U.S. Markets closed

Why new Environmental Protection Agency rules affect power plants

Ingrid Pan, CFA

Natural gas gains popularity with power generators (Part 8 of 12)

(Continued from Part 7)

The effect of new proposed EPA regulations

As we’ve seen, the EPA’s (Environmental Protection Agency’s) newly proposed regulations on power plant emissions may not have immediate effects, as there’s minimal new coal-fired power generation slated for construction given that the economics for natural gas–fired plants are currently better than coal-fired plants, in general. However, if the EPA proposal is indeed enacted, there could be long-term consequences. If US natural gas prices rise significantly relative to coal prices, making coal-fired electricity more attractive, there still might not be a push to build more coal-fired plants due to stringent regulation. This provides a long-term positive catalyst for natural gas demand, as coal becomes more disadvantaged by regulation. The EPA proposal makes natural gas the fuel of first choice for power generation. This is a positive for domestic natural gas–weighted producers such as Chesapeake Energy (CHK), Anadarko (APC), Range Resources (RRC), and Southwestern Energy (SWN).

EPA administrator Gina McCarthy commented that new coal plants could be viable if they could capture and store the excess emissions, an emerging technology that the industry refers to as “carbon capture and sequestration” or “CCS.” Many industry players view CCS technology in most applications as not yet economically viable. But the EPA’s proposal could provide a stronger financial incentive for the further development of CCS technology.

Plus, the EPA proposal itself is somewhat symbolic in that it represents the first time that the agency is regulating carbon dioxide emissions from power plants. That the agency, whose stated mission is “to protect human health and environment,” now has jurisdiction over this sphere could be interpreted as an overall negative for the coal industry.

Proposed regulations for existing power plants to be introduced by June 2014

Note that the EPA states that this proposed regulation applies only to new power plants, and the agency is currently seeking comment and information on the proposal, which is to be finalized in a year. The EPA commented that it’s also working on introducing a proposal to regulate existing power plants by June 1, 2014.

Continue to Part 9

Browse this series on Market Realist: