From: Vasu, Amy Sent: Wednesday, July 29, 2015 12:08 PM To: nfrey@omb.eop.gov Cc: Szabo, Aaron; Harvey, Reid; Tsirigotis, Peter; Culligan, Kevin Subject: For review -- revised CEIP text for the CPP Final Rule

Nathan, Attached is revised text on the Clean Energy Investment Program (CEIP), for Section VIII of the CPP Final Rule. Thank you. Amy

~~~~~~~~~~~~~~~~~~~~~~~ Amy B. Vasu U.S. EPA / OAQPS Sector Policies and Programs Division email: vasu.amy@epa.gov phone: 919.541.0107

<< CEIP revised text_CPP_7 29 15.docx >>*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

Revised draf CEIP language for the CPP Final Ruele, 7/29/15

2. Provisions to encourage early action Many commenters supported providing incentives for states and utilities to deploy CO 2 -reducing investments, such as RE and demand-side EE measures, as early as possible. In the proposal, the EPA requested comment on an approach that would recognize emission reductions that existing programs provide prior to the initial plan performance period starting from a specified date. We also requested comment on options for that specified date and on conditions that should apply to counting those pre-compliance emission reductions toward a state goal. The EPA received many comments requesting that the agency recognize early actions for the emission reductions they provide prior to the performance period, that the EPA allow those pre-compliance impacts to be counted toward meeting requirements under the rule, and that certain conditions should be applied to recognition of early reductions so as to ensure the emission reductions required in the rule. We also received comments from stakeholders regarding the disproportionate burdens that some communities already bear, and stating that all communities should have equal access to the benefits of clean and affordable energy. The EPA recognizes the validity and importance of these perspectives, and as a result has determined to provide a program – called the Clean Energy*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

Incentive Program (CEIP) – in which states may choose to participate. This section describes this program. The CEIP is designed to reward investment in certain RE and demand-side EE projects that commence construction following the effective date of an approved final state plan and that generate MWh (RE) or reduce end-use energy demand (EE) during 2020 and 2021. State participation in the program is optional; the EPA is establishing this program as an additional flexibility to

facilitate achievement of the CO 2 emission reductions required by this final rule, regardless of the type of state plan a state chooses to implement. Under the CEIP, a state may set aside allowances from its interim target or generate early action emission rate credits (ERCs, as defined in section VIII.K.2), and allocate early action allowances or ERCs to eligible projects for the MWh those projects generate or avoid in 2020 and 2021. A state implementing a mass-based plan approach, as described in section VIII.C, may issue early action allowances; a state implementing a rate-based plan approach, also described in section VIII.C, may issue early action ERCs. For each early action allowance or ERC a state allocates to such projects, the EPA will provide the state with an appropriate number of matching allowances or ERCs, as outlined below, for the state to allocate to the project. The EPA will match state-issued early action ERCs and allowances up*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

to an amount that represents the equivalent of 300 million short

tons of CO 2 emissions. The EPA has determined that the size of this matching pool is an appropriate reflection of the CO 2 emission reductions that would be achieved by the additional early investment in RE and demand-side EE the agency expects will be incentivized by the CEIP. For a state to be eligible for a matching award of allowances or ERCs from the EPA, it must demonstrate that it will award allowances or ERCs only to “eligible” projects. These are projects that:

 Are located in or benefit a state that has submitted a final state plan that includes requirements establishing its participation in the CEIP;

 Are implemented following the effective date of that state’s approved final state plan;

 For RE: Generate metered MWh from wind or solar resources;

 For EE: Result in quantified and verified avoided generation through demand-side EE, and that directly

benefit low-income communities; and

 Generate or avoid MWh in 2020 and 2021. The following provisions outline how a state may award early action ERCs and allowances to eligible projects, and how the EPA will provide matching allowances to states.*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

 For RE projects that generate metered MWh from wind or solar resources: for every two MWh generated, the project will receive one early action ERC (or the equivalent number of allowances) from the state, and the EPA will provide one matching ERC (or the equivalent number of allowances) to the state to award to the project.

