has a federally approved SIP which protects air quality and has emission control plans for nonattainment areas. These SIPs can be extensive, containing state regulations or other enforceable documents and supporting information such as emission inventories, monitoring networks, and modeling demonstrations

The contents of a typical SIP fall into several categories:1) State-adopted control measures which consists of either rules/regulations or source-specific requirements (e.g., orders

and consent decrees)2) State-submitted comprehensive air quality plans, such as attainment plans, maintenance plans, rate of progress plans,

and transportation control plans demonstrating ho these state reg lator and so rce specific controls in conj nctionand transportation control plans demonstrating how these state regulatory and source-specific controls, in conjunction with federal programs, will bring and/or keep air quality in compliance with federal air quality standards

3) State- submitted "non-regulatory" requirements, such as emission inventories, small business compliance assistance programs, statutes demonstrating legal authority, monitoring networks, etc.

4) Additional requirements promulgated by EPA (in the absence of a commensurate state provision) to satisfy a mandatory ti 110 t D (Cl Ai A t) i tsection 110 or part D (Clean Air Act) requirement

Specific state plans, revisions, and updates are incorporated by reference in the Code of Federal Regulations (CFR) under Title 40 (Protection of the Environment), Chapter I (Environmental Protection Agency), Subchapter C (Air Programs), Part 52 (Approval and Promulgation of Implementation Plans)

While most states already have authority to permit GHGs under preconstruction permit (PSD) programs EPA has identified 13While most states already have authority to permit GHGs under preconstruction permit (PSD) programs, EPA has identified 13 states that were required to revise their SIPs by 1/2/2011 – or accept a Federal Implementation Plan (FIP) which gives the EPA authority to issue the GHG portion of PSD permits until state rules are revised

— With the exception of Texas, which declined to revise its rules and questioned the legality of the EPA’s ruling, all other states who had not already done so are in the process of revising their rules or accepting an FIP


Source: www.epa.gov ; www.4cleanair.com

Documents

ScottMadden Managing Environmental Regulations in Uncertain Times · Uncertain Times New EPA Rules are Fundamentally Changing the Game for CoaCoa Ge e at ol Generation February 2011