UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

REGION 5 

77 WEST JACKSON BOULEVARD 

CHICAGO, IL 60604-3590 

APR 0 4 2007 REPLY TO THE ATTENTION OF 

( AR- 1 8 J) 

Nisha Sizemore, Chief 

Permits Branch 

Office of Air Quality 

Indiana Department of Environmental Management 

100 North Senate Avenue 

Indianapolis, Indiana 46204 

Re: Availability of Emission Offset Credits from Noblesville Station 

Dear Ms. Sizemore: ;5h) 

We have reviewed the information provided in your March 28, 2005, letter to our office 

regarding the availability of emission offset credits from the shutdown of an acid rain/ 

nitrogen oxides (NO,) budget trading program source. This letter describes our 

determination as to the amount of available offset credits generated by the shutdown. We 

have based our determination on the information you provided and discussions with your 

staff, our interpretation of the New Source Review (NSR) emission offset requirements 

of Section 173 of the Clean Air Act (the Act), permitting regulations at 40 C.F.R. 

3 51.165(a)(3), the NOx Budget Trading program (40 C.F.R. Part 96), the Acid Rain 

Deposition Control program (Section 407 of the Act, 40 C.F.R. Part 76), and the Clean 

Air Interstate Rule (CAIR). In addition, because of the complexity of the programs 

involved, we have coordinated this response both internally, as well as with the Office of 

Air Quality Planning and Standards, the Office of General Counsel and Clean Air 

Markets Division. 

Factual Background 

In February 2003, Cinergy Services, Incorporated, permanently retired from service three 

coal-fired boilers at their PSI Energy, Noblesville Generating Station (Noblesville 

Station) and replaced them with three combined cycle combustion turbines. Based on the 

information contained in the netting analysis for the construction permit (Permit# 057- 

14278-00004), this shutdown resulted in approximately 2,047 tons per year (tpy) of NO, 

emissions reductions. The Indiana Department of Environmental Management (IDEM) 

asked whether these reductions, in whole or in part, are available for use as offset credits. 

Through a September 1,2006, permitting action (NSR Permit No. 145-23127-00001), the 

State of Indiana transferred to the Noblesville Station approximately 91 tons of the offset 

credits generated by the boiler shutdowns to the Knauf Insulation plant in Shelbyville, 

Indiana. The Knauf plant is located in the same 8-hour ozone non-attainment area as the 

Noblesville Station and the transfer of the NOx offsets enabled Knauf to meet the 

requirements of a major modification under NSR for ozone purposes. 

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Statutory and Regulatory Background 

Section 173(a)(l) of the Act requires that, prior to issuing a permit in a non-attainment 

area, the permit issuing authority must determine that the new source or modification will 

not interfere with reasonable further progress toward attaining the National Ambient Air 

Quality Standards (NAAQS). 42 U.S.C. 5 7503(1)(1); 40 C.F.R. 5 51.165(a)(3)(i). 

Section 173(c)(l) of the Act requires new or modified major sources in non-attainment 

areas to offset increased emissions by obtaining reductions of the same air pollutant in the 

same non-attainment area, or another non-attainment area if certain requirements are met. 

42 U.S.C. 5 7503(c)(l). Section 173(c)(2) of the Act provides that "[e]missions 

reductions otherwise required by this chapter shall not be creditable as emissions 

reductions for purposes of any such offset requirement." 40 C.F.R. 7503(c)(2). This is 

known as the "surplus" requirement. To be creditable, emissions reductions must also be 

permanent, quantifiable, and federally enforceable. 40 C.F.R. 5 5 1.165(a)(3)(i)(C). 

To determine what emission reductions are surplus and creditable, the NOx emission 

limitations required under the Act for each of the three boilers at the Noblesville Station 

must first be determined. Only emissions reductions beyond the requirements of the Act 

are eligible as NSR offsets. Specifically, the Nitrogen Oxides Supplement to the General 

Preamble to 40 C.F.R. Part 52 (57 Fed. Reg. 55620,55626 ( Nov. 25, 1992)) states that 

only "reductions achieved that exceed the requirements of both the Acid Rain Deposition 

Control Program, and any applicable Title I requirement are creditable for purposes of 

offsets." 

