Beating the Dead Horse That is Coal

Though there is a ‘coup’ underway in Libya and the geopolitical crisis over Ukraine continues to intensify, the drama of the week focuses on the fate of coal and new environmental rules that will have a lasting impact on energy markets.

Since the Environmental Protection Agency (EPA) announced its new plans for curbing carbon emissions from power plants earlier this week, there has been a flurry of speculation over who the winners and losers will be and the significance of this for energy markets.

In what is being cast essentially as a redrawing of the US energy map, the EPA has proposed to cut power plant emissions by 30% from 2005 levels by 2030. The losers, on the face of it, will be coal-dependent companies, while natural gas, renewables and nuclear energy generators would conceivably gain by default.

Coal-fired plants are currently the largest source of electricity in the US, and the largest polluters. According to FRB Capital Markets, the EPA’s new Clean Power Plan will cut coal consumption in the power sector by 267 to 285 million tons until 2030.

The Environmental Defense Fund is rejoicing. From its perspective, the EPA’s new rules finally open the door to investment in renewable energy. The new plan “will give entrepreneurs, corporations, and venture capitalists the market signal they need to go full steam ahead with low-carbon innovations. It may be one of the largest market opportunities in history to drive the development and implementation of clean energy on a national level.”

But determining the effect on markets is not as easy as pointing to the obvious winners and losers because each state will roll out its own regulations, which gives us a multitude of smaller pictures that have yet to coalesce into the bigger picture.

What has to happen now is that regulators in each state will have to decide how to meet the EPA’s requirements, and how they are going to pay for it—not to mention who is going to pay for it.

That’s where it gets tricky, and where the opponents (largely the coal industry and those who support it) find the bulk of their ammunition.

Their starting point comes from President Barack Obama himself, who noted that while the EPA rule will mean massive savings in the longer-term, it “will require tough choices along the way.”

The coal industry and friends are predicting dire consequences, despite the fact that many of the coal-fired power plants are too old to repair without incurring massive costs. They forecast that consumers will spend billions more for electricity, and that the economy will spiral downward, taking jobs with it.

So how will the states respond? Unevenly, of course, because each has to make a different percentage of emissions cuts based on their current capacity and record. Kentucky, for instance, derives 93% of its power from coal, but only has to make 18.3% in cuts in CO2 emissions.

By contrast, in the state of Washington, there is only one coal-fired power plant, which was already scheduled to close down by 2025, while hydropower is the dominant source of electricity generation.

In Oklahoma, officials have already vowed to sue the EPA for issuing “arbitrary” rules.

Then we have natural gas, which is expected to be one of the biggest winners coming off the EPA plan, with natural gas demand projected to rise significantly as a result. But what is curious is that the American Petroleum Institute (API)—the biggest oil and gas lobbying group—is dead set against the EPA’s new rules. "The uncertainty created will have a chilling effect on energy investment that could cost jobs, raise electricity prices, and make energy less reliable," API President Jack Gerard said.

But what is less understood is that the API does not represent natural gas companies’ interests alone, rather it represents refining and petrochemical interests as well, so from its perspective the impact will be broader and more significant. This lobby is on both sides of the divide.

James Stafford

sourche: http://oilprice.com/Energy/Energy-General/This-Week-in-Energy-Beating-the-Dead-Horse-That-is-Coal.html