The Environmental Protection Agency’s new carbon emissions rule for the power sector could end up increasing greenhouse gas pollution more than if there was no regulation at all, critics of the plan said Tuesday.

"In many ways, this proposal is a way to extend the life of coal plants disguised as a greenhouse gas regulation," said Meredith Hankins, a professor of Environmental Law and Policy at UCLA.

The EPA's new Affordable Clean Energy (ACE) plan would direct states to set modest limits on emissions that can be achieved with relatively minor upgrades to existing coal power plants. To facilitate those changes, EPA proposes to rewrite its New Source Review (NSR) rule, which regulates pollution from new facilities or modified sources.

Taken together, critics say the new emissions limits and loosened NSR program could allow coal operators to upgrade facilities and run them longer, even if that means higher emissions than retiring the plants and shifting to less polluting sources, like natural gas or renewables.

"That's why NSR exists — to address the almost inevitable increase in emissions that results from investments in power plants," said Joe Goffman, a former Obama EPA official who helped craft that administration's carbon rule, the Clean Power Plan. "So there's an internal contradiction embedded in this proposal."

The NSR review is one place the ACE plan could be vulnerable to legal challenges, as EPA has seen similar efforts overturned in the past. Even if it survives, analysts and utility executives say it remains unclear how many coal owners will opt to keep their coal plants open, rather than investing in less polluting resources.

"The forward curve for natural gas looks exceedingly attractive," said Tom Fanning, CEO of Southern Co., a major coal plant operator. "So the dynamic of adding cost to coal while gas remains exceedingly cheap I think weighs in the interest of moving ... from coal to gas and renewables."

The NSR changes

Under the New Source Review program today, a power plant must undergo new pollution permitting if an upgrade to its facility would increase its emissions over the course of a year.

The EPA's proposed changes in the ACE rule would alter that timeframe, allowing facilities to escape NSR review if they can show their emissions are not increasing on an hourly basis. A similar proposal is pending in a bill before a House committee, Hankins pointed out in a blog post.

Altering how NSR is triggered could allow some plants to emit more over the long term, she and others said.

"Your hourly [pollution] level may stay the same, but if you dispatch more hours, then under this proposal it doesn't seem like you would trigger review," said Brian Prest, a doctoral research fellow at Resources for the Future, an environmental nonprofit.

The changes in the NSR are a linchpin in the overall effectiveness of the plan, EPA Assistant Administrator Bill Wherum said on a Tuesday press call.

"The NSR program and this ACE proposal are somewhat in conflict because on the one hand we would be mandating efficiency improvements at power plants under the ACE rule and on the other hand we have a New Source Review program that might require permits to be a pain for those very efficiency projects that are required under the ACE rule," Wherum said. "So those two requirements need to be reconciled … and that's what we proposed to do here."

The importance of the NSR review is borne out in EPA's regulatory impact analysis (RIA) for ACE, Prest pointed out. There, the agency predicts there will be net benefits from the plan if plant upgrades can be made cheaply — without NSR review — but admits that benefits disappear if NSR remains unchanged and upgrading is more costly.

Only a 4.5% heat rate improvement (HRI) at $50/kW generates net benefits under EPA's analysis. A smaller, 2% HRI produces net costs, denoted by numbers in parentheses, as does a more expensive 4.5% HRI at $100/kW. ACE RIA

"If you look at either of the other alternatives they've modeled, at $50 per kilowatt if you can only get a two percent improvement then it becomes a net loser," Prest said. "Or if you say you still get the 4.5% improvement but it takes $100/kW, then again it's a net loser.

"The only way it can be a net winner is to assume that the NSR reforms would reduce the cost of improving those heat rates," he said.

Legal vulnerabilities

While the NSR review may be the keystone to the EPA's new plan, it also could be its greatest vulnerability.

"The agency's attempt to alter NSR at this point is really flying into the teeth of a lot of previous efforts that were unsuccessful," said Goffman, now the executive director of the Energy and Environmental Law Program at Harvard. "The agency has taken at least two runs before at what used to be called NSR reform and those efforts ended up in court and ended up being rejected by the courts."

Those attempts at reform came during the George W. Bush administration, when Wherum was last at the agency.

