The settlement requires TVA to address emissions at plants that account for 92 percent of its coal-fired capacity, EPA said, and will result in reductions in emissions of nitrogen oxide, sulfur dioxide, particulate matter and carbon dioxide.
"The message here is we don't have anything against coal, but companies have to clean up their coal pollution," EPA Administrator Lisa Jackson told reporters in a teleconference.
The lost generation could be made up by switching from coal to natural gas and by cleaner sources such as the burning of biomass.
Modernizing these plants and encouraging clean energy means health protections and greater economic opportunities for the people living near TVA facilities, said Jackson, who grew up in the shadow of heavy industry in Louisiana.
Additional pollution controls will prevent premature deaths, heart attacks and cases of asthma, resulting in $27 billion in annual health benefits, she said.
She said the EPA does not expect that investments by TVA would not drive up utility bills power bills for customers.
More stringent regulation of coal-fired power plants by the EPA may result in the shutdown of between 30,000 and 70,000 megawatts of generation in the next few years and the investment of as much as $80 billion by companies to clean up remaining plants, according to industry estimates.
The settlement agreement calls for TVA to spend $350 million for environmental projects and to promote energy efficiency in communities near its power plants.
TVA will pay $1 million to the National Park Service and the National Forest Service to improve forest and park land damaged by emissions from TVA plants, EPA said.
TVA will also pay a civil penalty of $10 million, with Alabama and Kentucky receiving $500,000 each and Tennessee getting $1 million.
Those states, along with North Carolina, the National Parks Conservation Association, Sierra Club and Our Children's Earth Foundation, were involved in developing the settlement, EPA said.
TVA will retire 10 1950s-era units at its Johnsonville plant in Tennessee along with units at the John Sevier and Widows Creek plants already identified as potential units to be shut.
Another 2,800 MW of TVA coal generation identified in the agreement may also be idled or retired if TVA does not invest in new pollution-control equipment.
Last month, TVA said it planned to idle as much as 4,700 MW of coal-fired capacity while increasing renewable, nuclear and natural gas-fired generation over the next two decades.
Environmentalists applauded the settlement. "The days of old, uncontrolled coal plants are coming to a close," said Bruce Nilles, head of the Sierra Club's anti-coal effort. "We are going to see a significant reduction in the amount of coal being burned."