Is coal power headed for a downsizing in US?

Tougher federal air pollution rules coming next year could prompt electricity companies to close as many as 1 in every 5 coal-burning power plants in America, primarily facilities more than 40 years old that lack emissions controls, according to a recent Wall Street analysis.

The regulations now being crafted by the Environmental Protection Agency (EPA), expected to go into force next April and November in accordance with the Clean Air Act, are part of a long ratcheting back of mercury, acid-rain, and smog-forming emissions from utility smokestacks.

What's surprising is the extent to which those EPA rules – combined with a recent drop in the price of natural gas – could over the next four to five years cause the utility industry to accelerate retirement of old coal-fired power plants rather than spend to upgrade the plants' emissions controls, says the study by Credit Suisse, a Wall Street investment banking firm.

"If the EPA rules were not bad enough for coal generators, we think a large chunk of the US coal fleet is vulnerable to closure simply due to crummy economics where we see coal pricing at a premium to natural gas," says the study, released late last month. "We see the company specific implications of EPA policy as interesting when considering that 15-30 percent of the US coal fleet is at risk of either closure or needing significant [capital expenditure] to stay in operation."

Entitled "Growth From Subtraction: Impact of EPA Rules on Power Markets," the 86-page study sees positive long-term outcomes for investors as big utility companies are forced by 2016 to shed older, inefficient equipment. Yet the study notes that the "EPA rules simply accelerate an inevitable market tightening by 4-5 years" as coal, which for decades has been the low-cost fuel for producing electricity, takes a back seat to natural gas.

Small, old coal plants at high risk of closure

Coal power, with about 340,000 megawatts of generating capacity, today produces about half of US electricity. After expected emissions upgrades, the coal fleet will continue to have plants, producing about 103,000 megawatts, that are still "lacking any major emission controls," the study says. The oldest, smallest coal plants with few emissions controls make up an "at-risk" (of closure) portion that account for about 20 percent of total US coal-fired generating capacity, or 69,000 megawatts.

The cost to cut sulfur dioxide (SO2), nitrogen oxides (NOx), and mercury emissions could run $50 billion to $70 billion, not counting the oldest plants. Upgrading those would cost another $80 billion to $110 billion. It's that last chunk of change that may mean hundreds of power plants get boarded up – and new gas turbines and wind farms and other lower-cost power-fuel options get built instead, the report authors say.

Utility industry executives are keenly aware of this scenario, even if the public generally is not, said Jim Owen, a spokesman for the Edison Electric Institute, a Washington trade group that represents investor-owned utilities. (Investor-owned utilities supply about 70 percent of US electric power.)

"There is little doubt that coal-based generation will continue to come under increasing regulatory pressure in the next few years at a time when natural gas is very likely to continue capturing a larger slice of the generation portfolio," he writes in an e-mail. He had no comment on the merits of the Credit Suisse report, however.

Environmentalists were buoyed by the Wall Street study, but they worried that the report's projection of plant closures – even though regarded as good for investors – would prompt members of Congress to intensify their attacks on EPA clean-air regulations. Some 41 congressmen, including 17 Democrats, last month sent a letter to EPA Administrator Lisa Jackson opposing new pollution regulations limiting emissions of industrial boilers. The Council of Industrial Boiler Owners released a study last month that claimed more than 300,000 jobs were at risk. The Credit Suisse report, in fact, didn't get much media attention until the blog of Sen. Jim Inhofe of Oklahoma, ranking Republican on the Environment and Public Works Committee, posted it under the alarm-ringing headline "EPA hits the Heartland."

EPA's greenhouse-gas rules yet to come

That may be only an opening salvo, however. New EPA regulations restricting greenhouse-gas emissions – mainly carbon dioxide – for large emitters such as power plants are due to be implemented in January. Those rules are expected to produce fireworks.

"We anticipate that the new Congress may unleash a full-scale attack on virtually every EPA air regulation – not just those proposing reductions in greenhouse-gas emissions," says Frank O'Donnell, president of Clean Air Watch, a Washington-based environment group.

The EPA rule changes projected by the Credit Suisse study would remove from the air tons of pollutants that health officials blame for breathing problems and thousands of premature deaths. The Credit Suisse study projects that the amount of coal burned each year would drop by 157 million tons to 324 million tons.

Limited reduction of carbon emissions?

If that really did happen, it would greatly cut greenhouse gases. But only a fraction of that reduction may come to pass, says John Thompson, director of the coal transition project for the Clean Air Task Force, a Boston-based environmental group.

"It's our view that these EPA rules make a tremendous environmental impact and improvement on mercury, NOx, and SO2, but not much on greenhouse gases," says Mr. Thompson.

Most of the electricity and carbon-dioxide emissions, he says, come from big coal plants that are usually in operation. The plants that would be retired are generally smaller plants called on to generate power only a few times a year – responsible for providing about 10 percent of America's electricity load, he says. Even if a large number of these low-production units are closed, overall greenhouse-gas emissions will not drop that much, he says.

Natural-gas turbines, which also generate greenhouse gases, would likely replace the older plants. That means "the benefits on climate from plant closures are pretty small," Thompson says.