How will the “Clean Power Plan” Affect Michigan?
by Jamie Scripps
On August 3, 2015, the Obama Administration finalized new rules aimed at reducing carbon pollution from the power generating sector. These rules, known as the “Clean Power Plan,” are an important step in curbing a major contributing factor in climate change. Section 111 of the federal Clean Air Act (42 U.S.C. §7411) and the U.S. Supreme Court’s decision in Massachusetts v. EPA, 549 U.S. 497 (2009) provide the legal authority for the Clean Power Plan.
Section 111 requires the U.S. Environmental Protection Agency (“U.S. EPA”) to regulate a source which “causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare.” In Massachusetts v. EPA, the U.S. Supreme Court held that greenhouse gases, including carbon dioxide emissions from motor vehicles, meet the Clean Air Act’s definition of an air pollutant. As a result, U.S. EPA is required to treat carbon pollution as an air pollutant, and to decide whether carbon dioxide from vehicle emissions causes or contributes to endangerment of public health and welfare.
Building upon this decision, in June 2013, President Obama announced his Climate Action Plan, which directed EPA to develop carbon pollution standards specifically for the power generating sectorThe result is the Clean Power Plan, a historic move to comprehensively address carbon dioxide emissions from this carbon-intensive sector. “Carbon dioxide (CO2) is the primary greenhouse gas [GHG] pollutant, accounting for roughly three-quarters of global greenhouse gas emissions in 2010 and 82 percent of U.S. greenhouse gas emissions in 2013. Fossil fuel-fired electric generating units (EGUs) are by far the largest emitters of GHGs, primarily in the form of CO2, among stationary sources in the U.S.” U.S. EPA expects the Clean Power Plan to reduce power sector carbon emissions by 32% (from 2005 levels) by 2030, with individual state targets tailored to each state’s power generation mix.
With these individualized targets in mind, states will play a key role in implementing the Clean Power Plan. Section 111(d) of the Clean Air Act requires states to develop their own plans for regulating pollutants from existing stationary sources whenever U.S. EPA promulgates a standard for new sources in a particular category. These state implementation plans, known as Section 111(d) plans are subject to federal approval, and allow states to customize their responses to the new rules. If a particular state fails to come up with its own plan, the state will be subject to a federal plan. Valerie Brader, the Executive Director of the newly-created Michigan Agency for Energy (“MAE”), has indicated that Michigan intends to develop and submit its own state implementation plan by September 6, 2016 in order to maintain control of its energy future.
While Governor Snyder’s administration apparently intends to comply with the mandate of the Clean Power Plan, Attorney General Bill Schuette opposes it. In August, he added Michigan to a multi-state emergency petition to U.S. EPA to delay implementation of the Clean Power Plan, which was denied. Mr. Schuette has indicated he is considering joining another lawsuit now that the rule is final. On behalf of the Snyder Administration, Ms. Brader has stated that Michigan will comply and will not challenge the Clean Power Plan in federal court, explaining that Attorney General Schuette is acting “in his individual capacity” in challenging the rules.
The new rules enumerate three “building blocks” for state compliance — on-site energy efficiency improvements at coal-fired power plants; increased use of zero-carbon generation, such as wind and solar; and increased use of natural gas. Challengers argue that the inclusion of zero-carbon sources such as renewables and natural gas which fall “outside the fence line” of a generating plant as a “building block” to achieve compliance with the new targets for CO2 reduction is outside the scope of the Clean Air Act. By contrast, those defending the Clean Power Plan are confident that the Clean Air Act leaves it to U.S. EPA to determine the appropriate boundaries of any compliance effort.
Another legal challenge to the Clean Power Plan is based upon an apparent discrepancy between the House and Senate versions of the 2008 amendments to the Clean Air Act. The House version appears to prohibit power plant regulation under Section 111d, since they are already regulated under the air toxics program in Section 112. Alternatively, the Senate version is concerned with whether a second rule is created to regulate a pollutant that is already being regulated. Proponents argue that “EPA has not regulated greenhouse gases previously, and the agency argues it deserves deference from the courts in choosing the Senate version.”
