Catalyst with Shayle Kann - Unpacking EPA’s newly proposed power emissions rule

Episode Date: May 18, 2023

Are you a utility or climate tech startup looking to understand how artificial intelligence will shape your company? Come to our one-day event, Transition-AI: Boston on June 15. Our listeners get a 20% discount with the code PSPODS20. Last year, the Supreme Court struck down the EPA’s first attempt to limit greenhouse gas emissions from existing power plants. But it also preserved the EPA’s authority to regulate greenhouse gas emissions. The agency just needed to find the right approach. The question for the EPA was: What legal tools would pass the scrutiny of the court? Last week, Biden’s EPA came out with its answer. The proposed plan requires new and existing power plants to meet emission standards. The agency estimates that the rule would reduce GHG emissions by a total 617 million tons through 2042, a small but meaningful fraction of the total. Right now the U.S. power sector emits about 1.5 billion tons per year.  It’s an approach that dovetails with the Inflation Reduction Act (IRA), which is expected to dramatically reduce the cost of key emissions-reducing technologies, such as carbon capture and storage (CCS) and hydrogen. If the IRA was the Biden administration’s carrot for reducing climate emissions, then the new rule is the stick.  In this episode, Shayle unpacks the proposal with John Larsen, who leads U.S. climate policy research at the Rhodium Group. In March, John’s team modeled the impact of hypothetical power emissions standards on the U.S. power fleet, finding that many coal plants might shut down rather than install CCS. Shayle and John dig into specifics, like: The four main options available to power plant operators under the proposed rules: shut down, install carbon capture and storage (CCS), co-fire with hydrogen, or just run less The differences in rules for new and existing plants How the standards become more stringent with higher capacity factors The role of states in the rules and the “off-ramps” they could use to get around some of the rules The power plants that would be exempt from the rules, such as gas peaker plants with low capacity factors What the changing economics of CCS and hydrogen could mean for the effect of the regulations The legal gauntlet that the plan is sure to face, including lawsuits from Republican states  Recommended Resources: Rhodium Group: Pathways to Paris: Post-IRA Policy Action to Drive US Decarbonization Rhodium Group: Has the Supreme Court Blocked the Path to the 2030 Climate Target? Heatmap: What the EPA Can’t Say About Its New Power Plant Rules Canary: The EPA has a controversial new plan to clean up power plants Catalyst is a co-production of Post Script Media and Canary Media. Support for Catalyst comes from Climate Positive, a podcast by HASI, that features candid conversations with the leaders, innovators, and changemakers who are at the forefront of the transition to a sustainable economy. Listen and subscribe wherever you get your podcasts. Catalyst is supported by Scale Microgrids, the distributed energy company dedicated to transforming the way modern energy infrastructure is designed, constructed, and financed. Distributed generation can be complex. Scale makes it easy. Learn more: scalemicrogrids.com.

Before we start, we have two events coming up in June that our East Coast and West Coast listeners should know about. On June 15th, PostScript Media is holding Transition AI Boston. It's a one-day conference in downtown Boston digging deep into the applications for artificial intelligence and the energy system. We're going to have panels networking and a workshop on chat GPT. Speakers include Priyadonti, the co-founder and executive director of climate change AI. Pamela Isam, who is the former executive director of AI and technology at the U.S. Department of Energy. Patrick Walsh, a general partner at National Grid Partners, and Savannah Goodman, the data and software climate solutions lead at Google. So if you're in the business of energy and climate tech and a better understanding of AI is important to your job, you should come to the event.

Again, downtown Boston, June 15th, our listeners, get a 20% discount. Follow the link in the show notes and use the code PSPOD 20 when you buy your ticket. And for those of you over on the West Coast, our friends at Canary Media are hosting their next live. event in Seattle on June 28th. It's going to be a good one. I can attest. I've done multiple events with Canary. And Canary Live, Seattle is going to feature some of the biggest names in our industry like Amy Harder, David Roberts, Rames Nam, as well as Canary's executive editor, Lisa Hymas. The venue is the legendary radio station, K-E-X-P in downtown Seattle, and you can expect some amazing panels in lively networking. Again, we've done multiple shows with Canary. The Canary

live events are incredible, so go check it out. Canarymedia.com slash Seattle to get your tickets today. Don't miss out on either of these events. From the studios of PostScript Media and Canary Media. I'm Shale Khan, and this is Catalyst. It seems to me you have three high-level options. You can shut down or not build it in the first place. That's option one. You can attach carbon capture up to what will need to be 90% carbon capture.

Or you can blend with and ultimately predominantly fire with hydrogen. So I just add one other point to this first. There is if you are, you can run below 50%. Oh, right. Or you can become a load following or peaker type resource. You can, yeah, drop yourself out of the race, so to speak. Newly proposed EPA power plant emissions standards. What could possibly be more interesting?

No, I'm serious. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility, built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. predictive, verifiable, and designed to perform when it counts.

