Emissions: Where Are the Traders?
Market fundamentals are driving NO X prices higher.
Environmental compliance appears poised to become the biggest single driver of asset value for electric generators during the next five years.
While limits on sulfur dioxide (SO 2) emissions have been achieved with relatively minor impact through the tradeable allowance program, permit systems in the future will become increasingly stringent. The NO X State Implementation Plan (SIP) Call represents just the first instance of this.
The next two years will see further resolution of New Source Review enforcement actions, proposed regulations of coal plant mercury emissions, and likely further action with regard to multi-emission proposals governing NO X, SO 2, and mercury emissions within a single program.
Platts Research & Consulting (PR&C) has conducted in-depth analysis of the NO X SIP Call emissions market during the last several months, even as the price of NO X emission credits for the region has traded in the $6,000-$7,000/ton range. Based on this analysis, we have concluded the following:
- Market fundamentals are driving NO X prices higher. There appears to be a shortage of NO X credits in 2004, even with the one-month delay in the compliance date. While many coal-fired generating units have ordered selective catalytic reduction for 2004 in-service, PR&C's analysis indicates that current compliance efforts are insufficient to achieve the rate and budget targets for 2004. Therefore, a combination of additional retrofits not yet committed and price rationing will be needed to balance the market in 2004 and possibly 2005. The uncertainty between these two elements accounts in part for the surge in 2004 vintage prices observed in the first quarter of this year.
- In the past, NO X prices were viewed as leveling the economic playing field between coal- and gas-fired generation. However, persistent high forward prices for natural gas projected by PR&C have shifted power plant economics in favor of coal-fired generation. We therefore expect little displacement of coal generation by natural gas, combined-cycle plants, even while incremental generation from gas will tend to drive overall NO X rates downward. However, we expect changes in the source of coal-fired generation, causing some plants to back down and others to ramp up.
- The 2004 squeeze on NO X prices is likely to impact wholesale power markets, increasing prices by $1 to $2/MWh in peak markets and by $2 to $3/MWh in off-peak markets. The regions with higher concentrations of coal-fired generation (the Midwest and Southeast) are likely to experience power price increases in the upper end of these ranges, while Pennsylvania, New York, and New England, having already made cuts in emissions, will experience price increases toward the lower end of these ranges.
The implementation of the NO X SIP Call trading program is likely to usher in an era of emissions regulation that profoundly affects power plant investments.
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