Dive Brief:

• The U.S. Court of Appeals for the District of Columbia Circuit has thrown out an EPA rule aimed at allowing small backup generators to operate for longer periods without being subject to air pollution controls, SNL Energy reports.
• The agency had sought to allow diesel backup generators to run for up to 100 hours annually without being subject to emissions regulations, but the three judge panel from the D.C. Circuit ruled that EPA had failed to consider electric reliability and efficiency implications of the rule.
• A coalition of electric generators led by the Electric Power Supply Association (EPSA), the industry's trade group, argued that the rule could distort power markets and give an unfair advantage to demand response providers, who supported the rule. Environmental groups vehemently opposed the rule as well, which they viewed as a regulatory loophole that would exacerbate air pollution.

Dive Insight:

In 2010, EPA started allowing backup generators to operate for 15 hours a year without being subject to emissions regulations as a part of demand response programs implemented during times of extreme load or emergency conditions that could trigger blackouts. In January 2013, the agency updated those rules, according to SNL, to allow backup generators to run for 100 hours a year for "emergency demand response," in addition to emergency events when a blackout is possible. 

Generating companies, represented by EPSA, opposed the rule from the beginning. They said that because the generators are not subject to the same regulations, they can underbid large power plants in the market, digging into their revenues and possibly even causing reliability problems. Environmentalists worried that the rule could undermine cleaner sources of backup power — such as the nascent battery market — and other demand response programs while providing what they say is essentially a subsidy for dirty power.

On the other side, the EPA and demand response providers argued that the change was needed to allow generators to meet requirements for emergency demand response in wholesale markets.

The Court sided with the rule's critics in the case of Delaware Department of Natural Resources v. EPA, saying the EPA acted "arbitrarily and capriciously" in issuing the rule without properly assessing its potential reliability impacts. It encouraged the agency to consult with FERC and NERC on potential reliability impacts of future rules. 

The ruling could have implications beyond the case, Argus notes. The EPA's assessment of reliability impacts under the Clean Power Plan is at the center of the legal dispute around those proposed carbon regulations, with many generators arguing the agency did not properly address those concerns in that rule either. However, some believe the EPA has struck a contrast with its past approach and has made a good faith effort to engage industry and address reliability concerns for the Clean Power Plan.