Learn more at energy hub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital,

shaping policy and building the clean economy. tune in as we unpack how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. I'm Shail Khan. I invest in revolutionary climate technologies at energy impact partners. Welcome. Okay, so last week, the Biden administration in the United States through the EPA proposed what could be the first really big regulations to limit greenhouse gas pollution from existing. existing power plants. Think of it as the stick where the recently passed

inflation reduction act was a series of carrots. I thought the responses to the proposal were pretty interesting and honestly a bit funny. On one hand, we had some environmentalists decrying the rule saying it would just lead to further fossil infrastructure lock-in by allowing power plants to comply mostly by adding carbon capture. And on the other hand, we had some industry voices claiming carbon capture would be unrealistic on this time frame anyway, and the rule was really just a veiled way to shut down even more coal and natural gas than would be shut down anyway. And in reality, I think, the regs themselves that have been proposed actually could come up with

a very different set of outcomes than most of what the conversation in the media has suggested. I think our understanding of this rule really comes down to three questions at the high level. The first is, will it hold up in the inevitable series of legal and and policy challenges that are coming. The second is, if it does hold up, what are the details of the structure itself? What would it take to comply? And third, how and when might carbon capture

and to some extent hydrogen co-firing of natural gas take real hold in the market? Let's see if we could figure it out. My guest this week is John Larson, who is a partner at the Rhodium Group. John has been analyzing these kinds of policies since before the last round came out. Remember the Clean Power Plan?

So he's got all the wonky details, which is exactly what we want. With no further ado, here's John. John, welcome. Thanks for having, Michelle. Let's talk about these new EPA power plant regs. Actually, I have a first question for you about this, which is, my recollection is that the last time,

we'll talk more about the history here, but the last time a U.S. administration attempted to regulate the power plant world through EPA regs, we branded it. It was called the Clean Power Plan at the time. This time, it appears they're not attempting to brand it. Do you think that that's like a strategic decision? I mean, the proposal is so complicated and not catchy that I think maybe it's better to not have the shorthand because it'll be harder for it to like get into the inside the Beltway echo chamber or maybe just people are just going to call it power plant rules from now on or something

short-hand, but yeah, I don't know. It's clear there was a deliberate non-branding effort here. Right. I wonder whether it is to make it harder for the opposition to attach itself to it. You know, it's easy to say like to rail against the clean power plant. It's harder to be like, I hate these new EPA power plant, existing power plant emissions regs. Yeah, you can't see it in like an election campaign ad, right? It's like a one-off. Like, I'm against this because, you know, because there's no this.

Right, right. Anyway, so I think for our purposes, we'll come up with some shorthand that's going to work well for us. But let's contextualize it historically, because I think to start, it's important to note that this is, as I just alluded to, is not the first time that a presidential administration in the United States has attempted to use the powers of the EPA to regulate power plants for greenhouse gas emissions. So can you just walk us through a brief history of EPA authority to do this kind of thing and attempts that we've seen in the past? And we'll talk about these new rules that have been proposed by the Biden administration. Yeah, definitely. So the way to think about it to start is that EPA has to regulate greenhouse gases from power plants because EPA decided after the Supreme Court told them to make a decision around whether or not greenhouse gases, gases are a pollutant in Massachusetts versus EPA, which is 2008. So that's where it all begins.

And EPA started to regulate greenhouse gases from vehicles. As soon as they did that, they had a statutory requirement to at least decide whether or not to regulate GHGs from other sources. And so they've started to go down the road of going after stationary sources like power plants, starting with the biggest sources, which are coal and gas plants. And They started doing that by going after new sources of greenhouse gases first. And so they regulated CO2 emissions from coal plants and technically from gas plants. But at the time during Obama, they just said combined cycles kind of fine. That's the best you can do.

And then after that, that as soon as you regulate new sources for greenhouse gases, you have to regulate the existing sources. And that's obviously there's a lot more existing power plants than new power plants, in any given year. And that's where EPA put out the clean power plan in the second term of the Obama presidency and went through proposed rules and then finalized them, I think, in 2015, at which point, and we won't unpack what it did and how it worked, I think. But at the time, it was the first time EPA tried to do this. And long story short, it took several, several years to finally get taken up by the Supreme Court. last year through West Virginia versus EPA at which the Supreme Court said what EPA did in that

regulatory approach was unconstitutional or at least not what Congress allowed it to do. And so they need to go back and look at regulating power plants through the lens of just emission controls at the plant, which is different than how the clean power plant approach it, which was, well, you can reduce emissions at a plant by building wind and solar somewhere else and displacing that CO2. There's a little detour in between where the Trump administration revoked the Clean Power Plan

and tried a different approach, which was basically like, we're only going to regulate new and existing plants through efficiency improvements, which does almost nothing for reducing pollution. And those were quickly stricken

by the Biden administration. Well, not quickly, but they stopped defending it in court and then actually in this new proposal last week struck the Trump rule and are replacing it with this new proposal. So I guess just to summarize then, first of all, these new rules that have been proposed are not coming out of thin air. It's sort of like the natural result, or it's a result anyway. I don't know whether it's the natural result. You could tell me it's a result of a bunch of this

