Wisconsin businesses should plan now to protect the environment

I. Introduction

On June 18, the Environmental Protection Agency (EPA) announced proposed emission guidelines that states should use when developing their State Implementation Plans (SIP) to address greenhouse gas emissions from existing coal-fired power plants (EGUs) in the United States, commonly referred to as the Clean Power Plan. After receiving public comments, the rule is expected to be finalized by June 2015, and States will be required to submit their SIP by June 2016. The deadline for public comments on this proposed rule is December 1, 2014.

Because Wisconsin has more than 60 percent of its baseload electricity generated by coal-fired EGUs, this rule will have a dramatic impact on Wisconsin utilities and their customers. Given the compliance strategies proposed by EPA in this rule package, there will almost certainly be “winners” and “losers” when this rule is finalized and implemented by Wisconsin. Godfrey & Kahn recommends that Wisconsin stakeholders begin planning for future implementation of this rule now so that potential winners can maximize their chances and potential losers can mitigate their costs associated with this far-reaching EPA rule package.

This bulletin provides an overview of the regulatory package, describes EPA-recommended strategies for Wisconsin to consider when implementing the SIP, and suggests planning strategies that stakeholders should consider adopting now to plan for eventual implementation.

II. Clean Energy Plan Review

EPA’s stated statutory basis for regulating greenhouse gas emissions from coal-fired EGUs is Section 111 of the Clean Air Act. This section gives EPA the authority to require states to develop performance standards for a category of existing sources; in this case, large-scale coal-fired EGUs.

This regulatory process was initiated by EPA by issuing draft guidance that States can use in adopting their SIPs to achieve greenhouse gas emission reductions. States can use this guidance as a “road map” for how to achieve their State’s EGU emission reduction targets by the 2030 compliance deadline.

Generally speaking, EPA has established a 30 percent greenhouse gas emissions reduction goal for coal-fired EGUs by 2030, compared to total 2012 reported emissions for the sector. EPA’s goals are expressed as emission factors that measure the number of pounds of carbon dioxide emitted for each unit of electricity generated (here the unit is megawatt/hour (MWh)). Each state has the authority by regulation to convert this emission factor goal to a total tons of CO2 emitted goal for all coal-fired EGUs in the state.

Each state was assigned a specific target to achieve carbon dioxide emission rates from the combined coal-fired EGU sector in that state by a target date of 2030. Wisconsin was assigned an emission rate of 1,203 pounds CO2 per MWh. This represents an approximate 30 percent reduction in the emission rates for coal-fired EGUs that must be achieved in Wisconsin by 2030.

III. Strategies to Guide States to Implement EPA Goals

In the proposed regulation, EPA proposed four strategies (Building Blocks) that States may consider to achieve the carbon dioxide reduction goals in their SIPs. It is important to note that these four Building Blocks are not intended to be the exclusive means of achieving these goals; rather, they are EPA-recommended strategies that States should consider. The four EPA-recommended Building Blocks for reducing carbon dioxide emissions from coal-fired EGUs are:

1. Improving the carbon dioxide emission rate of the protected facility.

2. Increasing the use of existing natural gas combustion units.

3. Expanding the use of renewable energy sources with low carbon dioxide emissions.

4. Expand the use of demand-side energy efficiency programs for EGU customers.

The EPA described how these four Building Blocks would contribute to the overall goals set for each state. For Wisconsin, the EPA recommended increasing renewable energy goals as a percentage of existing baseload generation to 11 percent.

For the Demand Side Management Building Block, EPA has established recommended savings targets of 1.5 percent and 1.0 percent for Wisconsin under the Energy Efficiency Building Block. These savings targets would result in estimated cumulative annual electricity savings of 11.8 percent by 2029 and 6.2 percent by 2024 for Wisconsin, respectively.