Acid Rain Deposition Control Program 

To the extent that any of the reductions at Noblesville Station are required under the Acid 

Rain Deposition Control Program, that portion of the reductions would not be surplus and 

therefore could not be used for offsets. Title IV of the Act requires that coal-fired boilers 

meet the NOx emission limitations set forth in 40 C.F.R. Part 76 through one of three 

compliance options. Unit operators can choose to: (1) meet an individual standard annual 

emission limitation based on the boiler type; (2) meet an average of the standard emission 

limitations of two or more boilers; or (3) for units which cannot meet their standard 

emission limitations, meet the United States Environmental Protection Agency (U. S. 

EPA) approved alternate emission limit based on the installation of the NOx emission unit 

controls prescribed for that boiler type. The operator of the Noblesville Station chose 

compliance option (2) above (NO, averaging) to comply with the requirements of 

40 C.F.R. Part 76 (326 IAC 21 in the Indiana rules). The units at Noblesville were 

therefore required to meet a group average NOx limit. 

Sources choosing to comply with the Acid Rain Deposition Control Program through 

NO, averaging are required to submit a NO, averaging plan that specifies each unit's 

standard limit, an alternative contemporaneous emission limitation (ACEL) and an 

estimated annual heat input. The ACEL represents an estimation of the actual NOx 

emission rate at which the boiler will operate during each calendar year the plan is in 

effect. Neither the ACELs nor the heat inputs are enforceable limits unless the group 
NO, emissions rate' exceeds the group NO, emissions limit for the calendar year in 

question. 

For purposes of calculating creditable NSR offsets, the standard acid rain emission limits 

for each of the three retired boilers was used. ACELs for these units were not used for 

calculating available credits because once the three higher emitting Noblesville boilers in 

the averaging plan were shut down and removed from the plan, the remaining units in the 

plan were able to readjust their ACELs higher in a new averaging plan, thus potentially 

allowing more emission into the atmosphere.' We have concluded that only emission 

reductions below the standard emission limit are surplus and exceed the requirements of 

the Acid Rain Deposition Control Program. 

At the time of shutdown, during compliance year 2003, the three Noblesville Station 

boilers were part of an averaging plan composed of 35 boilers. The boilers were dry 

bottom wall-fired coal boilers and were required to meet a standard emission limitation of 

0.46 lbs per million British thermal unit (MMBtu). Because actual heat inputs are used to 

calculate group NO, emission limits for each Acid Rain compliance year, an average of 

the actual heat inputs during the time period the units were operating under the Acid Rain 

Deposition Control Program (2000 through 2002) was used to calculate surplus emission 

reductions. As shown in the calculations in Enclosure A, a total of 774.9 tons of NO, 

offset credits would be available prior to taking any other program into consideration. Of 

the 774.9 total tons of potential offset credits, 401.4 were emitted during the ozone 

season and 373.5 during the non-ozone season. 

Nitrogen Oxides SIP Call Program 

On October 27, 1998, U. S. EPA finalized its NO, State Implementation Plans (SIP) Call 

rule requiring 22 States and the District of Columbia to submit SIPS that address the 

regional transport of ground-level ozone (63 Fed. Reg. 57356). This rule allocated a 

budget of NO, allowances to each State covered by the rule and allowed States to choose 

from a mix of pollution-reduction measures to achieve the required reductions. One of 

these measures included the ability to adopt a cap-and-trade program. States were 

provided the option of adopting U. S. EPA's model NO, Budget Trading Program 

contained in 40 C.F.R. Part 96. Under the NOx trading program, each state's budget of 

' The group NO, emission rate for each calendar year is calculated by multiplying the actual NO, emission 

rate by the actual heat input for each boiler, summing the products for all boilers in the plan and dividing by 

the sum of the total actual annual heat inputs for all of the boilers in the plan. The group NO, limit is 

calculated in a similar fashion, except that instead of multiplying each boiler's actual heat input by its 

actual NO, rate, each boiler's actual heat Input is multiplied by its standard NO, limit. If the group NO, 

rate is at or below the group NO, limit, then all of the boilers in the plan are automatically deemed to have 

met their individual ACELs and heat input limits (even if in actuality some or all of the limits were not 

met). If the group NO, rate exceeds the group NO, limit, then the individual ACELs and heat input limits 

in the plan become enforceable limits and are used to determine which boilers caused the group to exceed 

its group NO, limit. If the group NO, limit is exceeded, excess emissions monetary penalties are assessed 

against the owners and operators of the boilers in the averaging plan. 

