1 Memorandum

To: Clean Power Plan Docket
Subject: Stranded assets analysis

Date: July 2015

T he EPA performed a stranded assets analysis for purposes of responding to comments on the proposed Clean Power Plan. Some commenters said that the proposed state goals were so stringent that states would have no choice but to adopt requirements that would result in retirements of coal

- fired capacity that had been built relatively recently or had recently made pollution control investments, resulting in stranded ass ets. For the final rule , the EPA revised the goal

- setting methodology

. Th e analysis i n this memo demonstrates that the final performance rates provide sufficient flexibility to states to address stranded asset concerns. The final rule’s goal

- setting app roach (now referred to as “emission performance rate calculation”) represents a level of generation and emissions across each interconnect ion that is consistent with the ability to operate affected EGUs through the end of their book life, considering both the age of each facility and recently installed capital

- intensive pollution control retrofits

. This memo describes the analysis assumptions, methodology and findings.
Assumptions In this context, the EPA is considering a potential “stranded asset” to be a coal

- fired EGU that retires before it (or a capital

- intensive pollution control that it has installed) is fully depreciated. We use “book life” to represent the period of time over which investment in a coal

- fired EGU is fully depreciated

.
T he EPA esti mated the book life of coal

- fired EGUs to be 40 years, and conservatively assumed a book life of pollution control retrofits at 20 years. Note that the book life of coal

- fired EGU (coal steam and IGCC) is twice as long as the debt life and the depreciati on schedule used for federal tax purposes . The book life was estimated based on researching financial statements of utility and merchant generation companies in filings to the Security and Exchange Commission. 1 These statements typically list the period over which long

- lived assets are depreciated for financial reporting purposes. Additionally, note that while the book life for environmental retrofits is often 15 years , this analysis conservatively assumes 20 years.

While coal steam facilities have been retrofitted with various pollution controls, this analysis focuses on wet and dry scrubbers, as well as SCRs, since these are the m ost capital

- intensive controls, and as such represent long er

- term investments. Methodology
This analysis compares the amount of coal generation included in the final rule’s national emission performance rate calculation 2 in each interconnect ion to the amount of coal generation from coal

- fired EGUs that we assume are not fully depreciated in 2025 and/or 2030. If the amoun t of coal generation remaining after the BSER calculation is greater than the amount of generation from EGUs that we

1 IPM Documentation Chapter 8 , available at: http://www.epa.gov/powersectormodeling/

2 For more information on how the national emission performance rates were determined, please see the final rule preamble

.2 assume are not fully depreciated in a given year, it demonstrates that the final rule allows the flexibility for sates to preserve these un its as part of their plans

.
T he emission performance rate calculation described in the final rule preamble applies all three building blocks to their full potential in the region that sets the national rate (the region where the emission performance rate calculation results in the highest emissions rate for each subcategory). In the other regions, full application of the building blocks would result in a rate much lower than the national emission performance rate

. For these regions, this analysis assume s that building blocks two and three are not applied at their full potential such that the regional rate is equal to the national emissions performance rate for each category. This makes the analysis consistent with the emission performance rate calculati on approach in the final rule

.
T he analysis identifies the coal

- fired EGU s included in the emission performance rate calculation that will be less than 40 years old in 2025 and/or 2030. The analysis also identifies the coal

- fired EGU s included in the emission performance rate calculation that have pollution control retrofits that will be less than 15 years old in 2025 and/or 2030 , including retrofits projected in the base case.

T his analysis includes all coal

- fired capacity that is included in the emis sion performance rate calculation . The analysis does not reduce that capacity to account for recent retirement announcements or future projected closures.

T he analysis is conducted using the three regions that were used in the emission performance rate

ca lculation : The Eastern, Western, and Texas Interconnections

. Results
In both 2025 and 2030, the amount of 2012 coal generation remaining in the final guidelines’ emission performance rate calculation after the BSER calculation is greater than the amount o f 2012 coal generation that , under the book life assumptions in this analysis, is not fully depreciated in 2025 or 2030. The analysis results are provided below.

Table 1. 2012 Coal

- Fired Generation Assumed in National E mission Performance Rate Calculatio n (TWh)

2025 2030

From All

Coal From Undepreciated Coal From All Coal From Undepreciated Coal

Eastern Interconnection 762 750 578 431

Western Interconnection 158 130 116 103

Texas Interconnection 70 61 70 383 As explained above , f or the region that sets the national emission performance rate for steam in the given year (which for fossil steam is the Eastern Interconnection in 2025 and in 2030) , the coal

- fired generation included in this table represents all coal fired generation th at is included in th at emissions performance rate calculation. In the other regions that did not set that rate in that year , the coal

- fired generation in this table is higher than the level shown for that region’s emissions performance rate calculation ; t he difference represents the building block potential in those regions that was not captured in establishing the national emission performance rate

. As a result, the national emission performance rates for steam do not assume that steam generation would be reduced below the levels shown in this table. The total amount of coal generation shown in this table decreases between 2025 and 2030 consistent with how the emission performance rate calculation captures the gradual phas ing

- in of building blocks
two an d three. For more information on how the national emission performance rates were determined, please see the final rule preamble.

Conclusion The EPA’s role is to set emissions guidelines that meet the statutory requirements, which includes consideration of cost in identifying the best system of emission reduction, as EPA has done in these guidelines. States have a broad degree of flexibility t o design plans to achieve the rates in the emissions guidelines in a manner that meets their policy priorities, including ensuring cost

- effective compliance. Although not a required component of EPA’s consideration of cost, this analysis shows that the nat ional EGU performance rates in the final guidelines can be met without the retirement of affected EGUs before the end of their book life, and without the retirement of affected EGUs before the end of the book life of capital

- intensive pollution control ret rofits installed on those EGUs. The EPA recognizes that power plant economics are determined by many aspects of markets that are outside of EPA’s control such as wholesale power prices and capacity prices and that the compliance path of least cost may inv olve retiring assets that have not fully depreciated. Nonetheless, this analysis further demonstrates the extent of flexibility available to states in designing their plans to best serve the policy priorities of the state.