 For EE projects that benefit low-income communities: for every two MWh in end-use demand savings achieved, the project will receive two early action ERCs (or the equivalent number of allowances) from the state, and the EPA will provide two matching ERCs (or the equivalent number of allowances) to the state to award to the project. Early action allowances or ERCs awarded by the state, and matching allowances or ERCs awarded by the EPA pursuant to the CEIP, may be used for compliance by an affected EGU with its emission standards and are fully transferrable prior to such

use. The EPA discusses the CEIP in the proposed federal plan rule, and will address design and implementation details of the CEIP, including the appropriate factor for determining equivalence between allowances and MWh and how to determine a low-income community, in a subsequent action. Before doing so, the EPA will engage states and stakeholders to gather additional information concerning implementation topics, including the*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

provisions outlined below, and to solicit information about the concerns, interests and priorities of states, stakeholders and the public. In order for a state that chooses to participate in the CEIP to be eligible for an allocation of allowances or ERCs fromthe EPA, a state must include in its initial submittal a nonbinding statement of intent to participate in the program. In the case of a state submitting a final plan by September 6, 2016, the state plan would either include in its plan requirements establishing the necessary infrastructure to implement such a program and authorizing its affected EGUs to use early action allowances or ERCs as appropriate, or would include a non-binding statement of intent as part of its supporting documentation and revise its plan to include those requirements at a later date. Following these state plan submittals in 2016, the agency will create an allowance or ERC account for each participating state that reflects the pro rata share – based on the amount of

the reductions from 2012 levels the affected EGUs in the state are required to achieve relative to those in the other participating states – of the 300 million short ton CO 2 emissions-equivalent pool that the state is eligible to receive. Thus, states whose EGUs have greater reduction obligations will be eligible to secure a larger proportion of the federal*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

allocation upon demonstration of quantified and verified MWh of RE generation or demand side-EE savings realized in 2020 and

2021. In its final state plan submission, due no later than September 6, 2018, or state plan revision if applicable, the state must include requirements for implementing the CEIP. If a state that indicated CEIP participation in its 2016 submittal either decides not to include the CEIP in its final plan, or includes state plan requirements for the CEIP that the EPA determines to be unapprovable, the EPA will redistribute the matching allowances or ERCs allocated to that state in 2016 to other qualifying states participating in the CEIP. Unused matching allowances or ERCs remaining in state accounts on January 1, 2023 will be retired by the EPA. For purposes of establishing a state plan program eligible for an award of matching allowances or ERCs from the EPA, such a program must include a mechanism for awarding early action

emission allowances or ERCs for actions that reduce or avoid CO 2 emissions in 2020 and 2021, and that is implemented in a way such that the early action allowances or ERCs allocated by the state would maintain the stringency of the state’s goal for emission performance from affected EGUs in the performance periods established in this rule. Specifically, the state must demonstrate in its plan that it has a mechanism in place that*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

enables issuance of ERCs or allowances from the state to parties effectuating reductions in 2020 and 2021 in a manner that would have no impact on the aggregate emission performance of affected EGUs required to meet rate-based or mass-based emission standards during the compliance periods. 1 This demonstration is not required to account for matching ERCs or allowances that may be issued to the state by the EPA. Participation in this program is entirely voluntary, and nothing in these provisions would have the effect of requiring any particular affected EGU to achieve reductions prior to 2022, or requiring states to offer incentives for reductions achieved prior to 2022. 2 These and other details will be developed in the subsequent action. The EPA is providing the CEIP as an option for states

1 For example, under a mass-based implementation, the state plan could include a set-aside of early action allowances from an emissions budget that itself reflects the state goals. Allocation of those early action allowances to parties effectuating reductions in 2020 and 2021 would have no impact on the total emissions budget, which sets the total allowable emissions in the compliance periods. Alternatively, under a rate-based implementation, the state plan could require that early action ERCs issued to parties effectuating reductions in 2020 and 2021 would be “ borrowed ” from the pool of ERCs created by the state during the interim compliance period. For every early action ERC awarded for actions in 2020 and 2021, the state would retire one ERC from the pool of ERCs created as a result of reductions achieved from 2022 onward.

2 In addition to the Clean Energy Incentive Program, states may also offer credit for early investments in RE and demand-side EE according to the provisions of section VIII.K.1 of this final rule: a state may award ERCs to qualified providers that implement projects from 2013 onward that realize quantified and verified MWh results in 2022 and subsequent years.*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

implementing plans – and is including a similar program for the Federal Plan proposal being issued concurrently – for several reasons. Chief among them are those offered by commenters to the

effect that the overall cost of achievement of the emission performance rates or state goals could be reduced by an approach that granted some form of beneficial recognition to emissions reduction investments that both occur and yield reductions prior to the first date on which the program mandates reductions or imposes emissions standards. Other commenters pointed out that

to the extent that states and utilities would benefit from the availability of low-cost RE and other zero-emitting generation options during the interim and final periods, the EPA should include in the final guidelines provisions that accelerate deployment of RE resources, since in so doing the program would speed achievement of expected reductions in the cost of those technologies commensurate with their accelerated deployment. In addition, the EPA believes the CEIP can play an important role in supporting one of the critical policy benefits of this rule. In our analysis, we observed that by initiating the emission reduction mandate for EGUs in 2022, the rule created an investment environment that favored greater increases in the development and deployment of RE than we projected under the proposal. The incentives and market signal generated by the CEIP can help sustain the momentum toward greater RE investment in*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