Note: the use of the standard limit is applicable in this case because the ACELs of the three units were 

higher than the standard limit. 
NO, allowances is allocated to sources subject to the Program for each ozone season 

(May 1 through September 30) and sources are allowed to trade allowances as necessary. 

The three coal-fired boilers at the Noblesville Station were originally allocated 59, 54, 

and 52 allowances (tons) per ozone season for the years 2004 through 2006. Every three 

years, each state's NO, budget is reallocated to the existing sources subject to the NOx 

Budget Trading Program. Because these three boilers were permanently retired from 

service in 2003, Indiana is allowed to reallocate these emission reductions to other 

sources in the future. 

The U. S. EPA has determined that participation in the NO, Budget Trading Program also 

qualifies as meeting Reasonably Available Control Technology (RACT) on a sourcecategory wide basis. "Final Rule to Implement the 8-Hour Ozone National Ambient Air 

Quality Standards - Phase 2," 70 Fed. Reg. 71612,71627 (Nov. 29,2005). If the NOx 

SIP Call allowances allocated to the three Noblesville Station boilers are transferred or 

reallocated to other sources subject to the NO, SIP Call, those other sources could 

increase their emissions. Therefore, the emission reductions made by the three 

Noblesville Station boilers are necessary to assure that the source category continues to 

meet RACT. As a result, the reductions during the ozone season are required to meet the 

RACT provisions of the Act and therefore not available for use as offsets. We believe 

there are special measures that could potentially be taken to ensure that the Noblesville 

boiler allocations are not reallocated to other sources (i.e., are permanent emission 

reductions) and therefore available as offsets. 

Clean Air Interstate Rule 

IDEM'S March 2005 letter did not specifically request that we address the impact of 

CAIR on the availability of NSR emission offset credits. Even so, upon further review, 

we believe we cannot fully address offset availability without consideration of CAIR. 

CAIR, finalized on May 12, 2005 (70 Fed. Reg. 25162), is based on U. S. EPA's finding 

that SO2 and NO, emissions from 28 states and the District of Columbia contribute 

significantly to non-attainment of the NAAQS for fine particles (PM2.5) and/or 8-hour 

ozone in downwind States. CAR requires these states to reduce emissions of SO2 and/or 

NOx to eliminate their significant contribution to downwind states, and establishes SO2 

and NOx emission budgets for each covered State. Similar to the NOx SIP call, states 

may choose between two compliance options to meet these emission reduction 

requirements: 1) participate in an U. S. EPA-administered interstate cap-and-trade system 

that caps region-wide emissions in two stages, or 2) meet an individual state emissions 

budget through measures of the state's choosing. To ensure that the emission reductions 

required by CAIR are achieved on schedule, U. S. EPA also promulgated a Federal 

Implementation Plan (71 Fed. Reg. 25328 (April 28,2006)). CAIR established the 

annual and ozone season NO, budgets for Indiana based on the heat input of sources that 

were operating during the base year of 2001. The three boilers at the Noblesville Station 

were operating during this time and were therefore included in the calculations used to 

establish the Indiana NO, budgets. Although the recently submitted Indiana CAIR SIP 

does not propose to allocate any allowances to the Noblesville boilers that have shut 

down, the budgets continue to reflect those sources. In effect, Indiana allocated the 
allowances that were included in the Indiana budgets for the Noblesville boilers to other 

Indiana sources. 