While some legal uncertainty will remain as these issues work their way through the courts, momentum is on the side of implementation of the new rules as states begin the process of crafting their individual plans. As Governor Snyder’s administration convenes its stakeholder process, Michigan will be charting a course for achievement of state-specific carbon emission levels that have been set by U.S. EPA.
The Clean Power Plan establishes overall interim and final target emission rates for carbon from steam electric and natural gas-fired power plants. The rules also establish custom interim and final goals for each state, based on the overall target emission limits and the state’s unique power generation mix. Michigan has the option of using either a rate-based emission reduction approach (carbon pounds per MWh) or a mass-based approach (total tons of carbon). Measured by emission rate, the rules require Michigan to achieve a rate of 1,169 carbon pounds per MWh generated from EGUs or earned through low-carbon generation or customer efficiency programs. This target is down about 39% from the historic baseline of 1,928 carbon pounds per MWh in 2012, and down roughly 26% from the 2020 projection of 1,588 carbon pounds per MWh. A mass-based measurement requires a reduction to 47,544,064 total tons of carbon from a 2012 baseline of 69,860,454 tons, and a 2020 projection of 54,837,037 tons. If Michigan uses a mass-based goal, the new rules will require that Michigan demonstrate that carbon reductions from existing sources do not lead to increases in emissions from new sources.
Because the rules use 2012 as the baseline year for measuring carbon reductions, Governor Snyder’s administration is disappointed that Michigan will not receive credit under the Clean Power Plan for carbon reductions from renewable energy development and energy efficiency improvements made before 2012. Ms. Brader has stated that the Clean Power Plan rules “reward delay over early action,” particularly when it comes to renewable energy.
Prior to the promulgation of the Clean Power Plan, Michigan had already seen strong investment in the development of wind and solar energy projects as a result of the passage of the Michigan “Clean, Renewable and Efficient Energy Act” in 2008 (PA 295 of 2008). According to the Michigan Public Service Commission (“MPSC”), “Statewide, there has been significant investment in the renewable energy sector since the passage of PA 295 in 2008. Assuming an installed cost of $2,000 per kW for new renewable energy projects, $2.9 billion has been invested to bring approximately 1,450 MW of new renewable energy projects on-line through 2014 in Michigan.” The law’s energy efficiency standard has had a similar impact. According to a recent MPSC report, “E[nergy] O[ptimization] programs across the state accounted for electric savings totaling over 1.4 million MWh (megawatt hours) and natural gas savings totaling over 4.86 million Mcf (per thousand cubic feet) for program year 2014. Those numbers equate to approximately 172,500 households’ annual electric usage, and around 57,000 households’ annual natural gas usage.”
Renewable energy and energy efficiency investments made after 2012 will count toward compliance with the rules, and will play a key role in moving Michigan’s power-related carbon emissions in the right direction. There is also an extra incentive for renewable energy – particularly wind and solar – under the voluntary add-on to the Clean Power Plan called the “Clean Energy Incentive Program.” This program is optional, but if Michigan added the program to its implementation plan, it would give Michigan extra compliance credits in 2020 and 2021 for wind and solar generation and energy efficiency measures in low-income communities.
This fall, the MAE will initiate a stakeholder process to begin gathering information and comments on the development of Michigan’s implementation plan. Two major utility stakeholders, DTE and Consumers Energy, support Michigan’s effort to develop its own plan and agree with Ms. Brader that it is important for Michigan to “maintain control of its energy future.” One of the express goals of the MAE stakeholder process will be to identify the most cost-effective power generation and efficiency mix for Michigan’s compliance with the Clean Power Plan.
5 Lakes Energy and the University of Michigan developed a model for this purpose, the State Tool for Electricity Emissions Reduction (STEER), which is being used by eight states in the development of state implementation plans. The STEER analysis for Michigan, published by the Institute for Energy Innovation, shows that “reducing energy waste is Michigan’s least-cost tool for complying with the Clean Power Plan.” Additionally, “[l]east-cost generation options represent a tradeoff between natural gas, cogeneration, and renewable energy, depending on the long-term projected cost of natural gas.”
The Legislature will need to amend certain statutes in order for Michigan to comply with the Clean Power Plan at the lowest cost. Michigan is not the only state facing this task. According to the National Conference of State Legislatures, “[s]o far in the 2015 session, legislatures in 31 states introduced 89 bills or resolutions related to the Clean Power Plan and power plants’ carbon dioxide emissions regulations. Specifically, 24 states have introduced 60 bills and seven states have enacted legislation.” In Michigan, Senator Mike Nofs, Chairman of the Senate Energy & Technology Committee, and Representative Aric Nesbitt, Chairman of the House Energy Policy Committee, have spearheaded a review of Michigan’s existing energy laws. However, while Michigan’s lawmakers understand the need to accommodate the Clean Power Plan, it remains unclear how the Legislature and Governor Snyder will ultimately resolve compliance with the new rules.
With the need to reduce carbon emissions from power plants, energy efficiency and renewable energy development are increasingly important to Michigan’s power generation mix. Under current state law, however, it may not be possible for Michigan to achieve adequate energy efficiency improvements or wind and solar deployments in time for the state to achieve the Clean Power Plan goals. For example, Michigan’s 2008 renewable energy standard requires that at least 10% of the electricity that electric suppliers sell to retail customers come from renewable energy sources by this year.. According to the MPSC, “[a]ll providers are expected to be able to meet the 10 percent renewable energy standard in 2015.” If the utilities meet this standard this year, there will be a need for a new mechanism such as another renewable energy standard, or an integrated resource planning process, or some combination of both, to assure that Michigan is generating enough renewable energy to adequately cut carbon in its power generating sector.
Lawmakers should also bolster the state’s efforts with energy efficiency or “energy optimization” (“EO”). Michigan’s current EO standard requires utilities to provide energy efficiency programs that create savings of 1% of retail sales of electricity , and 0.75% of retail sales of natural gas. PA 295 also includes spending and rate-recovery caps in its energy optimization section. These caps prohibit a utility from spending more than 2% of total retail sales revenues from the previous two years on EO programs, and prevent a utility from increasing its rates to recover any costs which exceed 1.7% of total retail sales revenue for natural gas providers and 2.2% of total retail sales revenue for electric utilities. The Legislature will need to amend the state statute to remove these barriers to energy efficiency, Michigan’s least cost option for complying with the Clean Power Plan, so that Michigan can achieve its carbon reduction goals in the most cost effective manner.
Even without the impetus of the Clean Power Plan, it would make good economic sense for Michigan to increase energy efficiency even more than what is required under current law. Since their inception in 2008, Michigan’s EO programs have been incredibly cost-effective. According to the MPSC, “For every dollar spent on EO programs in 2014, customers should expect to realize benefits of $4.38.” There is significant cost-effective energy efficiency potential remaining. According to a 2013 study by the MPSC, DTE and Consumers Energy, “[f]or the state of Michigan overall, the achievable potential for electricity savings in 2023 is 15.0% of forecasted kWh sales for 2023. The achievable potential for natural gas savings in 2023 is 13.4% of forecasted MMBtu sales for 2023.” In light of this potential, strong energy optimization programs should be a major component in Michigan’s plan to achieve the carbon reductions required by the Clean Power Plan.
Overall, the new rules present a challenge to our lawmakers, and a chance for all Michigan residents to benefit from a cleaner, more efficient energy system. Michigan has an obligation to act, and an opportunity to seize the benefits of the Clean Power Plan’s call for an energy transformation.
 Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, 80 Fed. Reg. 64,661 (October 23, 2015) (to be codified at 40 C.F.R. pt 60)
 42 U.S.C. §7411 (b)(1)(A)
 Executive Office of the President, The President’s Climate Action Plan, June 2013, p. 6, available at https://www.whitehouse.gov/sites/default/files/image/president27sclimateactionplan.pdf
 U.S. EPA, Regulatory Impact Analysis for the Clean Power Plan Final Rule, August 2015, available at http://www3.epa.gov/airquality/cpp/cpp-final-rule-ria.pdf
 Andy Balaskovitz, Midwest Energy News, “Michigan announces state-based strategy to comply with Clean Power Plan,” September 1, 2015, available at http://midwestenergynews.com/2015/09/01/michigan-announces-state-based-strategy-to-comply-with-clean-power-plan/
 Paul Egan, Detroit Free Press, “Michigan will comply with carbon reduction plan,” September 1, 2015 available at http://www.freep.com/story/news/2015/09/01/michigan-comply-carbon-reduction-plan/71505248/
 E&E Publishing, “Legal Challenges — Overview & Documents,” available at http://www.eenews.net/interactive/clean_power_plan/fact_sheets/legal
 U.S. EPA, “Clean Power Plan: State at a Glance, Michigan,” available at http://www3.epa.gov/airquality/cpptoolbox/michigan.pdf
 Jay Greene, Crain’s Detroit Business, “Michigan to develop own carbon reduction plan to comply with EPA rules,” September 1, 2015, available at http://www.crainsdetroit.com/article/20150901/NEWS/150909997/michigan-to-develop-own-carbon-reduction-plan-to-comply-with-epa-rules
 Report on the Implementation of the P.A. 295 Renewable Energy Standard and the Cost-Effectiveness of the Energy Standards (Feb 2015), p. 23, available at http://www.michigan.gov/documents/mpsc/PA_295_Renewable_Energy_481423_7.pdf
 Michigan Public Service Commission, 2015 Report on Energy Optimization Programs and Cost-effectiveness of PA 295 Standards, p.1, available at http://www.michigan.gov/documents/mpsc/2015_Energy_Optimization_Report_501851_7.pdf
 U.S. EPA, “The Clean Power Plan: Clean Energy Incentive Program,” available at http://www3.epa.gov/airquality/cpp/fs-cpp-ceip.pdf
 Emily Lawler, MLive, “Utilities support Michigan curbing its own carbon under federal Clean Power Plan,” September 2, 2015, available at http://www.mlive.com/lansingnews/index.ssf/2015/09/utilities_support_michigan_cur.html
 Institute for Energy Innovation, “Michigan and the Clean Power Plan: Assessment of Cost-Effective Compliance Options,” July 2015, available at http://instituteforenergyinnovation.org/files/dmfile/MichiganandtheCleanPowerPlan2.pdf
 National Conference of State Legislatures, “States’ Reactions to EPA Greenhouse Gas Emissions Standards : 2015 State Action,” available at http://www.ncsl.org/research/energy/states-reactions-to-proposed-epa-greenhouse-gas-emissions-standards635333237.aspx
 Report on the Implementation of the P.A. 295 Renewable Energy Standard and the Cost-Effectiveness of the Energy Standards (Feb 2015) available at http://www.michigan.gov/documents/mpsc/PA_295_Renewable_Energy_481423_7.pdf
 MCL 460.1077(1)(d)& (3)(d).
 MCL 460.1089(3).
 Michigan Public Service Commission, 2015 Report on Energy Optimization Programs and Cost-effectiveness of PA 295 Standards, p.1, available at http://www.michigan.gov/documents/mpsc/2015_Energy_Optimization_Report_501851_7.pdf.
 Michigan Public Service Commission, 2015 Report on Energy Optimization Programs and Cost-effectiveness of PA 295 Standards, p.12, available at http://www.michigan.gov/documents/mpsc/2015_Energy_Optimization_Report_501851_7.pdf.
Posted by Jamie Scripps, Principal
February 9, 2016