EPA's Clean Air Act Amendment could cause energy prices to rise as early as 2012
By JD Dodson
Ruling Background
On Thursday, July 7, the Environmental Protection Agency finalized a decision which may have an immense impact on the power generation industry. This "Cross-State Air Pollution Rule," an amendment to the Clean Air Act, gives the EPA authority to monitor green-house gas emissions from our nation's power plants. The Clean Air Act gave the EPA full responsibility more than 40 years ago to act if ever a new threat to health or the environment is discovered.
A previous amendment to the Clean Air Act, made in 1990, changed the generation industry significantly. It forced new coal plants to install strict emission control equipment, making approximately 88% of new plants built since 1990 natural gas-fired.
The debate on whether the EPA should hold power to curtail green-house gas emissions has been contested for nearly a decade. This debate ultimately led to the Supreme Court ruling June 20, reinforcing the EPA's responsibility on this issue. For further information regarding the ruling, please visit the following link:
rapidhttp://switchboard.nrdc.org/blogs/ddoniger/supreme_court_climate_decision.html
Coal Plant Impact
Coal plants produce roughly 4-trillion kilowatt hours annually and represent some of the cheapest electricity for the US. Nearly half of our nation's electricity is produced via coal, making the amendment a significant factor in any future power generation. Reducing pollution emissions means older plants will be forced to either shut down or retrofit with expensive scrubbing systems to comply with regulations. Given the depressed price of natural gas, it can be expected that most utility companies will opt to build natural gas-fueled power plants in the future.
Utility companies such as American Electric Power Co. and CPS Energy have already announced plans to close older coal-powered plants in favor of clean energy. This means a larger impact on Midwest power markets (i.e. PJM and MISO) which rely heavily on those older coal plants. Some reasoning for tightening up the Clean Air Act and a list of potential savings can be found at: http://www.epa.gov/air/sect812/prospective2.html Health Savings benefits are estimated to be $4 trillion by 2012 vs. the low estimate cost of implementation ($65 billion).
Large Map of Cross-State Air Pollution Rule (CSPAR) States
The EPA's new restrictions affect 27 states east of the Rocky Mountains (including Texas) and begin six months from now. Following the January 1 restrictions, a new set will be imposed May 1, forcing companies to comply - and quickly. The restrictions also establish new emissions trading programs for both SO2 and NOX. http://www.epa.gov/airtransport/
The stakes are high and far-reaching for electric utilities, independent power producers, energy traders, natural gas and coal producers, large energy users and investors in stocks and bonds of the affected companies. As your energy advisor, we strive to keep you educated as these new rules are expected to alter future gas and electricity contracts. Prepared for these effects, retailers have already implemented added costs to deals currently being priced.
DOE GRANTS AUTHORIZATION OF EXPORTATION OF US NATURAL GAS
On May 20, the Department of Energy granted Cheniere Energy (Ticker Symbol: LNG) approval to export natural gas from the Sabine Pass as liquefied natural gas (LNG). Liquefied natural gas is natural gas which has been temporarily liquefied to ease the transportation and storage of the commodity.
This authorization allows Cheniere Energy to distribute 803-billion-cubic-feet per year -- up to 20% of the current US storage -- to major LNG importers across the world.
By exporting the supply into the global market, demand and costs will increase. Exportation begins in 2015 and RPM is prepared to continually monitor the situation and keep our clients updated on the potentially rising rates.
MARKET UPDATE
Oil & Gas
The release of nearly 60 million barrels from International Energy Agency members' strategic reserves aided in the drop of World crude oil prices following a June announcement. Reflecting this drop in price, regular-grade gasoline fell from a peak average of $3.91 per gallon in May to an average of $3.68 a gallon in June
The Energy Information Administration is still expecting oil markets to tighten through 2012 due to increasing demand and stunted growth of supply from non-OPEC (Organization of the Petroleum Exporting Countries) countries. EIA anticipates West Texas Intermediate crude spot prices, which averaged $79 per barrel in 2010, to average $98 per barrel in 2011 and $103 per barrel in 2012. The projected US cost of crude oil will rise from $102 a barrel in 2011 to $108 a barrel in 2012.
OPEC met June 8 to discuss projection targets for the international oil market but reached no formal decision. The organization will hold their 160th meeting December 14 in Vienna.
Natural gas working inventories ended this June at 2.5 trillion cubic feet (Tcf), approximately 8% lower than the end of June 2010. EIA believes working gas inventories will build strongly during the summer months resulting in record-level highs the second half of 2011.
In 2012, the natural gas market expects to begin tightening due to the Henry Hub spot price increasing to an average of $4.54 per MMBtu.
The natural gas futures 12-month strop had a low of $4.22 in early March and a high of $5.06 in the beginning of June. Currently, the August contract is priced at $4.315 per MMBtu.
GDP
After adjustments to what was presumed as a 1.8% annual rate increase, the first quarter GDP for 2011 has been revised to .4% - significantly lower than the government initially thought. The Commerce Department reports a second quarter GDP increase at an annual rate of 1.3%.
A decrease in imports and an increase in both business investment and federal government spending contributed to the second quarter's growth.
The price of goods and services purchased by US residents slowed in the second quarter. Energy prices also slowed while food prices grew at about a 3.2% rate. Excluding food and energy, prices rose .2 % from the first quarter.
