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Does EPA’s latest regulation of air pollution from power plants affect your energy prices?

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Last month, the Supreme Court upheld the Cross States Air Rule (CSAPR) that allows the Environmental Protection Agency (EPA) to regulate air pollution from power plants that crosses state lines. The intent of the rule is to improve air quality by reducing power plant emissions that contribute to ozone and fine particulate pollution in other states. The rule is intended to replace EPA’s 2005 Clean Air Interstate Rule (CAIR).

CSAPR has a long history. It was finalized by the EPA in 2011 with an expected gradual implementation beginning in 2012 for Texas, and later for other states. The rule would require significant expensive upgrades by many coal-fired power plants or force their retirement. The rule’s announcement was met with significant opposition, especially from coal and utility sectors. And there was a significant price response in the forward electricity markets, especially in Texas. The rule was initially delayed and then subsequently vacated by the D.C. Circuit in August of 2012, putting the future of the rule in doubt. The court concluded that CSAPR exceeded the EPA’s statutory authority. Again, there was a significant price reaction – this time downward.

There was little news regarding CSAPR from August 2012 until just last month. But in the meantime, the EPA announced additional regulations impacting coal-fired power generation under its Mercury and Air Toxic Standards (MATS) that will begin to be implemented in 2015. Since 2012, many coal-fired power plants have either announced their retirement or have undertaken (or announced plans to do so) measures to comply with MATS. The equipment needed to control pollutants may include flue gas desulfurization (FGD) and dry sorbent injection (DSI). In addition to the cost of scrubbing coal generation, falling natural gas prices, due to the shale gas revolution, have incented construction of new power plants using cleaner and cheaper natural gas. This has caused additional coal plant retirements, especially by old and “dirtier” plants.

While the Supreme Court’s announcement last week seemed to bring CSAPR back to life, the energy markets did not react. The installation of new equipment and many plants already meets the CSAPR requirements. And for other plants, the retirement was already announced due to MATS or low natural gas prices. The eventual implementation of CSAPR may not significantly impact the generation stack. Furthermore, the details of CSAPR have not yet been announced, so the implementation date is unknown.

This is not to understate the importance of actions by the Supreme Court, the EPA, or the Obama Administration. Nor do I want to argue about the merits of this regulation. But for now, if you are an energy buyer, CSAPR has and may not impact your energy prices. But please do not let your guard down as there are still many price-impacting factors remaining in the market (i.e. gas demand and export growth and power plant retirements due entirely to end-of-life cycle issues).

Posted: May 23, 2014