EPA Repeal of Power Plant Emissions Rules May Have a Modest Impact
Energy Policy Perspectives: Vol. 23
The U.S. EPA’s actions on Monday are best interpreted as two separate policy events: 1) the U.S. EPA finalized its repeal of most of the Biden-era 2024 power plant CO₂ standards; and 2) issued a supplemental proposal which aims to go materially further. The supplemental proposal would rescind the remaining Obama and Biden-era federal GHG standards under Clean Air Act Section 111 and the underlying 2015 findings supporting federal GHG regulation of fossil-fuel power plants as well as adopt a broader legal interpretation that Clean Air Act Section 111 does not authorize the EPA to regulate power-plant emissions for purposes of addressing global climate-change. The distinction is critical for investors, the final repeal can have real project economic implications for some existing coal and new gas-fired generation plants, but the supplemental proposal is a potential structural catalyst into the future. If finalized and upheld by the courts, which will be difficult given existing U.S. Supreme Court precedents, it could materially reduce the ability of a future administration to reimpose similar federal carbon standards through ordinary EPA rulemaking.
Practical realities of repeal: Headline expectations appear very optimistic. While the EPA appears to anticipate that the repeal of EPA carbon emissions restrictions will unleash dramatic increases in fossil generation output and huge cost savings, we expect a more muted production response from utilities and electricity generators and less rosy cost savings results. We also do not believe that the financial implications to increased fossil generation output will be broadly material.
Carbon is not the only emissions restriction: The EPA finalized a repeal of the 2024 Biden power plant CO₂ rules which removes near-term and future requirements for fossil generation, including existing source CO₂ guidelines for fossil steam units, a CCS-based standard for qualifying coal modifications, and future (January 1, 2032 compliance date) CCS-based requirements for new baseload gas combustion turbines. Fossil fuel plants can still face material Nitrogen Oxides (NOx), Sulfur Oxides (SOx), mercury, particulate matter, ozone, permitting and local/state requirements even if the federal CO₂ restrictions disappear. Output limits from actual power demand conditions, plant age, incremental production costs and alternative regional purchased power costs, water availability (recent drought conditions), pipeline capacity, increasing electricity transmission constraints, ash disposal, and rising ambient temperatures are just some examples of other limiting factors on potential incremental generation output. Many fossil generation units are also already running at high levels of capability (capacity factor) that limit the incremental upside potential of U.S. generation output.
Regulatory and economic considerations: Just because a utility or generator can increase carbon emissions of various types, i.e. CO₂ or particulate emissions, does not mean that they have motivations to do so on a grand scale. Utilities for example earn a return on emissions controls equipment that need to be used and useful to maintain their cost recovery.
Local politics and regulation: Local statutes, politics, and regulation also play a role in power plant emissions. Many jurisdictions would not either allow nor welcome higher emissions, suggesting that some utilities/generators will respond to local considerations as well as EPA rules, especially for what might prove to be temporary gains in generation output. Local regulatory policy will play a particularly big role in utility responses to the EPAs new rules in order to maintain constructive regulatory and stakeholder relations.
Litigation certain: The state and environmental group litigation response to the EPAs moves is likely to be severe. Consortiums of state Attorney Generals are likely to litigate the new more lenient carbon emissions rules. The litigation could certainly reverse or delay implementation. New state and local emissions action is also possible.
Repeal savings/coal production: While the EPA estimated $310 billion in net present value cost savings ($23 billion annually) from its repeal action over the 2026-2047 period, with an annual U.S. electricity generation market of near $500 billion, the over 4% annual cost savings estimate appears generous, in our view. The EPA acknowledges that the cost savings estimate also does not account for the adverse environmental effects of the repeal which could transfer material costs elsewhere in the economy. The Trump administration has consistently over-estimated the beneficial economics of aging coal plants as seen in the Trump administration’s Michigan J.H. Campbell coal plant emergency order that was overturned by federal appeals court on September 11. The Michigan Attorney General argued that the uneconomic plant cost Michiganders millions of dollars to operate unnecessarily. The EPA’s contention that coal production for electricity generation will increase 10-fold as a result of the repeal appears to be magical math to us.
IPPs: Potentially positive
Implications for independent power producers: The IPPs have fewer political and regulatory considerations in deciding to increase electricity generation output where possible in the post-repeal power market. While some IPPs may benefit from looser carbon emissions, resulting in higher power sales volumes, some regional power prices could also be reduced by greater energy availability, potentially moderating the economic benefits of higher sales volumes. Obviously, some IPP portfolios could gain on the fossil generation side with unknown consequences to the remaining portfolio. Also, while some emissions controls and new generation capital could be delayed somewhat, future more restrictive EPA carbon rules could lead to higher long-term implementation and construction costs. Modified near-term power market dynamics could also delay some incremental and replacement generation capacity installations, proving somewhat counterproductive for overall U.S. nameplate generation capacity.
Utilities: More limitations on repeal benefits
Similar output responses: Like the IPPs, some new generation capacity and emissions control decisions could be delayed by the EPA’s carbon emissions repeals. Delays could result in higher long-term generation construction costs and reduced near-term overall generation capacity. While utilities may benefit on the margin from incremental power generation capacity availability due to the EPA’s carbon emissions repeal, we do not expect material financial benefits, particularly due to the nature of regulated rates.
Regulatory and economic considerations: While the National Rural Electric Cooperative Association lauded the EPA’s repeal, EEI did not, and that is somewhat telling. Many co-ops are rural and located in red states. Other utilities are more likely to be influenced by state regulation in making incremental generation decisions. For example, some utility earnings on emissions controls equipment and regulatory test year revenue considerations could play important roles in utility marginal generation decisions where possible.
Local statute, politics, and regulation constraints: State/local statutes, politics, and regulation play a huge role in power plant emissions. Many utilities and generators will respond to local issues as well as the new EPA rules. Many states and cities have more restrictive emissions limits and policies. Utilities in particular will respond to maintaining constructive longer-term regulatory and political relations rather than responding to what might prove to be temporary gains in generation output. There will also be significant regional differences in the generation response to the EPA repeal that is not only based on politics/regulation/law, but also based on the construction of company and regional generation portfolios. The EPA’s repeal is not likely to greatly increase generation opportunities in some of the most densely populated urban centers like New England, California, or New York that have generation portfolio type/transmission constraints in addition to regulatory/political/legal considerations.
AI Implications: We do not expect the EPA repeal to benefit artificial intelligence and large tech electricity load centers except in the very near-term. The impact could prove only short-term in duration through the current administration. The EPA’s repeal could also motivate more local regulations to offset the EPA’s decision effects. The long-term planning for AI power supply is unlikely to be materially affected by the EPA’s repeal in our view.
E&Ps and CCS: EPA’s repeal is modestly positive for natural gas demand, but potentially a near-term headwind for CCS investment
E&Ps: We view the EPA actions as modestly positive for natural gas E&Ps, as the repeal removes CCS-based requirements for new baseload natural gas generation and reduces a regulatory hurdle to developing incremental gas-fired power capacity. As a result, this could improve project economics and potentially accelerate some new CCGT development, although incremental gas demand could be partially offset by higher coal utilization.
CCS: We see a negative read-through for CCS investment from the removal of the regulatory requirement to install CCS on certain power plants. Importantly, the EPA action does not eliminate the Section 45Q carbon sequestration tax credit; rather, it reduces a regulatory incentive for CCS projects that had been supported by prior policy.
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