THE ENVIRONMENTAL PROTECTION AGENCY HAS PROPOSED wide-ranging regulations that will increase the cost of electricity production, particularly at the nation's lowest-cost, coal-fired generators.

Despite a doubling of electricity generation since 1970, atmospheric concentrations of sulfur dioxide and nitrogen oxide have declined. Title IV acid rain provisions of the Clean Air Act Amendments of 1990 will result in even greater reductions over the next few years. EPA has nevertheless charted a course to reduce utility emissions of these pollutants even further.

Under Title I of the CAAA, EPA has issued new ambient air quality standards for ozone and fine particulate matter of less than 2.5 microns in size (PM2.5) and has issued proposed new standards for regional ozone transport and haze at Class 1 areas (e.g., national parks and other wilderness areas). SO2 has been identified as a contributor to regional haze and PM2.5 formation, while NOx has been identified as a precursor to ozone, ozone transport, and, to varying degrees, PM2.5.

A recent RDI study, Energy, Economics & the Environment, analyzed the potential impacts of the new and proposed regulations on asset valuations, utility profitability and wholesale electricity prices. Complex gas and electric market simulation models were run to forecast gas and electricity prices and plant dispatch levels, assuming no new NOx or PM2.5 regulations. The risk and compliance options for every power plant in the country were then assessed individually. A least-cost compliance option was selected for each plant. These compliance options were fed back into the market simulation models to analyze the impacts of compliance on gas and electric markets.

The study found that proposed EPA rules could require capital infusions at existing plants of up to $22.9 billion over the next 10 to 15 years. These investments include the installation of pollution control technologies, co-firing with natural gas at coal-fired plants and conversion of coal-fired stations to natural gas-fired operations. Because of these capital expenses, as many as 60 plants totaling nearly 21,000 MW of capacity will be placed at-risk of shut down. Most of this capacity is in the Eastern Interconnection.

Unless these capital costs are recovered through increased stranded cost recovery, the impact of these proposed regulations on electricity prices will be highly dependent upon the ability of the gas market to meet increased demand. Expected demand could push gas prices up 15 percent by 2010, which would increase electricity prices 11 percent.

The relationship between the proposed EPA regulations, new capital and operating costs, gas prices and electricity prices create an interesting dynamic. The increased gas prices would push up electricity prices, allowing generators to recover much of their increased expenditure at existing coal and oil plants. Nuclear and hydro plants would also become more profitable because of the increased gas prices. Consumers, however, will suffer the most, paying up to $15 billion in additional electricity expenses per year by 2010.

Christopher D. Seiple is principal and Todd Myers is senior consultant with Resource Data International Inc.

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