## From: Szabo, Aaron <Aaron_L_Szabo@omb.eop.gov>

Sent: Wednesday, July 29, 2015 2:21 PM

To: Vasu, Amy; Culligan, Kevin; Harvey, Reid

Cc: Frey, Nathan J.

Subject: Summary of Interagency Comments Under EO 12866 and 13563 -- Clean Power Plan

Stranded Assets Memo

Attached please find a summary of interagency comments under EO 12866 and 13563 on the

Stranded Assets memo to support EPA’s draft final rule entitled “Carbon Pollution Emission

Guidelines for Existing Stationary Sources: Electric Utility Generating Units.”

Thank you and please let me know if you have any questions.

Aaron L. Szabo

Policy Analyst

Office of Management and Budget

202-395-3621

Aaron_L_Szabo@omb.eop.gov

<< Summary of Interagency Comments on Stranded assets docket memo.docx >>

## Summary	of	Interagency	Working	Co mments	on	Draft	Language	under

EO12866/13563	Interagency	Review.		Subject	to	Further	Policy	Re view.

1 Memorandum

To: Clean Power Plan Docket

Subject: Stranded assets analysis

Date: July 2015

The 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 assets. For the final rule, the EPA revised the goal

‐ setting methodology. The analysis in this

memo demonstrates that the final performance rates give sufficient flexibility to states to address the

stranded asset concerns raised by commenters. The final rule’s goal

‐ setting approach (now referred to

as “emission performance rate calculation”) represents a level of generation and emissions across each

interconnection 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.

The EPA estimated 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 depreciation 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 most capital

‐ intensive controls, and as such

represent longer

‐ 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 interconnection to the amount of coal generation from coal

‐ fired

EGUs that we assume are not fully depreciated in 2025 and/or 2030. If the amount 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/po wersectormodeling/

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

rule preamble. Commented [A1]: Any changes within this document

should be reflected within the preamble as well.

## Summary	of	Interagency	Working	Co mments	on	Draft	Language	under

EO12866/13563	Interagency	Review.		Subject	to	Further	Policy	Re view.

2 assume are not fully depreciated in a given year, it demonstrates that the final rule allows the flexibility

for states to preserve these units as part of their plans

.

The 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 assumes 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 calculation approach in the final rule.

The analysis identifies the coal

‐ fired EGUs 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 EGUs

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.

This analysis includes all coal

‐ fired capacity that is included in the emission performance rate

calculation. The analysis does not reduce that capacity to account for recent retirement

announcements or future projected closures.

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

calculation: The Eastern, Western, and Texas Interconnections.

Results

In both 2025 and 2030, the amount of 2012 coal generation included in the final guidelines’ emission

performance rate calculation after application of the building blocks is greater than the amount of 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 Emission Performance Rate Calculation (TWh)

2025 2030

From All

Coal From

Undepreciated

Coal From All Coal From

Undepreciated

Coal

Eastern

Interconnection 762 750 578 431

Western

Interconnection 158 131 116 103

Texas

Interconnection 70 61 70 38 Deleted: preserves

Deleted: operators

Deleted: determine the level of generation at

## Summary	of	Interagency	Working	Co mments	on	Draft	Language	under

EO12866/13563	Interagency	Review.		Subject	to	Further	Policy	Re view.

3 As explained above, for 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 that is included in that 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; the 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 phasing

‐ in of building blocks

two and three. For more information on how the national emission performance rates were

determined, please see the final rule preamble.

Conclusion

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 to 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 national

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 retrofits installed on those EGUs. 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

involve 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

. Deleted: This

Deleted: Thus, state plans can be designed to achieve the

EGU performance rates and statewide performance goals

without requiring the retirement of these units