Is the Natural Gas Phoenix Buried in Coal Ash? EPA’s Power Plant Rules
In April, the Environmental Protection Agency (EPA) finalized four significant regulations aimed at coal and natural gas-fired power plants (Power Plant Rules). The rules address air emissions, including greenhouse gasses (GHGs) and air toxics, wastewater discharge, and ash disposal from coal-fired power plants.
Rules specifically targeting power generation affect the generation mix. Stakeholders need to understand how new rulemakings will impact sector costs, potentially resulting in supply and demand changes.
A clear goal of these rules is to accelerate coal retirements by increasing compliance costs. While existing natural gas plants are not affected, the rules do regulate new natural gas plants and modifications, raising compliance costs for these facilities as well. As the rule stands, it will impact the ability of natural gas to meet rising power demand and replace coal-fired baseload generation — but litigation is expected.
Introduction
The EPA's new regulations for power plants have significant implications for both coal and natural gas-fired power plants. While the rules impose stringent standards on coal plants, they also set new benchmarks for new natural gas plants and future modifications to existing natural gas plants, particularly concerning GHG emissions. The added compliance costs will handicap the natural gas industry’s ability to respond to both increasing power demand generally, and to replace demand created by coal retirements, which will likely increase resulting from the rules.
The GHG Power Plant Rule: Three Categories & Carbon Capture for New Baseload Generation
Of the four power plant rules, the one that most impacts natural gas plants establishes new source performance standards and emission guidelines for GHG emissions from new, modified, and reconstructed fossil fuel-fired power plants, including natural gas-fired combustion turbines. We’ll first explain the key technology types for natural gas generation and a few key terms to understand how the rule applies to natural gas plants: capacity factor, nameplate capacity, and “best system of emission reduction.”
There are four different technology types for natural gas generation: combined-cycle gas turbines (CCGT), simple-cycle gas turbines (SCGT), steam turbines (ST), and internal combustion engines (ICE). Generally, CCGT plants are highly efficient, allowing them to generate low-cost power over extended periods, making them ideal for serving base and intermediate loads. In contrast, SCGT, ST, and ICE plants are primarily used to meet peak demand on the electric grid and, therefore, run less frequently. These three types can start and ramp up to full power quickly, which is critical in markets with an increasing concentration of intermittent renewable generation.
A power plant's capacity factor indicates its operational intensity, expressed as a percentage of the power it generates relative to its maximum "nameplate" capacity. A plant with a capacity factor of 100%, for example, would be operating continuously. But power plants have capacity factors that are lower than their nameplate capacities because they shut down occasionally for maintenance, because the energy source is intermittently available as in wind and solar, or because they only run during times of peak demand.
Turning back to the rule, it separates potential new or reconstructed combustion turbines (regardless of fuel type) into three subcategories based on annual capacity factor, focusing on the amount of potential electric output sold — low, intermediate, and base load. It also assigns CO2 emissions standards by applying the “best system of emission reduction” (BSER) within these subcategories to determine how much reduction is possible. The BSER is an EPA standard that identifies the most effective and feasible means of reducing emissions based on factors like technological feasibility, cost, environmental impact, and energy requirements. Importantly, sources subject to a BSER can meet a reduction limit without using the specific technologies identified in it by employing alternative methods that achieve the same or greater level of emissions reduction.
In sum, the rule has three categories of generators, each with their own BSER and CO2 emission standards. We will describe them in turn based on subcategory:
1) Low-load Peaking Generation: Less Than 20% Capacity Factor
The low load subcategory is made up primarily of peaking generators which will have a low capacity factor, selling less than 20% of their potential electric output because they generally only turn on in times of peak demand. The BSER for low-load generators is simply the use of lower-emitting fuels like natural gas and the CO2 emissions standard is between 120 to 160 lbs CO2/MMBtu, depending on the fuel source.
