The Latest: On June 30, 2022, the United States Supreme Court with a 6-3 majority issued a ruling in West Virginia v. Environmental Protection Agency (EPA) No. 20-1530, that the EPA had exceeded its authority under Section 111(d) of the Clean Air Act in its issuing of the 2015 Clean Power Plan Rule. That rule would have required operators of existing coal-fired power plants to undertake one or more of three actions to reduce carbon emissions which included adopting more efficient technologies to reduce emissions, shifting electricity production from coal-fired power plants to natural gas-fired power plants and shifting production from both coal-fired and natural gas-fired power plants to low or zero carbon generating capacity. The rule never went into effect as the Supreme Court in 2016 granted a stay on the rule amid numerous legal challenges including from 27 states. Under the Trump administration, in office between 2017 and 2021, the EPA repealed the Clean Power Plan Rule, replacing it with the Affordable Clean Energy (ACE) Rule. In January 2021, the Court of Appeals for the District of Columbia Circuit vacated the EPA’s repeal of the Clean Power Plan and vacated the ACE Rule as well. The Supreme Court’s ruling on June 30, 2022 reverses the judgement of the Court of Appeals for the District of Columbia Circuit.
Implications: The Supreme Court ruling in West Virginia v. EPA significantly reduces the scope of EPA power under Section 111(d) of the Clean Air Act to regulate greenhouse gas emissions at existing power plants, including the use of a cap-and-trade system or other measures aimed to directly reduce electricity generation at power plants such as coal and gas-fired power plants. The immediate implications of this ruling on the US power sector will be limited, as the Clean Power Plan never entered into effect. Nonetheless, the ruling will put considerable limitations on the scope of actions which could be pursued by the EPA moving forward, particularly as the Biden administration has directed the EPA to craft new regulations to address emissions from existing power plants. This in turn, will likely reduce the ability of the EPA to use regulation to drive a shift in the electricity mix in favour of less carbon-emission producing power sources. Therefore, it will remove the impetus for coal plant operators to diversify their power generation portfolios.
We maintain our outlook that the US market will see a robust expansion in renewables power capacity over the coming decade, which we expect will grow to a cumulative 484GW by 2031, from 230GW currently. This will see the combined hydro and non-hydro power renewable share of total generation in the US grow from 23% in 2022 to 33.5% in 2031. Over the same period, we forecast generation from coal-fired power plants will decline from 860TWh in 2022 to 470TWh in 2031, bringing the share of electricity generated from coal-fired power plants down from 21.6% in 2022 to 10.3% in 2031. This shift in favour of renewables and away from coal will be driven by a combination of factors which we expect will continue to drive investment regardless of the Supreme Court ruling. These factors include state government actions to support renewables development, federal government support for renewables including new offshore bidding rounds for offshore wind, as well as growing use of power-purchasing agreements by corporations to reduce company emissions and increase use of renewable power. Nevertheless, we note that the Supreme Court ruling has limited upside risk to our renewables outlook from new regulations and reduced downside risk to our outlook for coal power generation with some plant owners likely to extend operations.
In terms of spurring renewables development in particular, however, we note that upside risk to our forecast over the coming decade remains from the potential for the US Congress to pass a new domestic policy bill over the coming months which could include funding for tax credits for renewables projects. While the passage of such a bill is not our core view following an earlier collapse of negotiations in late 2021 following the passage of the Build Back Better (BBB) Act by the House of Representatives, renewed signs of momentum toward the passage of a domestic policy bill including some aspects of the BBB Act, which has not been passed by the Senate, raises the potential for such a development over the coming weeks.
What’s Next: Following the decision, we will be closely watching for the next steps from the EPA and from the Biden administration more broadly. In a statement released following the Supreme Court ruling President Biden indicated that he had directed his legal team to ‘work with the Department of Justice and affected agencies to review this decision carefully and find ways we can, under federal law, continue protecting Americans from harmful pollution, including pollution that causes climate change.’ In particular, the EPA is expected to issue a new rule on emissions from existing power plants, as noted above. Additionally, we will continue to follow developments in the US Congress, particularly ongoing negotiations around a domestic policy bill. That bill would by Senate rules need to be passed by September 2022, leaving limited time for an agreement to be reached.