Pipeline Limits, Price Spikes May Follow EPA Rule

Wednesday, August 24, 2011

The US Environmental Protection Agency's Cross-State Air Pollution Rule will impose a substantial burden on the power industry in the form of more than $15 billion in investments in emissions-control equipment, Bentek Energy said in a report released Wednesday.

The gas pipeline sector also may see significant constraints because of large gas demand increases stemming from switching coal-fired power plants to natural gas, Bentek said.

The firm projects an about 7 Bcf/d, or 13%, rise in natural gas demand by 2014 as 50 GW of coal-fired generation either will be converted to burn gas or shut down in areas that the EPA rule coves.

Commodity markets are signaling that the rule will not be implemented as scheduled, which would boost natural gas demand, trim coal demand and lead to higher power prices in the coming years, said Bentek.

"Natural gas futures prices and forward basis for 2012 and 2014 have not materially responded to the potential incremental demand associated with the rule," and Bentek said that "the significant risks, concerns and costs associated with this rule" will result in a delayed compliance schedule.

But even with delayed implementation, the implications for commodity markets should be substantial, with 15% -- or about 155 million tons -- of annual US coal production ffset or stranded by 2014 because of plant retirements, Bentek said. That represents more than $10 billion/year in lost revenue to the coal production industry unless the industry finds alternative markets for its supply, the company said.

Using its criteria for installing emissions-control equipment on large coal-fired units, Bentek said the EPA rule would impose a big financial burden on those owners, such as Midwest Generation, Union Electric, Detroit Edison and Georgia Power. Capital expenses for Union Electric and Midwest Generation would approach $2 billion and $1.7 billion, respectively, according to the report.

"If Congress fails to delay the EPA rule, utilities would have only a few months to bring units into compliance. Their ability to comply with sudden restrictions would be further hindered by a shortage of installation crews and supplies, caused by the sudden short-term demand," the report said.

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