history, right? The result of the clean power plan as it was proposed and then struck down, put the EPA in a situation where it still needs to regulate greenhouse gases from existing power plans, but had been decided by the Supreme Court that it couldn't do it in the way that the clean power plan suggested. And so the Biden administration could have either just taken what the Trump administration proposed, which it wasn't going to do because for whatever variety of reasons, including that those rules probably didn't do anything, but also couldn't go back to the clean power plan. So what they've come up with now is the sort of proposed solution to that problem. It allows the EPA to regulate in the way that it is mandated to do, but in a way that they believe,

at least, will pass muster from a legal standpoint. Yeah, that's right. And not only that, there's another quick sidebar, which is EPA has actually used this section of the Clean Air Act since the Clean Power Plan to go after other pollutants or other sources. So, so, or other sources. So you might have heard about the oil and gas methane regulations that EPA has put out for new and existing wells. Those regulate methane and CO2 from both new wells and existing wells using the exact same Clean Air Act section. And what do they do there? They think about, okay, what are the pollution controls I can install at the site to cut those emissions or practices? There's operational things too.

And so in some ways, EPA is coming back around to a consistent application of this of this statutory authority for power plants. Okay, so that gets us to the present as these rules have been proposed. And I think what we want to do is talk about three things. One is what are these rules actually do? Like, what is the proposed set of rules? The second is a little bit more about the legal road ahead. Are we just going to see the same thing

or a different version of the same thing happen here that happened to the Clean Power Plan? Is this the kind of thing that you might see utilities and generators planning around or is there going to be years before we know whether it has any real legs? And then the third is, okay, let's assume that it does stick around.

What do we think this might do to the market? Which I think is actually probably the most important question ultimately. So those are the three high-level questions I think we need to answer. Let's start with the details of the proposed plan. So just walk me through what these regs would do.

So, yeah. So there's two steps and there's also multiple like tiers within the steps. So the first thing to think about is new sources, new fossil fuel fire power plants. First thing to remember is that new coal plants are already, new coal plants were already regulated for greenhouse gases. That was done in Obama and actually kind of stayed in place during Trump. Can we briefly, as a pause, what does it mean that they are regulated for greenhouse gases? Can you just go one-level deep level there? Absolutely.

You cannot build a coal plant in the United States without meeting the emission standard in terms of pounds of CO2 per megawatt hour that the EPA has determined is reasonable based on its understanding of current technology. And so there's a partial capture-based standard for new coal. plants where they have to get emissions rate to a certain point pounds per megawatt hour based on an application of like capturing some amount of CO2 from the power plant, but not all of it, not 90%. I forget exactly where it is. It might be 20%. And yet the practical reality, not exclusively because of those rules, but related to them in part, is that we're not actually

building, there isn't a whole lot of new planned coal capacity in the United States anyway. So this is a, it's either a result of this or it's like a sort of a moot point because independent of anything else we're just not building a lot of new coal. Not even not building a lot, not building any period. There have not been any proposed coal plants

even before that proposed rule in place. In fact, I think my speculation that's one reason why it survived the Trump administration was because even the Trump EPA understood that it wasn't worth the fight because there was no new coal

coming in the pipeline. Right. Okay, so those are the existing rules on new coal plants. Right. I diverted you. So let's finish new plants and then obviously existing. Yeah, so that's where we start. Yeah, so then what's the first new thing with a proposal is now EPA is proposing to put controls on new gas plants.

So gas combined cycle and combustion turbines. And what they set it up and basically there's, these different tiers, and depending on what tier you're in, you have to comply with the different emissions rate at a different time period. So we could go into all of that, but the basics are the really big plants, meaning 300 megawatt nameplate units or larger, running at 50% capacity factor or more, need to meet a standard equal to 90% carbon capture. by 2035 or 96% hydrogen co-firing by 2038. So that's a pretty big, pretty big step for new gas plants.

Okay, so just to repeat that back to you, we'll talk more about which of these we think might happen, if either. If you're building a new gas plant, new gas-fired plant, specifically one that is over 300 megawatts, which is most of them, at least the bigger ones, and is operating a 50% plus capacity factor, which is an interesting delineation I want to ask about in a minute, then basically by middle of the next decade, you either need to be doing 90% CO2 capture or you need to be firing almost exclusively with hydrogen.

Yes. Two small details that matter here. It's 300 megawatts per generating unit, not plant. So if you have 200, 200 megawatt units at a gas plant, you are not subject to this. As you see, there's like weird little nuances. I'm interested in the ways, right, that you might sort of like get around this. Can you operate a 49% capacity factor? Can you build 200 megawatt units?

