U.S. coal outlook - I

New-build coal generation has been severely curtailed in recent years, a victim of ever-toughening regulations on emissions, state and federal support for renewables, and the dramatic expansion of domestic natural gas supplies through horizontal drilling and hydraulic fracturing. As recently as 2006, developers had planned to rely on coal for 43% of new-build generation projects over the next five years. But now, in our current five-year outlook, coal is expected to account for only about 1% of new-build generation in the U.S. 

By mid-2014, the power industry will know the fate of the EPA’s decade-long effort to control interstate migration of power plant air emissions. That’s when the U.S. Supreme Court is scheduled to issue its decision on the EPA’s Cross-State Air Pollution Rule (CSAPR), the latest in a long series of efforts by the agency to control power plant emissions of sulfur dioxide (SO2) and oxides of nitrogen (NOx) that move across state lines.

Federal courts often defer to the expertise of regulatory agencies when one of their rules is challenged. But that expectation of deference was shattered in August 2012 when a federal appeals court vacated CSAPR. In the weeks leading up to the December Supreme Court oral arguments over CSAPR, each side expressed confidence that it had the inside track to victory. We will know soon enough.  

Meanwhile, the Obama administration continued efforts to decarbonize the electricity business, announcing an aggressive climate change policy last June that included a commitment to lower emissions of carbon dioxide (CO2) from new and existing power plants. In late September, the public got a look at the EPA’s draft rule on carbon pollution for new fossil-fueled power plants that will be larger than 25 megawatts (MW). This draft rule is an update from the draft regulation initially proposed by the EPA in April 2012, which drew an estimated 2.5 million public comments--the most comments the agency has ever received for a proposed regulation.

For new coal-fired units, the EPA proposes to limit CO2 emissions to between 1,000 and 1,100 pounds per megawatt-hour of power produced. The proposed new standard is about half the current emissions level of a new coal-fired plant without CO2 emission controls. Operators will be given the choice of meeting standards over one year or seven. The proposed emission standards effectively mandate installing carbon capture & sequestration (CCS) equipment on an integrated gasification combined cycle (IGCC) power plant. 

“Because these standards are in line with current industry investment patterns, these standards are not expected to have notable costs and are not projected to impact electricity prices or reliability,” the EPA said in a technical fact sheet accompanying the new draft rule.  

The coal and power industries strongly disagree, asserting CCS is an extraordinarily expensive technology that has not yet been commercially deployed. The U.S. Department of Energy’s assistant director for the CCS program doesn’t see that technology as commercially viable for at least five to eight years. Also, mandating the installation of CCS technology on an IGCC plant is expected to push coal-fired power costs into the stratosphere. The construction cost for an IGCC plant has ramped up to between $4 billion to $5 billion for a 400-megawatt to 500-megawatt (MW) facility--about $10,000 per installed kilowatt of capacity, higher than nuclear power.  

Across North America, dozens of IGCC projects worth nearly $100 billion have been cancelled or placed on hold in recent years, victims of huge capital costs, permitting problems, technology challenges, abundant supplies of natural gas, and low gas prices. IGCC is called the “bleeding edge” for a reason, and utilities are trying to resist federal efforts to push them there. It is not clear when the EPA expects to finalize its CO2 regulation for new coal-fired power plants. But by mid-2014, the agency is planning to drop the other shoe: a new rule regulating CO2 emissions from existing coal-fired generators, something that could increase the speed at which the U.S. generating fleet is being turned over.

Because Republicans, the majority party in the House of Representatives, have crossed swords with the president on so many energy and environmental matters, the Obama administration is relying on executive-agency rulemakings, rather than legislation, to implement its plans. Unwilling to risk a repeat of the failed Waxman-Markey climate change bill in 2010, the president plans to transform the U.S. electricity market through rulemakings by the EPA, the Federal Energy Regulatory Commission, the departments of Energy and the Interior, and the Nuclear Regulatory Commission. 

Industry insiders say last year’s change in leadership at the EPA--new administrator Gina McCarthy was the former head of EPA’s Office of Air & Radiation--has led to a more positive engagement between the industry and those that regulate it. While no one would say McCarthy is a friend of the industry, neither is she considered an implacable foe, as was her predecessor Lisa Jackson. The EPA is the point agency for another regulation affecting coal-fired power: the Mercury and Air Toxics Standards (MATS), which the agency finalized in April 2013, though the EPA took an additional 60 days of public comment over the summer on issues relating to plant startup and shutdown. Formerly known as the Utility Boiler MACT, MATS limits power plant emissions of mercury, acid gases and toxic metals.

 After releasing the draft MATS rule in late 2011, the EPA spent 2012 and 2013 engaging with the industry and modifying the rule in ways that are expected to shave at least $1 billion off the industry’s initial compliance cost of $5 billion. MATS has an effective date of 2015, though one-year extensions are available on a case-by-case basis. The industry may choose to litigate MATS, but we note that rule has aroused far less vehement and widespread opposition than CSAPR. The differing effective dates of MATS and CSAPR, plus the looming prospect of CO2 emissions regulations for existing coal-fired power plants, creates extraordinary compliance headaches for the power industry. One extreme example--which does not include CO2 emissions control--is American Electric Power’s Rockport Power Station, a 2,600-megawatt plant that was considering installing a wet flue gas desulphurization (FGD) unit, selective catalytic reduction (SCR) system and a baghouse to reduce emissions of sulfur dioxide (SO2), sulfur trioxide (SO3), oxides of nitrogen (NOx) and mercury. Initially, the total price tag was estimated at about $1.5 billion, which almost certainly would not have been economically justified. But flexibility at the EPA will enable Rockport to limit equipment installations to a dry-sorbent injection (DSI) system and a baghouse to meet federal emissions standards, dramatically lowering the compliance cost for Rockport and extending its life by many years. 

EPA flexibility on MATS won’t necessarily mean dramatically lower compliance costs for all units. It all turns on a particular unit's coal burn, a plant's existing pollution-control equipment, and the interaction of different gases in its flue gas stream. And remember, Rockport’s compliance requirements did not include the need to reduce CO2 emissions.

Unfortunately, not all coal-fired plants were as fortunate as Rockport. In 2012 and 2013, dozens of coal plant owners across the country announced the closure of thousands of megawatts of power plants where it did not make sense to install pollution-control equipment. The list of actual or announced coal plant closures from 2012-2013 reads like a “Who’s Who” of the utility industry.

(To be continued)