The U.S. EPA has determined that participation in the CAIR NOx trading programs, as 

with participation in the NO, Budget Trading program described above, also qualifies as 

meeting RACT on a source-category wide basis (assuming that the State meets its CAIR 

requirements solely through controls on electric utility generating units). "Final Rule to 

Implement the 8-Hour Ozone National Ambient Air Quality Standards - Phase 2," 70 

Fed. Reg. 71612,71627 (Nov. 29,2005).~'~ Since the CAIR allowances allocated to the 

three Noblesville Station boilers have not been removed from the Indiana CAIR budgets, 

other Indiana sources are able to increase their emissions to account for the shutdown of 

the boilers. The emission reductions made by the three Noblesville Station boilers are, 

therefore, necessary to assure that the source category continues to meet RACT. Because 

CAIR applies during both the ozone and non-ozone season and these emission reductions 

are required for the source to meet the RACT provisions of the Act, we have concluded 

that no offset credits would be available during any time of the year from the shutdown of 

the Noblesville boilers. We do, however, believe there are special measures that could 

potentially be taken to ensure the emission reductions from the boiler shutdown are 

surplus and, therefore, available (such as the retiring of CAIR allowances). 

It should be noted that, since the first phase of CAIR will not be implemented until 

January 1,2009, emission reductions from the shut-downs that are not required by the 

NOx Budget Trading and Acid Rain Deposition Control programs will be available until 

that time. 

If you have any concerns or questions regarding this interpretation please feel free to 

contact Ethan Chatfield, of my staff, at (312) 886-51 12. 

Stephen ~othblatt, Director 

Air and Radiation Division 

Enclosure 

U.S. EPA proposed to reconsider its decision that meeting CAIR requirements equates to RACT by notice 

dated December 19,2006,71 Fed. Reg. 75902. 

4 Similarly, the Clean Air Fine Particle Implementation Rule to implement the PM2.5 NAAQS allows states 

to presume that compliance with CAIR qualifies as RACT for electric generating units (EGUs) for 

purposes of the PM2.5 NAAQS (assuming all required CAIR reductions are obtained from EGUs). 

U.S.EPA finalized this rule on March 29,2007. 
Enclosure A: Calculations 

Claimed NOx credits from shutdown of 3 boilers = 2,232 tpy 

Credits used for 3 new natural gas turbines = 185 tpy 

Remaining Claimed Credits = 2,047 tpy 

Average Heat Input (during time in Acid Rain program)*: 

Year 

Unit #I 2000 

200 1 

2002 

Average 

Unit #2 2000 

200 1 

2002 

Average 

Unit #3 2000 

200 1 

2002 

Average 

Ozone Season 

(May 1-Sept 30) 

630,783 

530,280 

547,133 

569,399 MMBtu 

648,597 

567,904 

60 1,442 

605,981 MMBtu 

61 1,836 

566,428 

530,674 

569,646 MMBtu 

Non-Ozone Season 

(Oct. 1 -Apr.30) 

85 1,436 

465,119 

237,595 

5 18,050 MMBtu 

848,497 

557,270 

260,378 

555,382 MMBtu 

820,867 

594,526 

236,277 

550,557 MMBtu 

Acid Rain: 

Creditable emissions = (Standard Limit for unit)*(average heat input rate from above) 

Ozone Season 

Unit #1: 0.46 IbMMBtu * 569,399 MMBtdyr = 13 1.0 tpy 

Unit #2: 0.46 IblMMBtu * 605,981 MMBtdyr = 139.4 tpy 

Unit #3: 0.46 IbIMMBtu * 569,646 MMBtuIyr = 131.0 tpy 

Non-Ozone Season 

Unit #I: 0.46 Ibh'lNIBtu * 518,050 MMBtdyr = 119.2 tpy 

Unit #2: 0.46 IbIMMBtu * 555,382 NIMBtuIyr = 127.7 tpy 

Unit #3: 0.46 IbMMBtu * 550,557 MMBtuIyr = 126.6 tpy 

NOx SIP Call Allocation (tons per year) - Ozone Season only: 

Unit#l: 59 

Unit#2: 54 

Unit#3: 52 

Year 2003 was not used because heat input data was only available for part of the year.