Yeah, that's interesting. Okay, but so then what about, so to that point, what if you are a smaller generator or if you are operating at a lower capacity factor? Yeah, if you're either smaller or operating, so they're basically breaking this down, by the role of the plant on the grid. So, you know, 50% and above is considered baseload, then there's intermediate,

and then there's kind of like low load slash, like, peaking, right? And for the low load, you need to meet a 30% hydrogen blend equivalent by mid-2030s, and for anything under 20% capacity factor, you just have to run efficiently. Interesting. So it's basically saying, It's interesting that sort of implicit in that

is like it makes it harder, assuming that it's more expensive to either do carbon capture or blend with a high proportion of hydrogen. It's sort of disincentivizing the build of new base load gas but saying maybe it's a little easy,

maybe we need a little bit more of the peaking shoulder load type gas. Is that basically the thinking, as we understand it? I mean, I think that's certainly one way they're thinking about it. Another is just that, you know, if your carbon capture in particular only really makes sense if you're running a plant a lot. You know, if you're going to install all that carbon capture equipment and then only run the plant 10% in the time, that's a very, very, you know, the cost of that on a per megawatt hour per ton base is very high, right? So, like, one thing we didn't get to yet, but it's worth noting is like all of the things that EPA, the only technologies EPA can consider itself. setting these standards are things that they deem adequately demonstrated and reasonable cost,

right? So that does play into how these peers get treated because even if it's adequately demonstrated, if it costs 500 bucks a ton, they can't really contemplate it, right? And I'm not saying that's what a peak or a carbon capture would cost, but still, like, I mean, it's, I think that's another factor driving the different treatment of different size plans. It's also an interesting point. Like, adequately proven and reasonable cost, You know, we'll talk more about this. We don't have a lot of power plants with carbon capture yet. We also don't have a lot of power plants firing hydrogen yet. So in some ways, it's sort of speculative that either of them would be proven and low cost. We hope both will be, but it's an interesting definitional thing. Plenty more to talk about there. Okay, so those are the rules for a new gas fired generation, which we should probably note, though it is true that there is no new coal plan in the United States, there is actually a fair amount of new gas plan.

So this is not like a theoretical thing. This is a very real thing. That's right. And I think this is a big difference in just the political economy of this rule, of this proposal versus what we were just talking about with regard to coal. Right. Okay. So then let's get to the existing power plants.

Like you said, we have a bunch of new planned gas, but it pales in comparison to the existing fleet of both gas and coal that we've got operating on the grid today. So what do these rules entail for operating plants? Right. So for any plant operating as of, and it's important to even just define new versus existing, new means anything that starts the permitting process after the proposal is in the federal register,

which is like any time now. So very soon, you know, very soon. So basically everything existing is everything currently on the system today. Right. And there's, you know, about 200 megawatts. sorry, gigawatts of coal, currently on the system today, all of which would be subject to new standards under this proposal, where basically the long story short is if you are a coal plant

and you want to stick around for the foreseeable future, like into 2040, you've got to install 90% carbon capture to stick around. Into 2040 is interesting because a lot of that coal is already scheduled to retire, prior to 2040, right? Yes, precisely. So that's the other nuance. So if you are a coal plant planning to retire before 2032, you don't have to do anything. Do you have a sense of how much of that 200 gigawatts of coal is already scheduled to retire before 2032? You know, when we look at this every year as part of our baseline construction for U.S. greenhouse gas emissions and at least 70 gigawatts is scheduled to leave the market between now and then from our account.

And we listen to the folks at the Beyond Coal campaign, actually at Sierra Club. They keep a really good headcount of all the announced retirements. And so that's where that number comes around. Okay. So high level with error bars around this, 200 gigawatts of existing coal, 70-ish of that, already scheduled to retire in time such that they don't have to make any changes regardless. So that leaves 130 gigawatts, which is still a lot. where something would have to happen.

And if they want to stick around until 2040, which is not that much further, then effectively would have to install 90% carbon capture. Yeah, basically 2040 and beyond. They have to be at 90% carbon capture. If they want to stick around into the mid to late 2030s, they've got a co-fire with natural gas up to 40%. And if it's anything below that timeframe,

they have to run it less than a 20% capacity. factor or less. Which is like totally uneconomic for coal plants. Right. So it seems unlikely. Is the, is natural gas co-firing with coal plants? I should know this probably. Is that like a, is that already a common thing? I don't feel like I've heard a lot about that.

It's not common, but when gas is like $2 a MMBTU and depending on the coal plant, it sometimes could make economic sense just even before you talk about climate. If, you know, I mean, there's some burner retrofit work you got to do to accommodate co-firing.

but it's not crazy. And, I mean, objectively, it does reduce the emissions rate at the coal plant if you're up to like 40% gas. But it's, you know, obviously nothing compared to 9% captured. Okay. So that's existing coal plants. Let's talk about existing natural gas plants. First of all, how much do we have? Let's contextualize it relative to the existing coal and then talk about what would need to happen.

I mean, I think at last, well, so this is an important nuance. So we talked about how there's the different tiers on the new. In the existing, the proposal only goes after the big 300 megawatt plus per unit. So if you're an existing peaker, if you're an existing natural gas peaker plant, these rules would not apply to you at all? You are not touched. That's a very important nuance that I feel like no one has picked up in the popular media because those peaker plants are important capacity resources in a lot of markets.

Yeah, I mean, I've already seen some folks who would, you'd expect to be opponents of this regulation coming out and saying that this is going to pose major threats to reliability. And just the fact that peakers and, you know, load following combined cycle units aren't touched at all says to me that that should be a very, very low concern, right, from a reliability perspective. because all the stuff you're using to balance on those hard hours already is untouched by this regulation. Right. Okay. So that's an important nuance. So we'll set those aside then and focus on the big multi-hundred megawatt baseload-like gas plants. So how much of those do we have and what would this do? I can get you the capacity of numbers in a second. But the baseloads does need to meet the same schedule as the new sources. So 90% carbon capture by 2035 or if you want to go the hydrogen route you've got to be 30% co-blended with hydrogen by 2032 and then 96% by 2038.