the period between now and 2022 so as to offset any dampening effects that might be created by setting the mandatory compliance date two years later than at proposal. The specific criteria the EPA is establishing for eligible RE projects reflect a variety of considerations. First, the EPA seeks to preserve the incentive for project developers to execute on planned investments in solar and wind technologies. Commenters raised concerns that the fast pace of reductions required by these guidelines could potentially shift investment from renewables to natural gas, thus dampening the incentive to develop wind and solar projects, in particular. Second, the EPA,

consistent with the Clean Air Act’s directive to incentivize technology and to accelerate the decline in the costs of technology, seeks to drive the widespread development and deployment of wind and solar, as it is essential to longer term climate strategies. Third, in contrast to other CO 2 -reducing technologies – including other zero-emitting or RE technologies – solar and wind projects often require lead times of shorter duration, which would allow them to generate or avoid MWh beginning in 2020. Finally, the EPA notes that these guidelines provide significant incentives for other zero-emitting technologies, particularly nuclear power, and as a result we do not have the same basis for including them in the CEIP as we do for wind and solar generation.*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

The specific criterion the EPA is establishing for eligible EE projects – namely that these projects provide benefits tolow-income communities - is also consistent with the technologyforcing and development purposes of section 111. The EPA believes it is appropriate to offer an additional incentive to remove current barriers to implementing demand-side EE programs in low-income communities. While the EPA acknowledges that a number of states have demand-side EE programs focused on these communities, 3 the agency also recognizes that there have been historic economic, logistical, and information barriers to implementing projects in these communities. As a result, the costs of implementing demand-side EE projects in these communities are typically higher than in other communities and stand as barrier to harvesting potentially cost effective reductions and advancing these technologies. The EPA intends for the CEIP to help incentivize increased deployment of projects that will deliver demand-side EE benefits to these communities, which will in turn lower the costs of these technologies. These lower costs will help new technologies penetrate in the future, thus improving the cost of implementation for the program overall, consistent with Congress’ goals in the New Source

3 Several of these programs are discussed in section IX of this preamble, including, for example, Maryland’s EmPOWER Low Income Energy Efficiency Program (LIEEP) and New York’s EmPower New York program.*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

Performance Standard provisions of the Act. Further, reducing barriers to demand-side EE in low-income communities will help

ensure that the benefits of the Clean Power Plan are shared broadly across society and that potential adverse impacts on low-income ratepayers are avoided. It complements other steps the federal government is taking to bring clean energy technologies to these communities, as we discuss in section IX of this preamble. More broadly, the CEIP responds to the urgency of meeting the challenge of climate change in two key ways. First, of course, it fosters reductions before 2022. Second, in targeting investments in wind, solar and demand-side EE, it focuses on the kinds of measures and technologies that are the essential foundation of longer term climate strategies, strategies that inevitably depend on the further development and widespread deployment of highly adaptable zero-emitting technologies. We are not requiring that projects demonstrate to statesthat they are “additional” or surplus relative to a business-asusual or state goal-related baseline in order to be eligible. At the same time, we believe that including an incentive to develop projects that benefit low-income communities will increase the likelihood of investments being made that would not have been

made otherwise. In order to be awarded matching ERCs or allowances by the*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

EPA for projects that meet the eligibility criteria, a final state plan must have requirements establishing the appropriate infrastructure to issue early action ERCs and allowances to eligible project providers by 2020. The state must require that the state or its agent will, in accordance with state plan requirements approved as meeting the ERC issuance and EM&V requirements included in section VIII.K: (1) evaluate project proposals from RE and demand-side EE project providers, including the EM&V plans that must accompany such proposals; (2) evaluate monitoring and verification reports submitted by providers following project implementation, which contain the quantified and verified MWh of RE generation or energy savings achieved by the project in 2020 and 2021; (3) issue ERCs (or their equivalent in allowances) to eligible providers for these MWh results; (4) ensure that no MWh of renewable or avoided generation receives early action or matching ERCs (or their equivalent in allowances) more than once. The CEIP will provide a number of benefits. First, the program will provide incentives designed to reduce energy bills early in the program through earlier and broader application of energy saving technologies, and help ensure that these benefits are shared with low-income communities. Second, the EPA believes that stimulating or supporting early investment in RE generation technologies could accelerate the rate at which the costs of*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

these technologies fall over the course of the interim performance period. In addition, the CEIP will provide affected EGUs and states with additional resources to help them achieve their state plan obligations. Finally, the program will improve the liquidity, in the early years of the program, of the ERC and allowance markets we expect to emerge for compliance with the requirements of these guidelines. 4 The CEIP does not modify the CO 2 emission performance rates or the final goals. The EPA is establishing this program as an option for states that wish to drive investments in RE and demand-side EE that will result in actual, early reductions in

CO 2 emissions from affected EGUs. States are also authorized to set their own glide path, or interim step performance rates or goals, so long as the interim and final performance rates or goals are met, and could do so in a way that takes into account the availability of the CEIP to assist affected EGUs in meeting the applicable glide path and performance rates or goals. While the EPA is not requiring states to take advantage of this

4 The Clean Energy Incentive Program is expected to provide states and affected EGUs additional flexibility in complying with the guidelines, and bears similarity in both design and purpose to the Compliance Supplement Pool, which the agency established as a part of the NO x SiP Call. See 63 FR 57356, 57428-30 (Oct. 27, 1998). Certain aspects of the Compliance Supplement Pool were challenged in litigation and upheld by the D.C. Circuit Court of Appeals. See Michigan v. EPA , 213 F.3d 663, 694 (D.C. Cir. 2000).*** E.O. 12866 Review – Draft – Do Not Cite , Quote or Release During Review ***

program, its availability simply enhances these already-existing implementation and compliance flexibilities while at the same time delivering meaningful benefits, particularly for low-income communities. The EPA looks forward to an upcoming public dialogue about the implementation details of the CEIP.