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EPA's Big Bet on Green Trading

Environmental Emissions: The cost to power markets of the Clean Air Interstate Rule depends on the ability to trade mercury.

Fortnightly Magazine - June 2005

to appropriately value tons of NOx in the first years of the CAIR program. In 2009, 23 states and the District of Columbia will have separate seasonal and year-round  programs, a further complication to those seeking to manage their allowance portfolio.

Over the next four years, prices will peak at $3,575 in 2006 before dipping to $2,625, according to forward-year assessments by Argus Air Daily . The start of limits on mercury in 2010, barring any delays by the lawsuits filed against the EPA’s mercury rule and those still expected, may have a mild impact on SO 2 prices into the start of the next decade.

With SO 2 having more than tripled in price between April 2004 and April 2005, it is being watched more closely and is driving most of the pollution control decisions, as well as the cost of coal ( see Figure 1 ). AEP alone is adding more than 8,700 MW of scrubbing capacity over the next five years as part of its $3.7 billion plan for emissions controls this decade.

The largest coal-fired-owning utilities have been out front in installing and planning new controls, as well as preaching the benefits of those decisions to its investors. AEP and Cinergy, for instance, the two large Ohio River valley plant owners, largely have the ability to pass on the cost of their environmental spending through rate cases in Ohio, Kentucky, Virginia, West Virginia, Indiana, and Illinois. Southern Co., another large coal generator, also is exploring rate mechanisms to offset its environmental capital spending. Those three companies make up the lion’s share of new scrubbers and SCRs earmarked for the existing eastern U.S. coal fleet, and a third of all the existing and planned scrubbers throughout the nation ( see Figure 4 ), according to Argus Media data.

Clear Skies: The “Un-finalized” Law of the Land

Though CAIR was finalized only in March, the plans for scrubbers and SCRs were laid out three years earlier, when President Bush outlined his similar Clear Skies legislative proposal forcing utilities to evaluate the potential for sharp cuts in emission limits over the next two decades. The administration is pushing to move the legislation through Congress, despite the EPA rules being finalized, because it feels Clear Skies will provide a stronger defense against litigation from either environmental groups or the utility industry. Utilities are forging ahead with their control construction projects regardless of the potential for years of litigation, as well as discord within the industry itself.

“These rules are the law of the land,” said Larry Monroe, program manager for emissions control research at Southern Co.

Southern, Cinergy, and AEP were among those ahead of the pack in securing deals to install the vast amount of controls needed, though they may not be able to mitigate the rising costs of other components, including steel, fuel, and transport costs. “There is no question there’s a shortage of boiler manufacturers,” said Tom Mason, Cinergy’s vice president for coal policy. Cinergy is adding as many as 11 new scrubbers, including the ones on plants it