Okay. So similar rules there to the new baseload gas-fired resources. Okay. Any other important components to the regs that we should talk about before we talk about what's coming next? So one other nuance that I think is actually worth talking about is there's different players in different parts of the regulation. So what I mean by that is for all things new, EPA is in charge. EPA will issue the permits. EPA will assess each project and say, are you or are you not meeting the standard?

EPA will enforce that standard. For all things existing, EPA sets the standards. in forms of what are called guidelines, actually. And then states have to make state plans that they can put forward to EPA and say, here is how we are going to regulate the power plants in our state to meet the binding guidelines you've set for us. And then EPA has to approve those plans and make them enforceable. But the state is actually in the driver's seat for that.

So there are going to be 50 state plans covering all of the covered. I mean, there might be one. I think Vermont has no baseload combined cycle units. So they would be out of the, off the hook, for example, for a state plan in this instance. But almost every state will have to issue a plan and get it approved by EPA. And so I bring that up because there's a separate little sub tier of all of this, which is in that process, if a,

state deems that a particular power plant can't meet the standard because of, but still has a remaining useful life on the system plant, get let off the hook or have a longer timeline simply because of physical issues. So you can imagine, I think next we're going to talk about the road ahead from a sort of legal and procedural standpoint, but just on this, on its face, you could easily imagine that, you know, in a red state that doesn't really want to comply with these rules that much in the first place, they find every opportunity they can to either not end up regulating existing plants or regulate them, but, you know, sort of take as many of these off-ramps as they possibly can.

Do you think that has a – well, that make a big difference in terms of the actual teeth that these rules could even theoretically have on existing plants? I think probably more for gas and for coal. I mean, coal's on its way out. You know, I mean, and there might be a handful of plants that end up getting tied up into the scenario you just described, but compared to existing gas plants, it's a relatively small part of the picture. But I do think in certain instances, there could be some interesting questions around big basal gas plants that I think we'll just have to see. I mean, it's still a little early to say, but that could be very much a way to loosen the stringent. to some degree.

Virtual power plants are becoming a reliable way for utilities to manage capacity, but enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched and being able to prove it from the control room to the living room. Energy Hub's platform handles the full picture, from near real-time forecasting, locational dispatch, and the kind of rigorous verification that holds up when regulators, grid operators, or leadership ask, did it deliver? Easy enrollment creates momentum.

Proven performance builds trust. That's why more than 170 utilities rely on Energy Hub to manage over 2.5 million devices delivering 3.4 gigawatts of flexible capacity. See what that looks like at energy hub.com. We're living through a profound economic shift, and energy sits at the center of all of it. Trillions of dollars are flowing into power plants,

transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital,

shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Okay, so let's get into the procedural stuff. There's a not short road between today with these rules having been proposed

and anything actually being enacted into law. You just talk through the process looking forward and sort of where the key pitfalls are in terms of whether this is going to become real. Yeah, so first thing is EPA actually I also put this in the federal register. to make it official. That'll happen within weeks. Then the clock starts on the comment period. So this is when anybody who has strong feelings about the regulation strong enough to sufficiently write an email or piece of favor to submit into the record, we'll do so. And you'll hear from everybody from all across the spectrum, both for and against or suggestions on how to make

things stronger or weaker, all that stuff, right? And then EPA is going to close the comment period and go dark and take in that comment and finalize the regulation. Nothing else can happen before that, right? So no lawsuits, nothing else, right? They got to actually put forward a final rule that is enforceable in binding. That is likely to, I mean, it looks like it sometime next year, midsummer, is when you could expect that. And then as soon as that's in the federal register, then the lawsuits are going to start flying. And they will presume they all, almost all will go to the D.C. Circuit, which will then eventually, you know, one, everybody expects something, some challenge on this to go back to the Supreme Court. And it's really hard to know kind of what the grounds would be or anything until the rule is final. And we've seen in other examples, the final rule can look different than the proposed rule. Like, I mean, it can be, it's based on the same thinking and arguments, but it doesn't, I mean, it might be more stringent. They might go after more existing gas plants. Like, you know, we don't, we won't, we won't. know until they do it. So that's something to watch. Separate from the lawsuits is the state

process that I mentioned, right? So as soon as it's final, EPA is proposing to give states two years to put together state plans and has a whole like check box, you know, a list to check of all the things you've got to do to make a adequate state plan. And then EPA is going to take a year or two review those plans and approve them or deny them. Independent of the lawsuits on the regs themselves that you should expect individual state lawsuits as well around individual state plans. Back to your question, like, what if stakeholders in a state are like, there's so many, they're using all these loopholes, that's not cool. We're going to sue and try and make it stronger. And we don't, you know, it's hard to know yet which court those will go to and then what pathway

