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Mercury Rising

How will the EPA's rulemaking affect U.S. energy markets?
Fortnightly Magazine - January 2004

cost roughly $15 to $35 per kilowatt, or about $15 million to $35 million for a 1,000-MW coal plant. Addition of a fabric filter or upgraded electrostatic precipitator could add $25 million to $40 million for the same 1,000-MW coal plant. In addition, variable costs for most units likely will increase on the order of $0.50 to $1.00/MWh with PACT technology and more if additional control equipment is required.

Still others may find that a fuel change would have been required to meet the mercury MACT limits. For example, many coal units recently have switched to Powder River Basin (PRB) coal to comply with SO 2 regulations. PRB coal is an inexpensive low sulfur coal, but it has relatively high mercury content that is difficult to remove compared with many bituminous coals. Faced with mercury MACT regulation, coal generation owners burning PRB coal (or other high mercury content coals) now may have found that a switch away from higher mercury content coals is the most cost-effective way of meeting mercury limits, as shown in Figure 3.

Secondary Impacts

In addition to the direct impact on coal-fired and oil-fired units, a MACT standard likely would have a number of indirect impacts on the industry. For example, if a significant number of coal-fired and oil-fired units choose to retrofit scrubbers, then it was probable that SO 2 allowance prices would decrease as units that retrofit scrubbers lower the demand for SO 2 allowances. This could have a secondary effect of increasing the competitiveness of coal units and, in some cases, displacing some gas units in the market.

Counteracting the impact of lower SO 2 prices, many gas units may benefit as smaller or less efficient coal-fired and oil-fired units are forced to retire. These units would be retired based on the fact that it may not be technically feasible or economically rational to install the required technology, or because the increased cost of operation may reduce their cost competitiveness in the market and, as a result, lower the dispatch frequency of the units. This would benefit gas units by improving their position within the dispatch merit order, which would tend to increase the amount that the units run.

In addition, the retirement of some coal-fired and oil-fired units will eliminate some of the surplus capacity that exists in many overbuilt markets, forcing a quicker return to market equilibrium and the resulting higher market prices. The forced retirement of some units would likely be one of the major impacts of a MACT command-and-control standard. Under the alternative market-based regulatory approach, many of the units that would retire under a MACT standard would find it economic to purchase allowances and continue operating.

The effect of coal-fired and oil-fired units that switch to lower mercury-content fuels would further impact the dispatch and electricity market prices for gas units. The change in the fuel prices would affect the dispatch order of coal-fired and oil-fired units, which in turn also would impact the dispatch order of gas units. In addition, average energy prices would tend to rise as the