Association for Public Policy Analysis & Management

In June 2014, the U.S. EPA released the Clean Power Plan, a ruling under section 111(d) of the Clean Air Act to reduce carbon emissions from existing generating units in the power sector. The ruling sets individual emissions limits for each state that must be reached by 2030, however it does not provide any prescription as to how these reductions must be achieved. Each state is granted the flexibility to develop their own compliance path that best suits their particular generation portfolio, resource availability, existing programs, and regulatory environment. Due to this inherent flexibility, there is still much uncertainty surrounding how the prescribed targets may be achieved, as well as the potential economic impacts of compliance. Specifically, each state will face three key decisions when developing their compliance plans.

First, groups of individual states may choose to form cooperative multi-state teams, in which case their emission targets are combined and the resultant consortium is responsible for jointly developing a cooperative compliance strategy. This may be beneficial in situations where neighboring states have different resources, or in regions where power system operations do not closely follow state lines. Second, states (or groups of states) may choose to pursue either rate-based (lbs CO₂/MWh) or mass-based (lbs CO₂) compliance targets. The ruling provides a mechanism for converting between these two approaches. Third, once this compliance framework is in place, each state must develop and implement a regulatory mechanism for meeting their prescribed emissions targets. Potential options include 1) a regulatory framework, i.e. mandating plant closures or emissions limits for specific generating units, 2) an incentive framework, i.e. implementing a carbon tax or other direct incentive for units to reduce their emissions, or 3) a market framework, i.e. a “cap-and-trade” system with exchangeable emissions certificates.  

We first review the four building blocks that EPA used to derive emissions targets for each state and discuss how these measures may be a “red herring” for those tasked with developing compliance strategies. Using Illinois as a test case, we then present the technical and economic impacts of the various potential compliance strategies discussed above. These results were obtained through application of AURORAxmp, a commercial power systems modeling tool that is widely used by utilities and analysts throughout the U.S to analyze power market operations and long-term expansion planning. We model the operation and expansion of the Illinois power system through 2040 to understand how the generation portfolio might change as result of implementing different compliance strategies and regulatory frameworks. We also compare the total compliance cost of each approach and analyze the resultant impacts to wholesale electricity prices. Of primary interest is understanding what potential benefits may result from pursuing mass-based, as opposed to rate-based, compliance as well as those that stem from implementing a multi-state compliance strategy. In this case, we also analyze several different potential multi-state collaborations to determine which group of Midwest states could form the most effective multi-state consortium.