Fitch believes the federal appeals court decision to uphold the Environmental Protection Agency’s (EPA) greenhouse gas rules will limit the use of coal for electricity generation and increase the nation’s reliance on other fuel options.
We also believe it will severely constrain the construction of future coal-fired plants. The U.S. Court of Appeals said the EPA was correct in using existing federal laws to reduce emissions of six gasses, including carbon dioxide, by denying two of the challenges and dismissing the others yesterday.
The effects of these rules are expected to further strain the operations of older, smaller coal-fired plants already struggling to address imposed restrictions on other pollutants. Many of these plants may be prematurely retired, as significant new investment would be needed to meet prescribed emissions requirements. Most are located in the Midwest and central states, including Pennsylvania, Ohio, Indiana, Illinois, and Michigan.
We also foresee a continued reduction in the use of coal as a fuel and an increase in the use of natural gas. Fuel price dynamics have already begun a large shift for some electricity producers. According to the U.S. Energy Information Administration, in April 2011, almost twice as much of U.S. net power output was generated from coal than natural gas-fired units. In April 2012, they contributed nearly the same. Other power resources, including nuclear, may also be given greater consideration going forward.
Future construction of coal-fired plants is unlikely given these rules and a myriad of others due this year and next. We will monitor the effects of the potential coincident retiring and lack of new construction closely.
The effects on bondholders is expected to vary based on issuer-specific factors, including power supply mix relative to the region, state environmental initiatives, rate flexibility, recourse to regulated cost recovery, and the owner’s debt, leverage, and capital structure, among others.