Winners and Losers of the EPA's New Rules

 | Dec 30, 2011 | 2:00 PM EST
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The uncertainty is over for owners of the nation's coal-fired power plants.

The Environmental Protection Agency (EPA) recently finalized two sets of rules. Those new rules make it clear which power plants will become winners and which will be losers. As expected, winners, including many utilities, are hailing EPA's rules as responsible, prudent and appropriate.

Some are surprised to learn that the EPA was reluctant to issue new rules regulating airborne toxins. But several states insisted their lands were being damaged by other states' power plants, sued the EPA, lost, appealed to the Supreme Court and won. The Supreme Court's decision forced the EPA to address cross-border pollution issues by either determining the pollution was harmless or promulgating new rules. The EPA studied the question and issued new rules.

Clearly, losers in EPA's new regulations are owners of old, inefficient, fully-depreciated and marginally economic coal-fired plants. For decades, these owners used the nation's skies as a free dumping ground for all sorts of disgusting chemicals. Worse, some coal plant owners believed they had an inalienable right to dump into the nation's skies tons of toxins without cost or consequence.

The EPA's regulations have become a polarizing issue because individual states made it a federal case. The polluters' intent was to spread their toxins to downwind states and perhaps out to the ocean. But downwind states didn't want their toxins and they objected to be on the receiving end of out-of-state pollution.

In promulgating new rules, the EPA believed they were being accommodating to owners of polluting plants. The EPA is not banning pollution. It is requiring power plant owners to undertake their best efforts to reduce pollution as much as practicable. They require owners to use existing technology designated as Maximum Achievable Control Technology (MACT). And they are giving them some time to comply.

By implementing Court-ordered rules, the EPA's MACT requirements are estimated to avoid more than 2,600 premature deaths, 4,100 heart attacks, and 42,000 asthma attacks. Under these new rules, the EPA calculates Americans can expect to receive $10 to $24 in health benefits for every dollar spent to meet MACT standards.

A clear winner is the health of the American public, particularly the part of the public who are unwittingly working and living downwind of offending plants.

Another clear winner is power plant owners who already meet EPA requirements and who are bidding into the nation's capacity markets. These owners will be rewarded with higher capacity payments as 50 gigawatts of depreciated assets exit the market. Noncompliant plants cannot compete in capacity auctions.

Winners include merchant nuclear plants owned by Exelon (EXC), Dominion Resources (D), NextEra Energy (NEE) and Entergy (ETR). Most of their generators should earn higher capacity payments.

Winners also include merchant natural gas plants owned by Calpine (CPN), GenOn Energy (GEN), and Constellation Energy Group (CEG). Most of their generators should also earn higher payments.

Finally, a majority of America's coal-fired power plants will do just fine and will also earn higher capacity payments or receive compensation from state regulators. Dominion, GenOn, American Electric Power (AEP), FirstEnergy (FE), NextEra and PPL (PPL) own coal assets that already comply with MACT rules or will soon comply.

But 50 gigawatts of capacity will be exiting the markets and that's about five times more than the EPA estimated. The exit comes about because owners of marginal facilities believe the EPA's upgrades are not worth the additional investment. Since their old generators should be fully depreciated, the financial impact to shareholders should be minimal.

But as 50 gigawatts exits, the impact on the nation's grids will not be minimal. As the Federal Energy Regulatory Commission testified in Congress, 50 gigawatts of part-time capacity exiting from the nation's fleet could strain Regional Transmission Operators' ability to deliver reliable power.

This leads to another potential winner: oil-fired power plants. Most of these old plants are also fully depreciated, rarely operate and already comply with EPA's MACT rules. They can sit on standby, earn rich capacity payments, and when dispatched, generate very expensive power.

If stand-by, oil-fired power plants are ever dispatched, those plants will establish the market-clearing price for the region. Oil-based market-clearing prices are extremely expensive and those high prices apply to the entire fleet operating in the region. Oil-fired plants can elevate margins for the entire the fleet.

Look for independent power producers, such as Calpine, GenOn Energy and Dynegy to retain old, oil-fired power plants. On a bad day, they should break even. On a good day, they can insert healthy margins for the rest of the fleet. Oil is the new king.

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