Wisconsin has broad authority to determine how it will achieve the 30 percent reduction goal for coal-fired EGUs in the state and is not limited to these Building Blocks when it submits its SIP to EPA by the June 2016 deadline. The challenges for the Department of Natural Resources (DNR) in preparing these implementation plans are numerous; not the least of which is that many of the practices underlying renewable energy and energy efficiency Building Blocks are regulated by and subject to the jurisdiction of the Public Service Commission (PSC).

IV. Strategies for Wisconsin Clients

Wisconsin businesses and developers considering renewable energy and energy efficiency projects should consider the potential implications of the Clean Power Plan. Here are some strategies to consider now for renewable energy and energy efficiency projects that are being considered:

1. Retroactive carbon dioxide emission reductions

The Clean Power Plan will allow for carbon dioxide emission reduction credits to be awarded for new building efficiency and renewable energy projects installed after June 2014. Parties to newly installed projects should take into account future carbon dioxide emission reduction values ​​that may apply to projects implemented after June 2014.

2. Supporting carbon dioxide reduction in order to use renewable energy sources

It is unclear what types of renewable energy projects qualify for carbon dioxide emission reductions under the Clean Power Plan. Project developers should advocate for the rights to own and sell such reductions in the development of state plans for renewable energy projects. For example, combined heat and power (CHP) project developers should advocate for the inclusion of a thermal energy component as well as an electricity generation component in calculating the carbon dioxide reductions associated with the production of energy for such CHP facilities. Similarly, digester developers and associated methane reductions attributable to digesters that produce gas for electricity generation should advocate for recognition of the carbon and methane reduction attributes associated with such facilities.

3. Reliable quantification of renewable energy (RE)/energy efficiency (EE) projects

The Clean Power Plan will require States to provide credible models to estimate carbon dioxide emission reductions associated with RE and EE projects. Parties involved in planning these projects should use the most credible methods to estimate project-attributable reductions in order to capture the maximum future value for these projects under the Clean Power Plan.

4. Who has the rights to carbon dioxide reductions in the case of qualified RES/EE projects?

Until Wisconsin adopts the SIP and it is approved by EPA, it is unclear which parties have the right to claim the value of CO2 reductions and whether such reductions are transferable to the state or utilities for the purpose of meeting mandatory Clean Power Plan CO2 reduction targets. Until regulatory clarity is provided, RE/EE project parties should clearly state in their agreements which party to the agreement retains the value attributed to such CO2 reductions that may be recognized in the future from those projects.

5. Municipal building regulations and the role of cities

Cities can play a very important role in promoting carbon reductions by encouraging/requiring more energy efficiency features for new buildings in zoning regulations. CO2 reductions resulting from such projects should be quantified as part of the zoning code compliance requirements. The municipality should consider determining which party (city, developer or tenants, etc.) retains the right to any CO2 reductions resulting from such projects that comply with energy efficiency and zoning.

6. Opinions and comments from interested parties

Wisconsin is entering a critical phase of developing the components of its SIP that will be required for the Clean Power Plan. It is certain that both the DNR and the PSC will be seeking comment on the manner and methods by which RE/EE projects will be considered as part of the Building Blocks under the Wisconsin SIP. RE/EE project advocates should be vigilant in commenting on the proposed strategies that these agencies will be considering over the next year to maximize value to contracting parties involved in such projects in the State. The DNR and PSC will likely seek comment on whether trading of measurable emission reductions generated by qualified RE/EE projects should be part of the Wisconsin SIP. Trading of emission credits could be another potentially huge value attribute for such qualified RE/EE projects, and contracting parties to such projects need to be heard on this issue by the DNR and PSC as these policy topics are developed.

V. Parting Thoughts

The state is entering one of its most important policy periods for developing strategies for Clean Power Plan compliance. Interested businesses should remain vigilant in taking advantage of the opportunity to share the state’s energy policy formulation to maximize opportunities and mitigate risks of Wisconsin’s mandatory CO2 reductions for Wisconsin businesses. In addition, parties considering RE/EE projects must consider the future impacts of the Clean Power Plan in their contractual negotiations with interested parties in those projects.

We live in interesting times!