that has to getting settled. Obviously, if the Supreme Court strikes a whole thing down, then everything else falls to, but, you know, there's like lots of different layers there. And then a assuming everything actually holds, the first real requirements will start coming in, well, the new source requirements technically start as soon as, you know, all new plants. So anything built after a federal register of the proposal will have these standards apply. And so the gas combined cycle, big baselo gas combined cycle unit is going to have to show how it's going to have carbon capture by 2035, right, to get its permits. And then separate from that for existing, the existing units are going to need to demonstrate

how they're going to comply with whatever the state plan requires of them that has been approved by EPA. And those requirements start to kick in by 2030 for those coal plants that we're talking about. Any coal plant that is not planning to retire will need to start demonstrating how it's planning to comply and how long it plans to stick around. And then gas plants not long after that. Okay, so lots of nuance there, but if I can boil it, yeah, if I can boil it down, there's some things, the regulations on new plants, for example, that would technically take effect pretty much immediately upon this getting published in the Federal Register. However, it would be subject to the legal challenges that are undeniably going to come. And then there's a separate set of things for which actually nothing would take effect for years, four or five years, if I'm adding up the numbers the way that you described it based on the state.

rulemaking procedures, similarly would be subject to the legal challenges. And so, you know, I guess one important question here is just how, if you're a generator or an IPP, if you're a utility, how do you think about this today, right? You've got these proposed rules, but there's so much uncertainty around the application of them, the legality of them, will they hold? we haven't even talked yet about the change of administration, right, and the next administration coming in potentially just like trying to shelve the whole thing. So do we have a sense of maybe with some, I don't know, historical context here?

Like, will this affect decision-making immediately, or is everything just going to be on pause for a while? Or is it business as usual until everything is confirmed? I think we can expect a distribution of behavior. I think some developers are going to hold tight and just kind of figure out what their no regrets. Pathway might be under an array of different scenarios. I think it's slightly easier story for existing coal. Like we said, it's already going on its way out.

A large chunk of the existing fleets are already going to be gone. Maybe coal owners are going to say, well, no matter what happens, if we shut down this extra set of gigawatts, we're probably fine and takes away some potential headaches. or risk if things do hold, right? Like, there's, like, trade-offs there. I think the existing gas question is the biggest one, right? Like, what do you do with, like, I mean, I think it's almost 300 gigawatts of combined cycle units.

So what are you going to do with that, right? And especially the fact that by 2035, you got to capture 90% of your emissions. And you're right. I think some people are going to roll the dice on the political front. because if you have a new president who doesn't care about climate change, there is nothing stopping them from saying, it's not even revoking the rules.

It's just like, we're going to revisit it. We're going to, you know, and just like at a minimum kicking the can, right? And at a maximum, taking it out completely, right? So there's that, there's a separate timeline that matters here, which is the Inflation Reduction Act timeline. Because there are tax credits for clean hydrogen and tax credits for carbon capture

that are available until the early 2030s. Well, they start, the plant, if the plant comes into service by the early 2030s, you can qualify for those. But once you qualify for them, you get them for 12 years or whatever, in the case of the CO2 credits. Yeah, yes, that's right.

But, like, you know, if you aren't in service by that, say, 2032 or whatever, and then you've got this regulatory requirement that kicks in 2035, all of a sudden, you've just, like, given up on 85 bucks a ton, of carbon capture that could have helped you comply if you're an existing plant, right? And so, and that's much more certain.

Like, you know, those rules are in place, those reg, sorry, incentives are in there for 10 years. And although Congress has tried to repeal them, they're pretty politically durable. So it's really, you know, so there's, I think, a way to expect a little more movement towards compliance, even if it's not even framed as compliance,

simply because some of the control technologies are heavily subsidized, right? And it's kind of a no-brainer to take advantage of that now and wait to see how the regs shake down than to get caught the other way around. Right. I mean, I think the simplest way

to think about this is that the inflation reduction act was the carrot, this is the stick, and even if you take away the stick in three, four years, you've still got the carrot as long as the IRA doesn't get repealed or at least these tax credits don't get repealed. So it is, yeah, that's a good point to consider them with each other. I want to spend one more minute on the sort of change of administration thing, though.

As you said, like next administration comes in soon, right? So this is, we have an election coming up next year. Administration begins in early 2025. Is it possible that this just never gets off the ground in the first place, depending on who gets elected? Yeah, I mean, the EPA is signaling that they intend to finalize this by summer of next year, right? So there could be a final rule before we have a new president in the scenario you just described. And that means two potential things.

One is there's this other arcane procedure called the Congressional Review Act where Congress can actually nullify a rule by an act of Congress. But you need the president to sign it. So let's say there's a scenario where you have kind of unified government led by people who don't care about climate change. to keep it nonpartisan for a sec. And those, that doesn't, that just nullifies. They do a resolution, president signs it. The rule's just gone at that point. That is one way this could go if elections completely flip leadership

across the federal government. If you don't have that scenario, but you still have a president, right? Yeah, they could very quickly, I mean, there's a lot of, you've seen this now, this kind of like climate rag back, whiplash between administrations from Obama to Trump to Biden, whereas some of the first things Biden did in office was to revoke a bunch or revisit or instruct EPA to like recompile regulations on certain sources.

