With compliance costs estimated at $50 billion to $60 billion during the next 15 years, the Clean Air Interstate Rule (CAIR) affects just about every market participant in the electric power industry.
Every significant power generator will add scrubbers and NOx controls, or will invest heavily in emissions technologies. American Electric Power Co. says it will spend about $5 billion retrofitting its coal plants, while the Tennessee Valley Authority says it will add $4 billion to $5 billion to the nearly $4 billion it has invested to date in emissions controls. Southern Co., Cinergy, Duke Energy, and Progress Energy also will add emissions controls to respond to these new regulatory requirements.
Global Energy Decisions forecasts that about 52,000 MW of renewable capacity will be built by 2020, at a cost of $53.4 billion, to comply with the renewable portfolio standards adopted by 20 states and the District of Columbia.1 Renewables of this order of magnitude can have a material effect on reducing emissions. With the Energy Policy Act of 2005 extending the federal production tax credit (PTC), wind capacity is expected to more than quadruple during the next five years alone.
Global Energy's Power Generation BlueBook,2 which tracks changing generation asset values, found overall asset values across North America were down 5 percent compared with winter 2004-2005 results. While the value change varies by region, plant technology, and fuel type, this downward change in value is driven primarily by our long-term market view, and the assumption that more new coal-fired generation will enter the market in response to sustained higher gas prices. Once power prices revert to an equilibrium level, it will be at a slightly lower price level than previously forecasted. The abundance of these newer, state-of-the-art assets greatly decreases the value of older, smaller, and less efficient coal-fired units.
SO2 and NOx allowance prices have increased dramatically since the CAIR rules were announced in March. In May, average trades for SO2 and NOx were $840 and $3,300 respectively, and SO2 allowance prices were four times higher than the same period a year ago.
Even coal generators are getting in on CAIR, proposing more than 37 GW of new coal projects. More than 15 GW would be clean-burning coal gasification and fluidized bed technologies, according to Global Energy's New Entrants project tracking service, and the prospect of new coal-fired generation already is having an impact on the value of power-generation portfolios.
Given the convergence of new CAIR regulations, state renewable energy standards, and the changing value of generation assets, Global Energy projects more than $100 billion will be invested in emissions controls and renewable energy projects nationwide during the next 15 years. This does not include additional investments in new clean-coal and long-term nuclear power projects.
The CAIR rulings affect 28 Eastern states and the District of Columbia. The map in Figure 1 illustrates the amount of annual emissions reductions from 2004 levels necessary to comply with the two phases (2009/10 and 2015) of CAIR. Twenty-six of the affected states were granted allowance budgets for annual SO2 and NOx emissions. Two of the 28 (Arkansas and Massachusetts) are required to comply only with seasonal ozone-limiting regulations and are exempt from annual caps under CAIR. The final rules excluded Kansas, based on new analysis of its contribution to downwind particulate emissions.
When full compliance is reached in 2015, SO2 emissions will have dropped by more than 83 percent and NOx by nearly 81 percent since 1990. Today, the 28 CAIR-regulated states account for more than 90 percent of the SO2 and 77 percent of the NOx emissions from electric plants nationwide.
Figure 2 () summarizes the amount of reductions from 2004 levels necessary for electric generating units to comply with the CAIR rules.
The EPA regulations require the CAIR-affected states to develop a compliance strategy by September 2006. Utilities in the affected states will need to decide where to put their money. The consensus is that most will, and have already begun, to invest in emissions controls. However, given the backdrop of high natural gas prices and state renewable standards (19 states and counting), some will opt to increase their generation portfolios with renewable energy or invest in new clean-coal projects.
Five states currently account for 39.3 percent and 27.9 percent of the nation's SO2 and NOx emissions, respectively. Generating companies in Ohio (10.7 percent), Pennsylvania (9.9 percent), Indiana (8.2 percent), Georgia (5.4 percent), and Texas (5.2 percent) are the most heavily affected by the EPA regulations. Of these five states, only Ohio (11.2 percent in 2003) and Texas (5.5 percent in 2003) reported a smaller share of SO2 emissions last year.
To put the impact of CAIR into perspective, consider Ohio, the largest state emitter of electric-plant emissions. To comply with 2015 CAIR standards, 49 of Ohio's largest non-scrubbed units (16 GW) would need to be retrofitted with emissions controls, with costs ranging from $4 billion to $6 billion. Since 33 of these 49 generating units were built more than 35 years ago, decisions to retrofit will need to be weighed carefully against investment in new generation and other compliance strategies.
Consider the 25 largest electric generators in the United States (). The group as a whole accounted for 71 percent of all electric generating unit SO2 emissions and 59 percent of all NOx emissions in 2004. The top three companies-American Electric Power Co., Southern Co., and the Tennessee Valley Authority-accounted for more than 23 percent of annual SO2 emissions and 20 percent of the NOx emissions nationally. Cinergy and Progress Energy round out the top five in terms of emissions score (the combined SO2 and NOx rankings).
At the other end of the spectrum is Calpine, with a predominately new gas-fueled fleet. Calpine ranked fifth in fossil generation in 2004, but 198th and 100th, respectively, in SO2 and NOx emissions. Along with Calpine, Texas Genco LLC, and Dynegy Inc. represent the largest fossil-fuel generators with the least amount of emissions.
The recently proposed merger between Cinergy and Duke Energy would move the new holding company to third nationally, while the proposed merger of Exelon and PSEG would create the 20th largest emitter nationally.
Now consider the 25 largest SO2-emitting generating units (), which are all coal units built during the 1960s and 1970s. In 2004, the group accounted for 14 percent of the nation's electric plant SO2 and represented nearly 19 percent of the CAIR rule clean-up necessary to meet 2015 standards.
The average size of each unit is more than 760 MW, and during 2004, the group ran at nearly 71 percent of capacity. Based on those parameters, their allocated 2015 emission budgets, and assuming the addition of new emissions controls, the group could generate nearly 50,000 surplus allowances annually by the first year of Phase II compliance in 2015.
Nationally, based on 2004 annual emissions, older units (more than 35 years) emitted 423 times more SO2 and 33 times more NOx than newer units built since 1999, yet at the same time, these older plants generated only 1.8 times more electricity ().
The newer units are predominately cleaner gas-fired units equipped with state-of-the-art emissions-control equipment. Most of the units operating prior to 1980 are not scrubbed-86.4 percent of the nation's SO2 emissions are generated by fossil units without emissions-control devices. But this is about to change, as many of the largest emitters in the country are going to announce, or have recently announced, plans to invest in control technologies.
The seeds of the next growth stage of the power generation business cycle are taking shape. Generating companies will need to carefully weigh the costs and benefits of adding emissions controls, expanding their renewable generating portfolio, building new clean-coal generating plants, or securing and banking enough emission credits to comply with the stringent EPA caps.
CAIR already is having an impact on the changing face of power generation asset values, but not in ways most people expected. The prospect of clean-coal technology and clean baseload power generation has created a sense of soberness in the assets market. There may be plenty of gas-fired generation out there, but the prospect of new coal-efficient, coal-fired generation replacing older, dirtier coal units means the race is on to get over the finish line. Is this the start of the construction stage of the next power business cycle? Stay tuned.
1. Renewable Energy: The Bottom Line, available from Global Energy at www.globalenergy.com.
2. Power Generation BlueBook, Summer 2005; www.globalenergy.com.