August 5th, 2011

EPA’s Clean Air Act Amendment could cause energy prices to rise as early as 2012

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 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:
http://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

http://www.epa.gov/airtransport/
The EPA’s new restrictions affect 27 states east of the Rocky Mountains (including Texas) beginning 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.

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. Already prepared for these effects, retailers have implemented added costs to deals currently being priced.