2) Intermediate Load: Between 20% and 40% Capacity Factor
For intermediate-load generators that will sell between 20% and 40% of their potential electric output, the BSER is using highly efficient simple cycle technology in combination with the best operating and maintenance practices. The CO2 emissions standard is different from the low load subcategory in that it is based on megawatt hours (MWH) instead of MMBtu — 1,170 lbs CO2 per (MWH), which makes sense because the BSER is focused on technology as opposed to fuel.
3) Baseload: Over 40% Capacity Factor
For new or modified baseload generators that will sell more than 40% of their potential electric output, the BSER has two phases. The first is similar to the intermediate load category but focusing on highly efficient combined-cycle technology as opposed to simple-cycle, and best operating and maintenance practices. The second and most controversial phase requires 90% carbon capture and storage (CCS) by 2032.
Practical Implications of the GHG Power Plant Rule for Natural Gas Facilities
Notably, the final rule does not directly address existing natural gas combustion turbines. Instead, the EPA has initiated a separate rulemaking process to regulate CO2 emissions from existing natural gas EGUs. This forward-looking approach is significant for two reasons: 1) the roughly 42% of power generation currently provided by natural gas facilities will not be affected by this rule and 2) litigation can change everything.
On the subject of litigation, in West Virginia v. EPA, the Supreme Court ruled 6-3 that the EPA lacked the statutory authority to implement the 2015 Clean Power Plan (CPP), which identified the BSER for power plants as “generation-shifting” electricity production from coal to natural gas and renewables. Under the CPP, operators could comply by reducing coal-fired production, investing in renewable energy, or buying emission credits in a cap-and-trade system. The Court applied the “major questions doctrine” and held that Congress didn’t provide “clear congressional authorization” for the EPA to use generation shifting as the BSER.
The new rule’s baseload BSER CCS requirement is similar to the rejected generation-shifting plan in that both require significant economic investments to comply and are politically sensitive, two factors the Court cited to under its application of the major questions doctrine. Litigation is likely to challenge this on similar grounds.
So just how many future power plants could be impacted by this rule? The rule applies to projects that begin construction or reconstruction after May 23, 2023, so we analyzed planned and retrospective capacity data from the Energy Information Administration (EIA) for additional context. EIA data for planned natural gas power generation data includes only nameplate capacity, while capacity factor data is retrospective. Although we cannot predict the exact capacity factor for planned generation, looking back at historic capacity factors by technology type provides useful insights.
We examined EIA’s most recent year of finalized generation data from 2022 and observed the weighted average capacity factor of each natural gas generation technology. We then analyzed the cumulative nameplate capacity of currently planned generation obtained from the most recent EIA-860M filing. By comparing the two and assuming that generators of a given technology will be used similarly to recent years, we can make some useful inferences.
For example, as you can see in the chart below, the average capacity factor of combined cycle generators has been around 56% in recent years.
It is worth noting that capacity factors have gotten more efficient over time. The newest CCGT plants (2014-2023) had the highest average capacity factor in 2022 at 66%. Plants from 1999-2013 averaged 57%, while those from the 1980s-1998 had the lowest at 36%. To be conservative, we applied the total average capacity factor of 56% to current planned capacity as you can see below.
Out of the 160 total currently planned generators, 36 are CCGT, with a combined nameplate capacity of 11,092 MW. If these average at least a 56% capacity factor, many would be regulated under the baseload category (at least 40% capacity factor), subject to the 90% CCS by 2032 requirement.
Three Coal Rules and What Comes Next
The remaining three rules focus on coal-fired power plants, updating the Mercury and Air Toxics Standards to tighten toxic metal emissions limits, aiming to reduce pollutants discharged through wastewater, and taking actions to protect communities from coal ash contamination. Collectively, they are likely to force the closure of more coal plants by increasing compliance costs, if the rule withstands litigation.
More coal retirements translates to more opportunities for other generation sources to replace baseload generation, but if the new natural gas rules withstand litigation, compliance costs may result in new natural gas generation being priced out, unless significant advances are made in CCS by 2032 that make it competitive. As with any new rulemaking, we have to wait and see what results after litigation and after the election. The extent of real-world impacts will only be known once the dust settles.