Two Non-Carbon Regulations About to Rock the Coal Sector
Dear Oil and Energy Investor,
When it comes to using coal for electricity generation, most industrial attention has been directed toward all things carbon. That includes concerns over carbon dioxide capture and storage and carbon emission “cap and trade” (see my article from June: “Two Ways to Profit From the Coming Carbon Cap“).
But actually, for producers, the main problem lies elsewhere.
Two separate attacks are underway on the emission of mercury, nitrous (nitrogen) oxides, and sulfuric oxides (MNS). My contacts in the coal-power electricity sector tell me flat-out that both of these attacks are a more serious challenge than limits on carbon emissions.
The first, the Carper-Alexander Bill, has been advanced by a bipartisan group of U.S. senators and would place significant limits (and penalties) on MNS discharge. The bill has been tabled but will be reemerging, in some form, next session.
It is the second attack, however, that poses the main challenge right now. This is the Clean Air Transport Rule (CATR), released in July for comment and scheduled for introduction on January 1st, 2012.
But everybody in the industry must approach the situation as if CATR is already in full force.
The EPA Means Business
The reason this standard is being used prior to formal application is the result of two U.S. Court of Appeals decisions out of D.C.
The first vacated the Clean Air Interstate Rule (CAIR); the second reconsidered and allowed the Environmental Protection Agency (EPA) to enforce the current regulations while it is revised.
That means the new restrictions are coming…
And the EPA means business on this one. It has already rejected several requests to extend the comment period. Now most major power producers utilizing coal have already indicated the new rule will require an accelerating shutdown of old generating capacity.
The emission restrictions are extensive. They require that 90% of mercury emissions be cut by 2015, along with 80% of sulfuric oxide and 52% of nitrous oxides by 2018. Cutting this amount of MNS is tantamount to transfiguring the entire electricity generation grid… in less than a decade.
Two Clear Results… They’re Coming Fast
First, more than 60 gigawatts (GW) of capacity will be coming off the grid by 2020 – more than twice as much as was retired in the decade ending this year. And that was before the appeals court reconsideration allowed the EPA to keep CAIR standards in place while expediting the introduction of the new rules. Since those new rules take effect in slightly more than a year, power companies must make decisions now based upon the harsher emission limits.
Second, we will experience an even greater movement to natural gas and renewable energy as sourcing for new power plants. In fact, there is now not a single co-generation facility (one that can use both coal and gas) on anybody’s agenda moving forward.
The result: We can expect natural gas to replace 20% to 25% of coal in the generation of electricity in the next few years, translating into the need for some five billion cubic feet a day of gas by as early as 2015.
This explains the rapid increase in gas extractions at unconventional fields (shale gas, tight gas, coal bed methane), despite the present market’s depressed prices. There is shortly going to be a hefty increase in domestic demand, and everybody in the industry knows the sourcing of that increasing demand.
I have begun a cursory evaluation of the impact… and it is extensive.
CATR standards will apply to 31 states and D.C., so the impact will be considerable. Even in those states where the rules will not apply (at least initially), interstate power transmission lines will still extend jurisdiction.
Already, generating plants in 17 states will be closed as a direct result of CATR. This will translate into a much greater amount (than the 60 GW already announced) of existing generating capacity coming off line by 2020.
There will be an introduction of a cap and trade approach here, as well, meaning some facilities exceeding the limits would have a somewhat longer life. But remember, such approaches also make those plants utilizing them somewhat less competitive on pricing and market access.
There is no question that CATR has decided a number of issues in power production moving forward. While coal production and usage will continue in several other regions of the world, like China, it will not continue here.
Breakthroughs in clean coal technology may change that view, but the cost of those new approaches seem certain to continue providing the advantage to gas in the present environment.
And, as always, I’ll be looking for the best way to profit.
[Editor's Note: If you want take advantage of these developments now, take a look at Kent's Energy Advantage portfolio; it has already factored this news into the equity selections. It includes the main power producer most insulated from the impact of CATR, major natural gas producers that will benefit, and the one company best able to straddle the coal and gas sourcing markets moving forward.]