Emission Rate Credits in the Clean Power Plan

In the Clean Power Plan, the Environmental Protection Agency (EPA) sets national carbon dioxide (CO2) emission limits for existing coal- and gas-fired power plants. States have an opportunity to adopt "state plans" that include enforceable emission limits and other policies to ensure power plants comply. An important choice for states is whether to adopt a rate-based or mass-based plan. This blog focuses on a necessary feature of rate-based plans: Emission Rate Credits (ERCs).

Mass-based plans, just for context

In mass-based plans, the state creates a permit - called an allowance - for each ton of carbon pollution power plants will be allowed to emit in the coming year. It then distributes these allowances. At the end of the year, power plant owners must submit to the state the number of allowances equal to their carbon dioxide emissions: if a power plant emitted 500 tons of CO2 that year, its owner must give the state 500 allowances. Actions that shift electricity production to cleaner sources or reduce electricity consumption will manifest in the amount of carbon pollution emitted from a power plant's smokestack.

Why we need ERCs in rate-based state plans

In rate-based plans, the state establishes an allowed emission rate for its power plants: pounds of CO2 emitted per megawatt-hour (MWh) of electricity generated. At the end of the year, power plant owners must show that their emission rate was equal to or less than the rate-based limit. Importantly, actions that shift electricity production to cleaner sources or reduce electricity consumption do not manifest in the power plant's emission rate; by analogy, if I drive my 2000 Honda Accord Coupe fewer miles, its fuel economy in miles-per-gallon does not change. States that apply rate-based limits must create Emission Rate Credits (ERCs) to account for these positive actions.

What's an ERC?

One ERC equals an emissions-free megawatt-hour of electricity. The operator of a coal or natural gas plant can add the emissions-free MWh of acquired ERCs to the MWh that the plant actually produced during the year. The operator then divides that combined number of MWh into the amount of CO2 emitted by the plant to determine the plant's effective emission rate for compliance purposes, as shown in the formula below.

Effective emission rate = lbs CO2 emitted / (MWh generated + ERCs purchased)

The plant is in compliance if its effective emission rate - including the ERCs - is equal to or less than the plant's allowed emission rate.

Which resources can create ERCs?

ERCs can be created, first, by power plants that generate emissions-free electricity, including wind, solar, geothermal, hydroelectric, tidal, and nuclear plants. These plants can only earn ERCs from power generation capacity installed after 2012. A wind turbine installed in 2010 thus cannot generate ERCs, but one installed in 2013 can. A 1970s-vintage nuclear power plant cannot generate ERCs, but if it got a capacity uprate in 2013 - if it changed operational practices so it produces more power than before - it can receive ERCs from the output of the extra capacity.

Second, energy-saving projects - like a lighting retrofit in an office building - installed in 2013 or later can create ERCs, provided that savings are properly quantified and verified (more on this here).

Third, some power plants that emit CO2 are also able to generate ERCs, but like above, only from power generation capacity installed after 2012. Examples include power plants that burn trash, combined heat and power and waste heat recovery units, and biomass-fired power plants.

Finally, existing coal and gas-fired power plants can generate ERCs under two circumstances. The first: if a coal- or gas-fired power plant produces electricity at an emission rate below its limit, it can be issued ERCs based on the difference between the emission limit and the power plant's reported emission rate. Second: in states that apply different emission performance limits to coal- and gas-fired power plants, existing natural gas-fired power plants can produce "gas-shift ERCs" (GS-ERCs) that represent the shift of electricity production from high-polluting coal plants to lower-polluting natural gas plants.

What projects are eligible to receive credits under the Clean Energy Incentive Program (CEIP)?

A wind or solar energy project developed after final submission of a state plan is eligible to receive one ERC for each MWh generated in 2020 and 2021, and a low-income energy efficiency project developed after final submission of a state plan is eligible to receive two ERCs for each MWh saved in 2020 and 2021. There is also a process for converting ERCs to allowances in a mass-based program.

Which MWhs can be used to create an ERC?

To be eligible to be turned into an ERC, MWhs must come from eligible projects that were installed in 2013 or later, connected to the grid, and located in a rate-based state. Only MWhs produced or saved in 2022 through 2030, except in the case of the CEIP, are eligible for ERCs.

These restrictions make sense:

  • Power plants (and energy efficiency projects) installed prior to 2013 are already displacing emissions from coal- and gas-fired power plants, and are therefore excluded from EPA's determination of potential emission reductions from the 2012 baseline.
  • An increase in off-grid generation does not displace emissions from grid-connected coal- and gas-fired power plants. Likewise, growing trees or saving non-electric forms of energy does not displace emissions from grid-connected plants.
  • The carbon pollution limits apply in the years 2022 through 2030 so emission reductions outside of this period are irrelevant for the purposes of the rule (except in the case of the CEIP).
  • Creating ERCs from projects in mass-based states and then applying them to a power plant's emission rate in a rate-based state would be counting the same emission reductions twice. There is an exception, though. Projects located in a mass-based state that can show a power purchase agreement proving their electricity is being used in a rate-based state are eligible for ERCs. These projects are not displacing emissions in their home state, so this is not considered double-counting.

Bottom line: If your project is grid-connected, located in a rate-based state, and produces CO2-free electricity or saves electricity, your project can likely receive ERCs for the MWhs it produces or saves electricity above and beyond 2012 levels between 2022 and 2030.

How are MWhs from qualifying resources transformed into an ERC?

EPA's Emission Guidelines describe a two-step process for project developers, and some additional steps for states.

First, developers submit an eligibility application to the state that:

  • shows the eligibility criteria described above are met;
  • includes an Evaluation, Measurement, and Verification (EM&V) plan describing how electricity produced or saved will be quantified and verified, with requirements specific to the type of resource (renewable, energy efficiency, etc.);
  • includes a verification report from an independent verifier signing off that the project meets eligibility criteria. States have to develop a process to accredit independent verifiers, and de-accredit bad actors or the unqualified; and

The state reviews this application and if approved, registers the project in an ERC tracking system.

Second, after the project has been implemented and is producing or saving energy, for each time period for which they seek ERCs, project developers submit a Measurement and Verification (M&V) report that:

  • demonstrates the project is installed and working properly;
  • describes how the methods described in the EM&V plan were implemented;
  • documents the amount of electricity generated or saved; and
  • includes another sign-off from an independent verifier.

The state then reviews this M&V report, and issues an appropriate number of ERCs for the project into the tracking system. Fossil fuel-fired power plants can purchase and use these ERCs to adjust their emission rate.

New processes, but familiar

The ERC-creation and tracking process is similar to the one used to create Renewable Energy Credits, and so little extra work will be needed for renewable energy projects. For energy efficiency, there are well-established protocols to quantify savings, but less experience turning savings into a verified, tradable credit. States will have to implement new processes.