News

Feb. 1, 2006

Contact Andy Bowen
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E3 Consulting forecasts power generation building boom
When older coal plants can’t meet new EPA pollution caps

Study made public at E3 Energy Conference at Beaver Creek

BEAVER CREEK, CO – In a presentation at the Fifth Annual Beaver Creek Energy Conference here, energy sector experts at E3 Consulting warned that numerous units in the aging fleet of coal-fired power plants in 25 eastern states will not be able to meet tougher new EPA pollution standards going into effect beginning in 2009.

The experts said many facilities will prove to be unsuitable for costly retrofitting projects and will have to be shut down, a situation that will require their replacement with more efficient facilities with lower emissions, commencing what could be a multi-billion-dollar reconstruction effort taking years.
The presentation was made by James F. Short, Chief Operating Officer, and Earl H. Franklin, Executive Consultant of E3 Consulting.  Their conclusions were reached after thorough review of the U.S. Environmental Protection Agency’s Clean Air Interstate Rule (CAIR), which passed into law in March, the Best Available Retrofit Technology (BART), or the Regional Haze Rule, the Clean Air Mercury Rule (CAMR) and pending state and local legislation cutting greenhouse gas emissions
           
Coal-fired power plants have an effective life of 50 years and many in the U.S. are that age, staff at E3 found, concluding that the new environmental regulations may present an insurmountable challenge to the old facilities.  Retrofitting or upgrading old plants to meet stricter pollution standards without being able to buy enough emissions allowances will be very expensive at some sites and impossible at others, E3 warns. Aggressive reductions in oxides of nitrogen will be mandated in 2009 and in 2010 for sulfur dioxide, but few in the industry have calculated the full impact of pending cuts in emissions allowances as well.

COLLAPSE SEEN IN EMISSIONS ALLOWANCES MARKET
Short said utilities and merchant power generators who believe the liquid trading market for emissions allowances will permit their older plants to operate without meeting the new pollution standards may be in for a surprise.  “Two thirds of the current allowance bank is going to go away.  Allowances will be in short supply and will be very expensive,” said Short.
           
Today, plants that operate efficiently and produce less pollution can sell their allowances to plants with insufficient allowances so those plants can operate at their physical potential.  With the implementation of CAIR, the whole trading market for allowances will change, getting tighter, and perhaps losing liquidity.
           
“The reduction in available allowances will be so high that we may see the liquid market for allowances literally collapse,” said Short. “We believe if that happens, there will be a wave of retirements, retrofitting and new construction of state-of-the-art coal plants. Capital and construction expenditures could reach well over $50 billion over the next five or 10 years.
           
“By 2015, our calculations show you’ll effectively have one allowance left for every 2.86 you had in 1998,” said Short. “Everyone in the affected states is in the same boat. Where are the allowances going to come from?  The answer is retrofits and retirements.”
           
Short said it is doubtful retrofits and retirements alone will provide enough emissions reduction to support active allowance trading. Making matters worse, the EPA pollution reduction targets require the states to comply without taking into account increases in population or economic growth in the states, further necessitating additional power generating facilities.


COMPLIANCE COSTS AT OLD PLANTS CAN BE PROHIBITIVE
E3’s staff of engineers, finance and environmental experts concluded that applying selective catalytic reduction (SCR) to control nitrogen oxide, flue gas desulfurization to control sulfur dioxide, and increased particulate control at older existing plants in eastern states will cost billions.  E3 determined that, provided retrofits are relatively easy and can be physically accomplished at all facilities, capital costs could be as high as $80 billion, with total levelized costs of $15 billion per year (2006 dollars) over the next 30 years.
           
“In fact, some facilities will not be able to be retrofitted and retrofit at others will not make economic sense.  Without a liquid allowance trading market, the future looks pretty bleak for such facilities,” said Short.
           
Putting additional performance pressure on the older plants are pending pollution abatement rules in several states and cities, such as the Greenhouse Gas Initiative being adopted by 10 states in the northeast.


HIGHER ELECTRIC PRICES, SHORTAGE OF BUILDING MATERIALS
All these costs will mean higher electric prices in the eastern interconnect.  “Somebody’s going to have to come up with the $15 billion per year, and it is going to be the rate base,” said Short.
           
Further, the analyses don’t take into account the construction logistics associated with so many plants being retrofitted and reconstructed.  “We could find ourselves running into a brick wall with respect to a lack of materials and craft employees. It may not even be possible to accomplish all the work that will need to be done to comply with the regulations between now and 2015,” commented Don Hurd, Chief Executive Officer of E3 Consulting.” Something may have to give, such as pushing out final compliance dates. There will be a lot of unhappy faces on environmentalists if that happens, but we may find that the materials for these projects can’t be produced at the rate, and trained craft may not be available in the amount required to meet the regulatory deadlines.”

Finally, with such sweeping changes in environmental regulation, we are seeing what is effectively energy policy being legislated through environmental law, Hurd said. “These laws and their regulations will have an effect on generating technologies, fuels, and the cost of generation.  What is troubling about this aspect is the potential for unintended consequences.  With PURPA and deregulation, we saw the boom and bust of the ‘90s and early 2000s, and we’re still feeling the effects of the bust.”

E3 Consulting (http://www.e3co.com/), with offices in Denver and Houston, is an experienced team of experts with backgrounds in engineering, the environment, science and finance. E3’s consultants provide objective oversight, critical analysis and solutions for businesses building, optimizing or restructuring energy projects.