Kate Mackenzie The death of US coal

Like many others, Bernstein Research analyst Hugh Wynne thinks the election of Scott Brown to a Massachusetts Senate seat last week is a death knell for cap-and-trade legislation, at least under this administration (we don’t necessarily agree with this assessment, but more about that later). And like others, he points to new EPA regulations as being an alternative source of curbing greenhouse gas emissions.

Only instead of the EPA’s CO2 endangerment finding, it’s the proposed tightening of sulphur dioxide emissions rules that Wynne says could affect US coal-fired power plants so much that US demand for coal goes into ‘secular decline’.

The existing standards, set in 1971, specify a 24-hour “primary standard” for SO2 emissions at 140 parts per billion, and an annual average standard at 30 ppb, and a “secondary standard” for three-hour periods at 500ppb. The EPA is proposing new one-hour standards of 50 – 100, or possibly up to 150, ppb, which Wynne says will equate to about a 50 per cent reduction in emissions by 2015.

Meanwhile, further emissions tightening is likely next year on mercury and other pollutants, under the Clean Air Act, and Wynne believes that Republican congressman Lisa Murkowski’s plan to limit the EPA’s new endangerment finding on greenhouse gases under the same act is unlikely to be passed, creating another way for the agency to regulate coal-fired emissions.

The problem is, he says, the cost of retrofitting coal-fired plants with SO2 scrubbers works out at about $300 per kilowatt of capacity, or over $100m for a 350MW plant. This is so expensive that for older plants nearing the end of their lives anyway, retirement may be a better option:

Tellingly, over the last 20 years, virtually all the coal fired power plants retired in the United States have been characterized by a combination of advanced age (averaging some 50 years of operation), commensurately high heat rates, and the absence of SO2 scrubbers. If the power plants with these characteristics continue to be retired in the years ahead, we estimate that over the next five years approximately 12% of U.S. coal fired generation capacity (equivalent to some 4% of total U.S. generation capacity) will be retired. More stringent requirements to install SO2 scrubbers will only accelerate the trend.

We note that Wynne cites ‘industry sources’ for the cost estimates, so it’s difficult to know how that will turn out. And he does observe that for regulated utilities, the regulations could be a boon as they will be allowed to increase their rates accordingly.

But combined with the increasing enthusiasm for natural gas, it’s not hard to see that coal could indeed decline.

And in case you’re wondering, the EPA has an economic rationale of its own for decreasing the sulphur limits:

EPA estimates that the revised standards would yield health benefits valued between $16 billion and $100 billion. Those benefits would include reduced hospital admissions, emergency room visits, work days lost, cases of aggravated asthma and chronic bronchitis, among others.

Related links:

The hidden cost of energy (on health) (FT Energy Source, 20/10/09)
News release: EPA proposes stronger air quality standards for sulphur dioxide (EPA, 17/11/09)
Coal and treasuries (Gregor, 25/01/10)