And we could very quickly, like you said, early 2025, have a completely different direction from the White House. depending on who's in charge. Let's just assume this sticks. Maybe it'll change to some degree, but let's assume that the basic contours of these rules remain in place and speculate a little bit on what it would mean. So basically, whether you are an existing,

well, in either case, you're an existing plant or you are a new plant. Let's focus on gas for the most part here. It seems to me you have three high-level options. You can shut down or not build. it in the first place. That's option one. You can attach carbon capture up to what we'll need to be 90% carbon capture, or you can blend with and ultimately predominantly fire with hydrogen. Those are basically the three options you've got available to you. Do we have any sense, or just even from your analysis, of what proportion of each of those three things might happen?

So I just add one other point to this first. There is, if you are, you can run below 15, Oh, right. Or you can become a load following or peaker type resource. You can drop yourself out of the race, so to speak. And I actually think that is the most likely pathway for a lot of these big gas plans. That's my early take three or four days after this thing's been out in the world. We have not, we are looking at this rule closely now and plan to analyze it deeply. But at the moment, we're still kind of taking it all in. But the reason why I say that is twofold one, that is largely what EPA's own analysis of its proposal shows.

There's still 1,000-ter-watt hours of natural gas generation on the system by 2035 or 2040 with no carbon capture or hydrogen connected to it. And that is existing plants that weren't covered in the first, place and new plants that are running below the threshold. And I think a really important way to think about this is like, you know, carbon capture is a big expense, even with the carbon capture tax credit. And when you're thinking about installing carbon capture, you have two types of generation you're competing against.

Heavily subsidized new, clean generation, like wind and solar, also gets huge tax credits, right, from the inflation reduction act, or uncontrolled fossil that, as long as it stays below capacity factors, is largely untouched or has a much lower, lower cost requirement. And sure enough, you know, EPA's own analysis finds that there's just like a couple gigawatts of additional installs of carbon capture by 2035 for gas plants and even for coal plants compared to their baseline. Many units either just retire,

like in the case of coal or in the case of gavs. I mean, some stuff doesn't get built, but then most of this is just running, but in a lower role on the grid. And then separately, when we looked at the Inflation Reduction Act of Brodium, we actually found, this is even before you talk about the regs, a huge shift in the role of gas combined cycle units on the grid.

instead of being the large, high-capacity factor baseload role they play currently, the average capacity factor a combined cycling unit today is 55% national average. We see that going down into the 20s because when it's solar are coming on in such huge volumes and their variables. So you're running these gas plants in a much different way by the mid-2030s, even before you talk about the regulation. So there's like other IRA-driven market shifts. that are reducing the role of gas and the way gas operates on the grid that I think

also reinforces what I said. But I think it's like most of the gas is just going to ramp down instead of installing carbon capture. So interesting. So the implication there is it's just like forcing natural gas into, you know, right now natural gas plays multiple roles on the grid. There are different types of plants that indicate that. And it's basically just sort of like wedging natural gas into the one category that, that is probably most difficult to replace with clean generation, at least in the interim,

it's saying, like, it's saying, you know, become a peeker, become a load following resource, or don't do it, I guess. I mean, there are other options, but I guess you're saying the market isn't going to pick those, we think. At least not from the analysis EPA has put out and kind of the shifts we're already anticipating from the IRA, right? And this brings up a different question is, well, should we, should EPA be thinking harder about those other categories, right?

You know, because... Right. I mean, the question I was going to ask and follow up to that is like, what does that do from an emissions standpoint? Obviously, you still have lots of natural gas generation without carbon capture or generating capacity without carbon capture, I guess, with less generation

because they're operating at lower capacity factors. How do you think about that from an overall decarbonization of the grid perspective? So, I mean, with our IRA analysis, we see power sector CO2 emissions dropping potentially quite a large amount, like from like the one and a half billion tons or so from last year, down to maybe half a billion tons, even lower in some instances,

depending on the economics by the early mid-2030s. With the remainder of that, you know, being like 15, 20 percent gas generation, coal is playing a very small share. the EPA analysis of the rule suggests a similar outcome, basically, with only like a small increment of additional emission reductions from the proposal. So it does show that, yes, you're actually getting some incremental gain above and beyond what the IRA would do. But it's, you know, double-digit million metric tons in a half a billion ton power system by the mid-2030s, which is, you know, not a huge shift.

