CO2 rule could cause 40% hit in gross margins of some fleets, ICF says

The Environmental Protection Agency (EPA) Clean Power Plan is “not just another air regulation” because some utilities’ generation portfolios could see a 40% loss in gross margin, while individual units could see a swing of 30% in capacity factor, according to ICF International.

ICF offered these and other observations on the controversial carbon dioxide (CO2) reduction proposal in a recent white paper by Steve Fine, an ICF vice president and Chris MacCracken, an ICF principal.

EPA is expected to issue the final version of the rule this summer that seeks to have states cut power sector CO2 emissions 30% below 2005 levels by 2030. Some legal challenges have already been filed.

The ICF officials say the proposed rule “has the potential to be a significant disruptor of markets and company business models. Fundamental decisions by states in the coming two years will have significant implications for participants across the power sector, leading to major swings in the value of generating units and portfolios as well as the attractiveness of investments in new assets.”

“The good news: Although these changes will bring costs and risks, they also will bring opportunities for creating market advantages and positioning certain players to succeed,” according to ICF. “To realize these opportunities, stakeholders should pay close attention to the development of state policies and carefully evaluate their current position and what mix of policies would best position them for the future,” according to the ICF assessment.

“The “wrong” choice costs a utility a whopping 40 percent of its gross margin, while the “right” one loses them almost nothing,” say ICF’s Fine and MacCracken.

“One set of policy choices increases gross margins for an incremental wind unit by 67 percent, siphoning value away from coal units, while others yield only moderate gains,” say the ICF authors. “These effects and the projection of load reductions from the growth of energy efficiency (EE) and distributed generation will seriously impact generator revenues and should cause companies to rethink everything from their planned investments to their very business model.”

The three biggest factors currently looming out there include the 2030 emissions goal for each states as determined by EPA; the specific components of each state’s plan to meet the goal; and the form of the program chosen by each state.

ICF showed various scenarios on how whether states go with plans based on “rate-based” standards for CO2 versus “mass cap” standards for CO2. The question of whether states go with state specific plans or regional CO2 trading plans.

The ICF officials said the rate of state-specific CO2 reduction being sought by EPA can vary widely – even among neighboring states.

For example, neighbors North Dakota and South Dakota both start at similar 2012 EPA-estimated fossil emissions rates, between 2,300 lb/MWh and 2,400 lb/MWh, but required reductions under South Dakota’s 2030 goal of 741 lb/MWh far outstrip those of North Dakota’s final goal of 1,783 lb/MWh.

In the East, Virginia would drop from EPA’s 2012 calculated rate of 1,438 lb/MWh to 810 lb/MWh, a 44% reduction, while neighboring West Virginia’s cut would be from 2,056 lb/ MWh to 1,620 lb/MWh, a relatively more modest 21%.

ICF International (NASDAQ:ICFI) provides professional services and technology solutions in a number of sectors, including energy and environment.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.