In EPA Battle, Old King Coal is Far From Merry

By the Financial Times (Financial Times) -- The U.S. power industry is facing its biggest shake-up since the Three Mile Island accident of 1979.

That incident killed off investment in new nuclear plants for a generation. This time, it is coal-fired power stations that are under threat.

New regulations governing pollution from coal plants that have been proposed by the U.S. government's Environmental Protection Agency could force up to 20% of those plants to shut down, according to analysts and industry executives.

The American Legislative Exchange Council, a free market campaign group, has described the impending upheaval as a "train wreck" that will cost jobs, send power prices soaring and lead to blackouts.

Concern over these effects has led to several pieces of legislation being put forward in Congress to curb the EPA's powers and stop the new rules.

Whether the pollution limits will in fact have such a devastating impact is debatable. The non-partisan Congressional Research Service argued in a report circulated last week that the most alarming forecasts were based on exaggerated assumptions about the EPA's plans.

Nevertheless, the financial impact on U.S. power companies could be significant.

The new regulations, intended to reduce the damage to public health from industrial pollution, include tighter restrictions on toxic chemicals in power plants' waste gases, on water use and on the disposal of coal ash.

The first to take effect is the Cross-State Air Pollution Rule (CSAPR), which cuts the permitted emissions of sulfur dioxide and nitrogen oxides, the gases that cause acid rain. It was set out in detail in July and will be enforced from the start of 2012.

There are several ways that generators can meet the CSAPR's requirements.
  • They may be able to buy more pollution permits in the trading scheme for acid gas emissions.
  • They can burn more low-sulfur Powder River Basin coal from Wyoming.
  • They can invest in more flue gas desulfurization equipment, or make more use of the equipment that is fitted already, or run their plants without it less often.

However, all of those options have costs attached and ultimately it may not be worth keeping older and less efficient coal plants open.

Those coal plants are likely to be replaced by a new wave of gas-fired plants, which have lower emissions and can take advantage of low fuel prices resulting from the shale gas boom.

The consequences for electricity companies will vary.

Daniel Ford, of Barclays Capital, says those with regulated businesses should be able to pass the extra costs on to consumers.

For unregulated businesses, it will depend on their fuel mix. Companies that are predominantly gas-fired or nuclear will probably gain because the new EPA rules will raise power prices but the coal-heavy ones are likely to be losers.

Analysts at Sanford Bernstein highlight Southern Company, American Electric Power and the combination of Duke Energy and Progress Energy as likely to have to close the largest amount of generation capacity in absolute terms.

Scana, Integrys, GenOn, FirstEnergy, Southern and AEP face losing the most as a proportion of their total capacity.

Companies have become increasingly vocal about their concerns.

AEP said in June that the new regulations could cost it $6 billion to $8 billion before the end of the decade, adding that it planned to close five coal-fuelled plants.

Michael Morris, AEP chairman and chief executive, last month called the timetable for compliance "as close to lunacy as you can get".

Probably the most sensitive issue is Texas, where the largest utility, Energy Future Holdings, is already struggling under the burden of the debt it took on in its $45 billion leveraged buyout in 2007.

Concern over the threat of blackouts in the state is already high this summer, because of the strain created by high temperatures -- which lead to heavier use of air-conditioning -- and unexpected plant shutdowns.

The issue has been given an extra political edge by the emergence of Rick Perry, the Texas governor, as possible Republican presidential candidate.

Perry has already struck out at EPA regulations for killing jobs and characterized the rules as "destructive federal over-reach".

EFH has also protested furiously, saying: "The severe and disproportionate impact on Texas is unjustified and the timeline unreasonable and will harm Texas jobs, prices, and power supply."

EFH and other companies have asked the EPA to delay implementation of the Cross-State Air Pollution Rule and are now waiting for a reply.

If the EPA refuses, it is likely that some companies and states will take legal action.

Brannin McBee, of Bentek Energy, a consultancy, says he expects the EPA will give the industry more time, perhaps by phasing in its new restrictions over a number of years.

There is simply not enough capacity in the U.S. to fit all the desulfurization equipment and build the new gas-fired plants and pipelines that will be needed within the EPA's timetable.

However, he adds, the EPA seems determined to press ahead with its strategy.

"The general consensus in the industry is that the new rules will have to be delayed somehow," he says.

"But we do believe the new limits will come in some way or another."


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