EPA Proposals For Greenhouse Gas Limits Face Stiff Industry Opposition

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The U.S. Environmental Protection Agency (EPA) unveiled its first-ever regulations limiting greenhouse gas emissions from newly constructed power plants last week. The agency proposes to limit the carbon dioxide (CO2) emissions from natural gas-fired power plants to 1,000 pounds per megawatt-hour (MWh) and emissions from new coal plants to around 1,100 pounds per MWh. The norms were set bypassing Congress using the executive powers of the government and could still face some legal challenges. This will be a first step towards a wider ranging regulation of greenhouse gas emissions from power plants as the regulation of CO2 from existing power plants is expected to follow next year. Overall, we see these regulations as being another blow for the coal industry and coal producers such as Alpha Natural Resources (NYSE:ANR) while it could prove to be positive for the natural gas industry over the long run.

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Carbon Capture Will Be The Center Of Legal Challenges

Power plants remain the largest emitters of greenhouse gases in the United States and tackling CO2 emissions from these plants has been the cornerstone of President Barack Obama’s climate action plan. (Related: How Obama’s Climate Action Plan Impacts The Energy Sector) Coal-fired plants which produce about 39% of the electricity in the country are seen as one of the largest sources of carbon pollutants. The typical coal-fired power plant emits about 1,800 pounds of carbon dioxide per MWh of power generated, which is almost twice the amount emitted by a natural gas-fired power plant. [1]

While most new natural gas-fired plants will be able to meet the emission norms without much investment, new coal-fired power plants will need to incorporate carbon capture and storage (CCS) technologies. CCS removes the CO2 from a plants emissions and pumps it into a permanent underground storage. CCS technology could make the construction of a coal-fired plant about 25% more expensive. The technology has been a subject of much debate since it has not been operated on a commercial scale to date and utility companies argue that it may not be viable to invest hundreds of millions of dollars on a relatively unproven and nascent technology. CCS is likely to be the key subject of the litigation that could possibly ensue between the EPA and the utility and coal industries over the new emission norms.

Regulation Of  Existing Plants Next Year Poses A More Serious Threat For Coal

Existing power plants account for nearly one-third of all greenhouse gas emissions in the U.S. and the EPA is expected to outline a set of standards for these power plants as well by June 2014. While we do not expect the emission limits for existing power plants to be as stringent as those for new power plants, we believe that it will still pose a significant challenge for the coal industry since it will be applicable to all the coal-fired plants in the country. Given that the average coal-fired power plant in the U.S. is over 40 years old, some utilities and power generation companies are likely to phase out their units instead of choosing to retrofit their aging plants with pollution control equipment. [2]

Natural gas power plants that comply with the EPA’s current standards cost about half as much to construct as a new coal plant with CCS and we believe that utility companies seeking to expand their generation capacity or replace their ageing coal-fired plants are more likely to gravitate towards natural gas power plants.

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Notes:
  1. Bloomberg []
  2. Washington Post []
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