EPA Emissions Rule Could Accelerate Growth of Carbon Capture and Green Hydrogen
On May 23, 2023, the U.S. Environmental Protection Agency (EPA) published in the Federal Register new proposed greenhouse gas (GHG) standards for fossil fuel-fired electric generation facilities. The proposal would impose on new and existing generators increasingly stringent GHG emissions limits and, if implemented, would be the first time the federal government has limited such emissions from existing electrical generation facilities. EPA proposes, among other things, recognizing blending hydrogen produced with low GHG emissions and carbon capture and sequestration (CCS) as compliance pathways, which, in turn, could further drive demand for these technologies and complement other green hydrogen incentives.
EPA’s proposed rule represents the latest effort to regulate electric power GHG emissions following its 2009 finding that such emissions endanger public health and welfare. In 2015, EPA promulgated the Clean Power Plan, which was intended to reduce GHG emissions from existing fossil fuel-fired generation facilities. It set standards for fossil fuel-fired electrical generation facilities, customized goals for states to cut emissions, and provided the states with a variety of means to reduce such emissions, including switching from burning coal to natural gas, increasing renewable energy sources, and making it more difficult to build new coal-fired power plants. Due to significant legal challenges, the Clean Power Plan was never implemented. Thereafter, in 2019, EPA repealed the Clean Power Plan and promulgated the Affordable Clean Energy rule, which took a different approach to addressing GHG emissions. Instead of setting emission limits, the Affordable Clean Energy rule called for efficiency improvements at electrical generation facilities and directed states to take the initiative on how they choose to regulate power plant emissions. In January 2021, the D.C. Circuit vacated the Affordable Clean Energy rule, and, in June 2022, the Supreme Court reversed the vacatur of the Affordable Clean Energy rule and upheld the repeal of the Clean Power Plan.
EPA now proposes to formally repeal the Affordable Clean Energy rule and to implement new GHG emission limits and guidelines for fossil fuel-fired power plants based on cost-effective and available control technologies. Specifically, EPA’s proposed “new source performance standards” (NSPS) and emission guidelines reflect the application of the “best system of emission reduction” (BSER) that, taking into consideration various criteria (e.g., costs, energy requirements, and statutory factors), is adequately demonstrated for the purpose of improving the emissions performance of covered electric generating units. Consistent with EPA’s traditional approach to establishing pollution standards for power plants under section 111 of the Clean Air Act, the proposed standards are based on technologies such as CCS, low-GHG hydrogen co-firing, and natural gas co-firing, which can be applied directly to fossil fuel-fired power plants. The rule requires fossil fuel-fired electric generators to meet standards on a three-phase timeline: Phase I commences when the rule is final and then becomes increasingly more stringent in Phase II (beginning in 2032-2035) and Phase III (beginning in 2038).
Low-GHG hydrogen and CCS as a “best system of emission reduction”
A key component of EPA’s proposal is the BSER outlined by EPA to address GHG emissions.
For certain frequently used combustion turbine generators, this focuses on co-firing of “low-GHG” hydrogen, i.e., hydrogen produced through a process that results in a GHG emission rate below 0.45 kg CO2e per kg H2 measured from well-to-gate, to comply with the new standards. Hydrogen produced by using non-emitting energy sources such as solar or wind, i.e., green hydrogen, to split water into hydrogen and oxygen through electrolysis, can help facilities meet EPA’s proposed BSER. The proposed rule recognizes a BSER pathway that requires co-firing with low-GHG hydrogen at a ratio of 30% (by volume) beginning in 2032 and ramping up to co-firing with low-GHG hydrogen at a ratio of 96% (by volume) beginning in 2038.
In addition, the proposed rule recognizes a BSER pathway for facilities that incorporate CCS. For large existing fossil fuel-fired facilities with natural gas units, EPA is proposing that BSER be based on either 90% capture of carbon dioxide using CCS by 2035 and/or meeting co-firing of low-GHG hydrogen requirements, as described above. For existing fossil fuel-fired facilities with coal units that are expected to remain operational beyond 2040, EPA is proposing that BSER be based on the use of CCS with 90% capture of carbon dioxide. EPA has determined that CCS satisfies the BSER criteria for these facilities because it is adequately demonstrated, achieves significant reductions in GHG emissions, and is highly cost-effective.
Potential to accelerate CCS and green hydrogen growth
The proposal is subject to change through the rulemaking process, and there may be questions around whether EPA’s CCS and low-GHG hydrogen BSER proposals, taking into account costs and other factors, are adequately demonstrated to be sufficient to meet EPA’s mandate. EPA will accept public comments on the proposed rule through July 24, 2023.
Nevertheless, the proposal has the potential to spur significant new investment and technological developments and complement other initiatives already under way. For instance, EPA notes that clean hydrogen tax credits established in the Inflation Reduction Act (IRA) and certain grant programs administered by the U.S. Department of Energy (DOE) are expected to drive down the associated low-GHG hydrogen costs. These efforts are already progressing, with nearly $42 million in funding to advance clean hydrogen technologies announced on May 22, 2023, hydrogen hub funding applications currently under review by DOE, and the U.S. Treasury Department expected to issue guidance providing greater certainty as to how GHG emissions from hydrogen production will be evaluated to clarify which projects are eligible for the new hydrogen tax credits. The proposal may also complement recently expanded tax credits incentivizing CCS and certain grant programs administered by DOE, such as: (i) the $820 million for up to 10 carbon capture large-scale pilot projects to develop transformational carbon capture technologies that capture carbon emissions from existing coal or natural gas electric generation facilities and existing industrial facilities not purposed for electric generation; and (ii) the $1.7 billion available for approximately six projects to demonstrate commercial-scale carbon capture technologies, pipeline transportation, and geologic storage infrastructure that can be readily replicated and deployed at fossil-fuel power plants and major industrial sources of carbon dioxide.
As these policies and others continue to incentivize green hydrogen production and new investments in related technology and infrastructure, offtake opportunities will also need to scale up quickly to create sustainable clean hydrogen project economics. EPA’s proposal could provide important long-term offtake opportunities, thus expanding the market for green hydrogen and compounding the benefits of other incentives to accelerate the growth and long-term economic viability of green hydrogen. Given that projects will need to commence construction before the end of 2032 in order to qualify for the carbon sequestration tax credit or the clean hydrogen tax credit under the IRA, if EPA’s proposal is implemented, it could create a significant a role for carbon sequestration and low-GHG hydrogen projects, potentially further driving demand for these technologies and complimenting other incentives.
