Op-Ed: CPP is an Opportunity for Appliance and Equipment Industry

September 28, 2015

Law360, New York (September 2015, 5:35 PM ET)

The U.S. Environmental Protection Agency has issued a carbon dioxide emissions rule, the Clean Power Plan, that will likely have a significant impact on the appliance and industrial equipment industry, due to states’ use of energy efficiency to meet EPA state-specific emissions goals.[1]

States seeking to comply with the rule will likely respond by employing programs for energy-efficient products, thereby helping reduce power plant emissions. Increased sales would be a plus for producers and marketers of such products. However, greater state involvement could result in a plethora of burdensome state efficiency rules.

Demand-Side Energy Efficiency as a Compliance Option Under the EPA’s Rule

On Aug. 3, 2015, the EPA issued a rule that sets state-specific goals for CO2 emissions and provides guidelines for states to follow in developing plans to achieve the goals. If a state does not develop its own plan, or the EPA does not approve a state’s plan, the agency will develop one for the state.

The EPA’s 2014 proposed rule included demand-side energy efficiency as one of four “building blocks” to determine the agency’s state-specific emissions goals.[2] In the final rule, the EPA eliminated demand-side energy efficiency (“building block 4”) to determine the goals.[3] This was an effort to reduce the legal vulnerability of the rule, by avoiding imposing power plant requirements that depend on activity “outside the fence.” But the EPA has maintained that demand-side energy efficiency is an option that states can use to meet the goals. Extra credit will even be provided for energy savings through demand-side energy-efficiency projects implemented in low-income communities.

The EPA also indicates that it will take a rigorous approach to measuring energy savings from demand-side energy-efficiency measures: savings are to be calculated on the basis of quantified ex post savings, not projected or claimed savings. This is spelled out in greater detail in a related EPA proposal discussed below.

The EPA’s Proposed Template for Compliance

Simultaneously with issuance of the final rule, the EPA proposed model rules that can serve as a template for states when preparing their state plan submittals.[4] There is opportunity for public comment on the proposal.

Consistent with the final rule, the EPA’s proposal takes a broad approach on what can qualify as a demand-side energy-efficiency program and takes a rigorous approach on measurement of savings under such programs.

The EPA proposes that any demand-side energy-efficiency program, project or measure that results in megawatt-hour savings may be potentially eligible to generate emission reduction credits, provided that it meets the presumptively approvable provisions for eligibility and the supporting evaluation, measurement and verification is rigorous, transparent, credible, complete and fulfills the requirements provided in the agency’s emission guidelines and the state plan. Examples of potentially eligible demand-side energy-efficiency program and project types include:

  • Publicly or utility-administered energy-efficiency programs, including those implemented in low-income residences and facilities.
  • Project-based energy efficiency evaluated site by site, for example those implemented by energy service companies at commercial buildings and industrial facilities.
  • State and local government building energy code and compliance programs.
  • State and local government incremental product energy standards.

The EPA’s proposal provides that it is presumptively approvable to quantify energy savings as the difference between actual metered electricity usage after an energy-efficiency program, project or measure is implemented and a “common practice baseline.” In short, CPB defines what would commonly have happened in the absence of the energy-efficiency program, project or measure.

The counterfactual analysis involved in determining CPB would be complex and potentially contentious. The EPA proposal states that the applicable CPB depends on a number of factors, such as the characteristics of the energy-efficiency program, project or measure, the mechanism by which electricity customers are engaged, local consumer and market characteristics and the applicable building energy codes and product standards, including the codes and standards compliance rate.

Opportunities and Challenges for the Appliance and Equipment Industry

States seeking to comply with the EPA’s final rule will likely use demand-side energy-efficiency programs to reduce the demand for electricity by end users.

The appliance and equipment industry could benefit from increased sales resulting from such measures. But, state action could result in a multiplicity of rules that industry must comply with. In addition, states scrambling to maximize savings — and seeking to assure that they exceed the CPB threshold — may press for standards that will be objectionable to members of the affected industry segment. This would result in hard-fought state standards-setting proceedings.

There are constraints on state action. Importantly, the federal Energy Policy and Conservation Act contains strong preemption authority over state efficiency rules.[5] Some states, particularly California, have nonetheless been active, including state standards for products purportedly not covered by federal standards and exceptions to preemption, such as state procurement and building code requirements meeting certain criteria. California recently adopted an enforcement rule that imposes severe civil penalties for violations: $2,500 per unit.[6] This dwarfs the $200 per unit civil penalty under the U.S. Department of Energy‘s appliance efficiency program.

Hitching their wagon to California, some states may model programs along the lines of the California efficiency regulations in an effort to earn credit toward compliance with the EPA rule. Some states may adopt a different course for efficiency standards to earn credit. Either way, companies would face multiple state requirements, complicating planning and production and exposing them to compliance-related risks.

Multiple state requirements for products could result in industry pressure to have those products subject to preemptive DOE standards. States might well resist such an effort, in order to preserve programs for which they receive credit toward meeting EPA’s state-specific emissions goals.

Cloudy Horizon

The EPA rule is controversial and opposed by the coal industry, coal-reliant states and other groups. It is being challenged in court and Congress. The rule is already a political football in the 2016 presidential campaign, and a hostile administration after President Obama’s could put the rule in its crosshairs.

Appliance and industrial equipment companies should take these considerations into account as they plan in light of the rule.

—By John A. Hodges, Harris Wiltshire & Grannis LLP

John Hodges is counsel in Harris Wiltshire & Grannis’ Washington, D.C., office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] EPA, Final Rule, Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, 40 C.F.R. Part 60, http://www.epa.gov/airquality/cpp/cpp-final-rule.pdf.

[2] 79 Fed. Reg. 34830 (June 18, 2014).

[3] The three remaining building blocks for determining the goals are: (1) heat rate improvements at affected coal-fired steam electric generating units; (2) generation shifts among affected EGUs; and (3) renewable generating capacity.

[4] EPA, Proposed Rule, Federal Plan Requirements for Greenhouse Gas Emissions from Electric Utility Generating Units Constructed on or Before January 8, 2014; Model Trading Rules; Amendments to Framework Regulations, 40 C.F.R. Part 62, http://www.epa.gov/airquality/cpp/cpp-proposed-federal-plan.pdf.

[5] 42 U.S.C. § 6297.

[6] CAL. CODE REGS. tit. 20, § 1609 (2015).

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