EPA Regulations to Lessen Carbon Emissions Has Many Energy Impacts
The Obama administration has made strides in trying to curb the output of carbon emissions in the US. While some of the EPA regulations have moved forward, some have stalled out for the time being. The Cross State Air Pollution Rule (CSAPR) was set to replace the Clean Air Interstate Rule (CAIR), but was vacated by the courts in late 2011 due to aggressive legal challenges. The Mercury and Air Toxics Standards (MATS) is expected to impact the retirement of a significant amount of coal generation in 2015 with estimates ranging from 10 to 60 GW of potential retirements. MATS is currently being reviewed by the Supreme Court and a decision will likely be made in the middle of 2014. According to a recent article, some believe that these regulations are part of a “war on coal.”
In summary, the article begs the question: How much coal-fired generation will there be in 50 years? The answer may not be as simple as it may seem. Yes, gas prices are cheap now. Yes, something needs to be done to help lessen the emissions of these coal plants. But how can this be done in a way that won’t put tens of thousands of people out of work and not send gas prices through the roof in the next 10 to 20 years?
It appears that the abundance of natural gas in the US is the first step in the scramble to reduce carbon emissions, while maintaining a secure electric grid. Natural gas is now replacing coal and it appears that trend will continue for the foreseeable future as a result of the volume of gas available and the continued low prices. Building a new power plant is expensive, but building a gas-fired plant is relatively inexpensive and fast compared to other options such as nuclear generation facilities and generally faces the least resistance in the approval and implementation phases.
Beyond the economic impact on coal country, another concern is the impact on grid reliability as new plants may not sufficiently replace older plants in regards to being available to run at the right place and right time as needed. Particularly in PJM, fear of costs from Reliability Must Run (RMR) contracts is a growing risk that is very difficult to quantify at this point. RMR costs are expenditures by the system operator to keep plants open that are economically viable, and are needed for system integrity.
There is also the risk of higher natural gas prices due to these changes. As gas replaces coal for generation supply, there will be an increase in gas demand which is bullish for prices, especially since the gas market is near long-term lows and with additional price support from eventual LNG exports and growing industrial demand. But so far, these factors have been shrugged off in the market place except for a modest year-over-year premium in the forward curve due to the abundance of shale gas reserves.
And while these reserves remain a boon, energy buyers should also consider the various upside risks in the market and consider locking in prices that are very attractive.