In 2005, the D.C. Circuit Court of Appeals threw out Wherum's first attempt to weaken the NSR rule in New York vs. EPA, ruling the agency defined "modifications" to generators too narrowly, allowing many to escape review.

A year later, the same court doubled down in a second case involving New York and EPA, forcefully rejecting another effort to expand exemptions to the NSR process by reinterpreting language in the Clean Air Act that says new source permitting will be triggered by "any" change at a generator that increases emissions.

"Only in a Humpty Dumpty world would Congress be required to use superfluous words while an agency could ignore an expansive word that Congress did use," the D.C. Circuit wrote.

Those NSR reform attempts bear striking resemblance to the plan put forward Tuesday, Goffman said.

"Even though the form of words being used may be different, it's really hard to see that concept the agency is relying on here is any different from concepts that have already been rejected by the courts,” he said.

Hankins, however, said that the specific change from measuring emissions yearly to measuring them hourly has not yet been fully vetted in court. The EPA introduced a similar plan in 2007, she said, but it was never finalized and so never faced legal challenges.

"EPA is likely to get deference on their interpretation of the Clean Air Act and how they interpret 'modification' and 'increase,'" Hankins said, "but looking at the proposed rulemaking, to me their interpretation does not seem well supported and I think there's an argument that they're being arbitrary and capricious."

Will coal operators upgrade?

If they survive, the NSR reforms could provide a window to keep existing coal facilities open longer.

"If you are compelling the utility industry to put money into coal plants as a result of this rule, which almost by definition they might not do otherwise, it stands to reason that those utilities, having made that investment, are going to run the plants more," Goffman said.

But the former EPA official and others said that whether coal operators will seize the opportunity remains in doubt.

Outside a Senate hearing on Tuesday, Fanning told reporters the new EPA rules would not change his utility’s long term plan, which is to retire its coal fleet — today nearly 30% of its generation — and be "low- to no-carbon by 2050."

"We're still studying it but you’ve got to understand that our integrated resource plan ... takes into account something like a 60-year long window, so it's not just what are we going to do in the next three to five years," he said.

Even if NSR reforms make it cheaper to upgrade Southern's coal plants, Fanning said that pouring money into those units could make them even less competitive than the natural gas and renewable resources that are undercutting them today.

"When you think about past EPA regulatory decisions where we've had to put scrubbers, baghouses, new water treatment, new ash management [on our coal plants] — all of those things require additional investment and therefore incur additional cost," Fanning said. "That just makes coal less competitive and that dynamic isn’t changing."

Fanning's perspective highlights what experts say is coal’s underlying uncompetitiveness with other sources of electricity.

"Most U.S. coal plant production is limited by poor economics relative to other options (gas, hydro, PV, wind, efficiency) so they lose out in dispatch, not because they have emissions caps, so coal will keep losing in the dispatch order," said Alison Silverstein, a former advisor to Pat Wood III, a Republican chair of the Federal Energy Regulatory Commission.

In contrast to coal’s economics, experts say natural gas remains cheap and renewable energy is declining swiftly in price, making doubling down on the dirtier resource less attractive.

“Clean energy is now cheaper than existing coal in a growing swath of the country,” said Sonia Aggarwal, vice president at Energy Innovation, a think tank. “At best, these [coal] upgrades will create an even wider gap between the cost of running coal and the cost of replacing any needed capacity with cheaper, clean alternatives.”

The calculus may be different, however, for small municipal and cooperative utilities, Silverstein warned.

"Most munis and co-ops don't face state price or resource mix regulation, they have captive customers, many don't participate in centralized wholesale energy markets, and they don't have deep credit so they can’t walk away from the plant mortgage," Silverstein said. "So they may keep borderline coal plants going until the pain is too great."

Whether or not utilities rush back to coal, Goffman said the entire debate over the EPA ACE rule distracts from the larger imperative of decarbonizing the power sector.

"We've got a climate change problem to solve and this proposal, it's not just rearranging deck chairs on a sinking ship, it’s rearranging the cushions on the deck chairs," he said. "It's the complete diversion of the federal government's resources from solving the big problem, and that's as much an indictment of this proposal as the terms of the proposal itself."