Wednesday, July 27, 2011

Rick Perry take note: utility analyst reports Texas can meet cross-state pollution rule simply by running scrubbers more!

As you may recall, Texas Gov. Rick Perry was among those loudly attacking the recent EPA “cross-state” pollution rule designed to reduce drifting power plant pollution. “Heavy-handed and misguided” is how the potential presidential candidate described it.

But now it appears that Perry himself may have been misguided – and certainly heavy-handed.

A new research report by Sanford C. Bernstein & Co. concludes that Texas could comply with the standards simply by turning on existing scrubbers! See highlights below.

It now appears as if the complaints by Perry and other Texas officials were ill-informed to say the least. It’s a classic case of industry-generated hysteria without a basis in fact.

Industry has whipped up the same kind of hysteria about EPA’s upcoming smog decision. This case study should be a lesson.

Sanford C. Bernstein & Co.,

U.S. Utilities: Can Texas Comply With The Cross-State Air
Pollution Rule? Yes, If Existing Scrubbers Are Turned On
U.S. Utilities
July 20, 2011
Hugh Wynne (Senior Analyst) • • +1-212-823-2692

• On July 7th, 2011, the EPA published the final version of its Cross-State Air Pollution Rule (CSAPR), a regulation that will cap the annual emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) from power plants in 23 eastern states, and set limits on summer emissions of NOx in an additional five states. The states covered by CSAPR account for over three quarters of U.S. coal fired generation.

• The Cross-State Air Pollution Rule finalizes regulations issued in draft form on July 6, 2010. The EPA's draft regulation was entitled the Clean Air Transport Rule (CATR). While CSAPR imposes annual SO2 and NOx emissions limits on Texas, CATR did not.

• After the release of the rule, Texas' utilities, regulator and politicians, as well as sell-side analysts on Wall Street, claimed that the rule could potentially cause widespread retirements and costly upgrades.  Energy Future Holdings warned investors that due to CSAPR it would "likely incur material capital expenditures and operating costs and experience material revenue decreases due to reduced generation."

 Bryan Shaw, Chairman of the Texas Commission on Environmental Quality, argued that, "This rule
will impose great costs on coal-fired power plants, causing some to shut down or curtail operations, threatening the state's electrical capacity reserve margins needed to avoid power disruption during times of peak demand."

 On Wall Street, sell-side analysts calculated that CSAPR puts 4.6 GW of lignite coal-fired capacity in Texas at risk of retirement.

• The EPA, by contrast, contends that in formulating CSAPR it set the 2012 SO2 budget for Texas at a level that can be achieved simply through the continuous use of existing flue gas desulfurization equipment.

• In this research note, we analyze the potential for the state of Texas to comply with CSAPR without costly upgrades or plant closures.

 We have analyzed the hourly SO2 emissions rate for each coal fired unit in Texas that is equipped with an SO2 scrubber. By plotting the distribution of these hourly emissions rates, we have determined the number of hours that each scrubber is in operation. We then assessed the impact on SO2 emissions of running these existing scrubbers continuously.

 We also assessed the emissions reductions potentially achievable by coal fired units that currently lack SO2 scrubbers. Specifically, we determine the level of SO2 emissions these units have historically achieved when burning lower sulfur coal.

• We find that if coal fired generating units in Texas were to run their existing scrubbers continuously, and if unscrubbed units were to achieve the SO2 emissions rates they have historically when burning lower sulfur coal, the state of Texas could likely comply with its SO2 budget under CSAPR in 2012.

Investment Conclusion

In this research note, we analyze the potential for the state of Texas to comply with CSAPR without costly upgrades or plant closures. We find that if Texas utilities were simply to run their existing scrubbers continuously, and switch unscrubbed units to lower sulfur coal, Texas could likely comply with its SO2 budget under CSAPR in 2012.

Individual Texas utilities, however, may find that under these circumstances their 2012 emissions of SO2 may exceed their allocation under CSAPR of SO2 allowances. We have therefore analyzed the impact on individual utilities of the need to purchase (or the opportunity to sell) SO2 emission allowances, assuming a price per ton of $700, as per the EPA's modeling.

Our analysis suggests that Energy Future Holdings would be required to buy SO2 allowances to cover its emissions, resulting in an incremental annual cost of $15 million. We calculate that Xcel Energy (XEL) would be required to spend $7 million to buy the required allowances.
We note that Xcel Energy (XEL), as a regulated utility, could pass through this cost to its customers, while Energy Future Holdings, as a competitive generator, would see its after-tax earnings reduced by an estimated $10 million annually.

On the other hand, NRG Energy (NRG) would likely benefit from the sale of excess SO2 allowances,
potentially adding $5 million to annual revenues. We calculate that American Electric Power (AEP) might also have an excess of allowances, worth $1 million annually to the company.

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