And I think to your point, for the even longer term, for long-term decarbonization, you know, we got to, the U.S. has to get those numbers down even further if we're going to get the most out of electrification of end uses and, you know, of industry and, you know, reduce the amount of, like, remaining emissions that have to get dealt with through direct-air capture or other carbon dioxide removal, right? And so if power is supposed to be the easy part, and we're still in the like multi-100 million

ton world by the late 2030s with this rule in place, then there's probably more to do to get those emissions down further. To what extent do you think that that analysis of the result, that being that most gas plants just sort of ramp down their capacity factor, would change in a world where carbon capture and or hydrogen end up being cheaper than anticipated, right? Like we've had the, we've had lots of instances in history, solar being an obvious example of cost curves falling faster than anyone anticipated at the front end of a major deployment push in the market. You know, in either case, right, for carbon capture, there's an $85 a ton credit until 2032,

as you said. Maybe it's more expensive today even with that credit, but let's say that, you Turns out carbon capture on power plants is actually totally effective and can be sub $85 a ton within that time range. And so the cost is basically net neutral or net negative by that point. Similarly with hydrogen, right, we have up to a $3 kilogram tax credit. We've got turbine manufacturers who are all designing new gas turbines that can support hydrogen blending up to potentially really high percentages. and rapidly falling costs of hydrogen production. Could you see the market actually shifting in either of those directions rather than having the gas plants continue uncontrolled but at lower capacity factor?

Or do you think it's something more structural about the market? No, I think, I mean, if technology is surprised on the upside, you know, fully controlled, it's called it gas with 90% captures or, you know, very, very high hydrogen blends, could play a much bigger role. I mean, I think this is always the case with forward-looking analysis of markets when technology costs are uncertain.

And that could, I mean, I think what would likely happen is you'd see a lot more big gas plants with carbon capture and they'd play a bigger role in the grid than, say, you know, the existing uncontrolled gas does in the EPA analysis now, which I think would be, you know, net good for the climate to be honest. Like, you'd get more juice for the squeeze, so to speak, from these regs if the technology costs come down faster.

And, I mean, there's a couple other question marks that could influence this to the degree to win. So another IRA tax credit holds nuclear, right, retains nuclear on the grid. What happens to those nuclear plants that take that tax credit when it expires 2032? Are they now economically competitive again because of market dynamics? are they not? If they exit, that leaves space, right, for like big, controlled baseload gas in a way that if they're still online,

maybe they're, you know, they wouldn't get, you know, their market sharing that by gas. So there's like that interaction that's worth talking about, maybe geothermal surprises the upside by the mid-2030s and plays that base load role instead, and then all of a sudden nuclear and gas, the carbon capture, go away. There's like a few other ways you could play out the technology uncertainty that would lead to further emission reductions than what this regulation delivers, at least so far from our understanding of the EPA analysis.

Okay, so final question then, you know, obviously there's going to be a lot of action and fighting, legal battles, all sorts of things over the coming months and years with regard to this proposal. What are the kind of signposts that we can watch out for in terms of not, just like is this going to survive a legal challenge or anything like that? But what the market, how the market is reacting, rather? Like, should we be looking on the lookout for announcements of new gas plants that plan to deploy carbon capture? Will we hear from plant operators planning to ramp down capacity? Like, how are we going to start to get a sense of which direction the world is heading?

Yeah, I mean, I think looking at announcements around. carbon capture at new plants or even existing plants now. I mean, there's already been a handful since the IRA got passed because 45Q is helpful there, the carbon capture tax credit. And I think you could see more. I think one particular place to watch is, you know, the net power technology would obviously be, that's like I think up to 98% capture.

That's oxy combustion, the natural gas combustion that sort of like has inherent high-level capture. Yeah, and if the economics that that company talks about are real, then all of a sudden that gets into the no regrets kind of territory I was talking about. Where it's like, well, we don't know what's ahead with this rule, but if we built this thing instead of a conventional combined cycle with retrofit optionality later, that could be a better move for us, right? Like I think looking at some of those tradeoffs that developers are considering it's important.

I think also looking at, I mean, we, every year, more coal operators announced more retirements than they did the year before, right? And if we see that trend continue or accelerate in response to this regulation, I think that's going to be another important place to watch because, you know, even though there's more gas and coal in the system now, coal still emits more on a per megawatt hour basis, right? So it still matters, at least for the near or medium term, from an emissions perspective. And then I would watch states posture here. it's not really just a blue-red state kind of conversation. One wonky nuance is there's a handful of, quote-unquote, blue states that have carbon pricing

that covers their existing power plants right now. EPA is largely quiet about how that would fit in this regime and is taking comment on it. But you can imagine a final rule that doesn't accommodate that carbon pricing will have some states that are normally climate champions being kind of grumpy about what they're going to do, you know, California, New York. And I mean, I'm not, that's another place to watch is how they thread the needle and feel like their fleets are going to be handled kind of in a special way, you know, based on their preferred regulatory approach.

All right, John, I feel much more equipped to pretend like I understand what's actually going on here than I did an hour ago. So thank you for that. Thanks for coming on. Thanks a lot. I try my best. This is a good conversation. Thanks for having Michelle. John Larson is a partner at Rodium Group, where he leads U.S. climate policy research.

This show is a co-production of PostScript Media and Canary Media. You can head over to canarymedia.com for links to today's topics and some of the analysis from John's team. PostScript is supported by Prelude Ventures, a venture capital firm that partners with entrepreneurs to address climate change across a range of sectors, including advanced energy, food and ag, transportation and logistics, advanced materials and manufacturing, and advanced computing. This episode was produced by Daniel Waldorf. Mixing by Roy Campanella and Sean Marquand, theme song by Sean Marquand.

I'm Shale Khan, and this is Catalyst.