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 EnvironmentalManagement 100North Senate Avenue Indianapolis, Indiana 46204

Re: Availabilityof Emission Offset Credits from Noblesville Station

Dear Ms. Sizemore: 

# ;5h)

We have reviewed the informationprovided in your March 28, 2005, letter to our office regardingthe availability of emission offset credits from the shutdown of an acid rain/ nitrogen oxides (NO,) budget tradingprogram source. This letter describes our determination as to the amount of available offset credits generatedby the shutdown. We have based our determination on the information you provided and discussions with your staff, our interpretation of the New SourceReview (NSR) emission offset requirements of Section 173of the Clean Air Act (the Act), permitting regulations at 40 C.F.R. 

### 3 51.165(a)(3), the NOxBudget Tradingprogram (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 containedin the netting analysisforthe 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 approximately91tons 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 NOxoffsets enabled Knauf to meet the requirementsof 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 apermit in a non-attainment area, the permit issuing authority must determine that the new source or modificationwill not interfere with reasonablefurtherprogress 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

areasto 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. Tobe creditable, emissions reductions must also be permanent, quantifiable, and federally enforceable. 40 C.F.R.

### 5 51.165(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 reductionsbeyond the requirements of the Act are eligible as NSR offsets. Specifically, the Nitrogen Oxides Supplement to the General Preambleto 40 C.F.R. Part 52 (57 Fed. Reg. 55620,55626 (Nov. 25, 1992)) statesthat only "reductions achieved that exceed the requirementsof both the Acid Rain Deposition Control Program, and any applicable Title I requirement are creditable forpurposes of offsets."



### Acid Rain Deposition Control Program

Tothe 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 NOxemission 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 averageof 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 NOxemission 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 (326IAC 21 in the Indiana rules). The units at Noblesville were therefore required to meet a group average NOxlimit.

Sources choosingto comply with the Acid Rain Deposition Control Program through NO, averaging are required to submit a NO, averagingplan 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 actualNOx 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 groupNO, emissions rate' exceedsthe group NO, emissions limit for the calendar year in question.

For purposes of calculating creditable NSR offsets, the standard acidrain 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 averagingplan 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 reductionsbelow 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 averagingplan composed of 35 boilers. Theboilers 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 groupNO, 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 calculationsin 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 duringthe 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 Columbiato submit SIPSthat addressthe regional transport of ground-level ozone (63 Fed. Reg. 57356). This rule allocated a budget of NO, allowances to each State coveredby the rule and allowed States to choose from a mix of pollution-reduction measuresto achievethe required reductions. One of these measures included the ability to adopt a cap-and-trade program. States were provided the option of adoptingU. S.EPA's model NO, Budget Trading Program containedin 40 C.F.R. Part 96. Under the NOxtrading program, each state's budget of



## ' The group NO, emissionrate for each calendar year is calculated by multiplying the actual NO, emission
rate by the actual heat input for each boiler, summingthe 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, allowancesis allocatedto sources subjectto the Program for each ozone season (May 1through September 30) and sources are allowedto 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 subjectto the NOx Budget Trading Program. Because these three boilers were permanently retired from servicein 2003, Indiana is allowedto reallocate these emission reductions to other

sourcesin 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 reallocatedto other sources subject to the NO, SIP Call, those other sources could increase their emissions. Therefore, the emission reductions made by the three Noblesville Stationboilers are necessary to assure that the source category continuesto 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 measuresthat could potentiallybe taken to ensure that the Noblesville boiler allocations are not reallocatedto other sources (i.e., are permanent emission reductions) and therefore available as offsets.



### CleanAir InterstateRule

IDEM'SMarch 2005 letter did not specifically request that we address the impact of CAIR on the availabilityof NSR emission offset credits. Even so, upon further review,

we believe we cannot fully address offset availabilitywithout consideration of CAIR.

CAIR, finalized on May 12,2005 (70 Fed. Reg. 25162), is based on U. S. EPA's finding that SO2and NO, emissions from 28 states and the District of Columbia contribute significantlyto non-attainmentof the NAAQS for fine particles (PM2.5)and/or 8-hour

ozone in downwind States. CARrequires these states to reduce emissions of SO2and/or NOxto eliminatetheir significant contribution to downwind states, and establishes SO2 and NOxemission budgets for each covered State. Similarto the NOxSIPcall, states may choosebetween 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 ensurethat the emission reductions requiredby CAIR are achievedon schedule,U. S.EPA also promulgated a Federal ImplementationPlan (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 includedin the calculations used to establishthe Indiana NO, budgets. Although the recently submitted Indiana CAIR SIP does not propose to allocate any allowancesto the Noblesville boilers that have shut down, the budgets continue to reflect those sources. In effect, Indiana allocated theallowances 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 NOxtrading 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 Statemeets its CAIR requirements solely through controls on electric utility generating units). "Final Rule to Implement the 8-Hour OzoneNational 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 NOxBudget 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) 886-5112.

Stephen ~othblatt, Director Air and Radiation Division

Enclosure

U.S.EPA proposed to reconsiderits decision that meeting CAIR requirements equates to RACT by notice dated December 19,2006,71Fed. Reg. 75902.

4 Similarly, the Clean Air Fine Particle Implementation Rule to implement the PM2.5NAAQS allows states to presume that compliance with CAIR qualifies as RACT for electric generatingunits (EGUs) for purposes of the PM2.5NAAQS (assuming all required CAIR reductionsare obtained from EGUs). U.S.EPAfinalized this rule on March 29,2007.

### Enclosure 

### A: Calculations

ClaimedNOx credits from shutdown of 3 boilers = 2,232 tpy Creditsused for 3 new natural gas turbines = 185tpy 

### Remaining Claimed Credits =

### 2,047 tpy

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

Year

Unit #I 2000 2001 2002 Average Unit #2 2000 2001 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 611,836 566,428 530,674 569,646 MMBtu Non-Ozone Season (Oct. 1-Apr.30) 851,436 465,119 237,595 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 

## * 569,399MMBtdyr = 131.0tpy Unit #2: 0.46 IblMMBtu 

### * 605,981 MMBtdyr = 139.4tpy Unit #3: 0.46 IbIMMBtu 

## * 569,646MMBtuIyr 

### = 131.0tpy Non-Ozone Season Unit #I:0.46 Ibh'lNIBtu 

## * 518,050MMBtdyr = 119.2tpy Unit #2: 0.46 IbIMMBtu 

## * 555,382NIMBtuIyr = 127.7 tpy Unit #3: 0.46 IbMMBtu 

## * 550,557MMBtuIyr = 126.6tpy

NOx SIP Call Allocation (tonsper 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.