As expected, the Environmental Protection Agency (EPA) Clean Power Plan will hurt the value of coal power plants, although the precise impact on coal units will vary widely, according to a recent assessment by ICF International.
Last summer, the EPA proposed its final Clean Power Plan rule. The measure requires states to draft plans to cut power sector carbon dioxide (CO2) emissions 32% by 2030. EPA published the rule in the Federal Register in October and many states, and other parties, have already challenged the rule in the U.S. Court of Appeals for the District of Columbia Circuit.
While it’s true that the plan will hurt the value of coal plants, the extent will depend largely on factors such as location and what strategy states elect to pursue in order to comply with the CO2 standard. That’s the bottom line from ICF officials David Gerhardt, Lin Deng, Parag Nathaney, and Chris MacCracken.
In general, natural gas combined cycles (CCs), gas turbines, and renewables gain in value—and coal plants decline, ICF said. Combined cycle units in regions with high carbon intensity (typically coal-heavy areas) gain the most relative to gas based regions.
Under a mass-based standard, affected sources must acquire allowances to cover every ton of CO2 emissions during a year or compliance period. The demand and supply of those allowances within a state determines the allowance price (i.e., cost) in dollars per ton that generators must pay. As a variable cost of generation, the CO2 price will be factored into the dispatch cost of generators, thereby impacting the market price for power, changing the margins and competitive positions of units within the market.
A key point to recognize is that to the extent that a generator is setting the power price in a market, its margin will remain unchanged because the price will incorporate its full CO2 cost, ICF said. “ Infra-marginal units, on the other hand, may see a reduction in their margin because their CO2 costs rise more than the power price, depending on their CO2 emission rate relative to the marginal unit.”
“Renewables may play a spoiler role in that they tend to limit the potential upside on gas plants in certain markets. We also find that coal units show discounts in value across all regions, but with an allocation of allowance scheme, values could improve above their baseline,” ICF said.
In general combined cycle gas units will prosper and wind projects should enjoy enhanced value while the value of coal units is hurt, but allocation matters, ICF said.
The effect on coal plant valuations is negative but much more varied—from as little as a 5% reduction to as much as a 70% decrease nationwide, with an average reduction of 30%, ICF said. The variation is driven by regional markets: coal plants in gas intensive areas decrease significantly compared with coal-dominant regions.
In natural gas-dominant regions, less CO2 is emitted by the marginal gas-fired plant, and thus compliance costs cannot be passed through as easily. In other words, compliance costs are rising faster than energy prices, and thus margins are compressed.
“On the positive side, under CPP, EPA gives states the flexibility to specify allowance allocations to generators,” ICF said in the brief analysis. “States may choose to auction allowances, as practiced by the states in the Regional Greenhouse Gas Initiative, or allocate some or all of the allowances for free to affected sources or others.
In its proposed Federal Implementation Plan, EPA allocates allowances to affected sources under a mass-standard based on their share of total generation from affected sources in the 2010–to-2012 period.