Under pressure: EPA's carbon rule will mean changes for coal

Under the first-ever federal regulation of carbon emissions, Pennsylvania is charged with slashing emissions from existing power plants by almost 32 percent by 2030 as part of a broader plan to cut greenhouse gases nationwide — a move that will add strain to an already stressed coal industry.

Coal producers in Appalachia are among those who will likely bear the brunt of the proposed regulations, according to a report from investment firm Moody’s. Last week, the EPA revealed its proposal to cut carbon emissions from power plants — the single largest source of carbon pollution that contributes to climate change — by 30 percent from 2005 levels. The nationwide reduction goal is set for 2030. 

“Over the long term, the new rules, if implemented, will hit hardest the coal producers in Appalachia, such as Alpha Natural Resources ... and Arch Coal,” as well as producers in the Powder River Basin of Wyoming and Montana, Moody’s stated.

The proposed changes from the EPA come as the coal sector overall has been contending with other regulatory pressures and competition from low-priced, lower-emitting natural gas as an electric generating fuel.

“The reality of coal is the marketplace has changed and there’s increased use of natural gas,” said David Wagner, an associate at the Pittsburgh office of law firm Reed Smith. “I think it’s the double whammy that has the coal industry — both producers and users — trying to figure out their next move.”

With the new emissions goal set for nearly 15 years from now, there is time for coal — and the overall energy sector — to adjust, Moody’s said.

“The EPA left the coal producers with some short-term breathing room and ample time to adapt,” the rating agency said. “The power sector’s carbon emissions have already declined by 15 percent since 2005, which leaves U.S. power plants halfway towards EPA’s target for a 30 percent reduction by 2030.”

Noting that utilities have been taking steps to cut emissions by switching to natural gas or adding renewables and efficiency programs to their portfolios, Phil Adams, senior investment grade analyst, at Gimme Credit said, “Due to the long tail on this process, we are not changing any call solely for reasons of EPA's Clean Power Plan at this time.” Gimme Credit is an independent corporate bond research service.

Prajit Ghosh, senior analyst at research and consulting firm Wood Mackenzie, said the regulations may not be as aggressive as they appear at first glance. 

One thing to keep in mind is that the goal isn’t to cut carbon emissions below current levels, but below 2005 levels, Mr. Ghosh noted. Emissions have been trending down since then anyway.

“We’re already below 2005 levels, largely driven by the recessionary impact on demand and efficiency gains, as well as natural gas prices prompting the switch from coal,” Mr. Ghosh said. “The point is we’re at a much lower level than we were before.”

In addition, the U.S. Environmental Protection Agency wants to see carbon output to drop on a per megawatt basis, which is less stringent than an overall emissions target, Mr. Ghosh said.

The EPA proposed that Pennsylvania lower emissions to a rate of 1,052 pounds per megawatt hour by 2030, down from 1,540 in 2012.

Uncertainty remains

The devil is in the details. It will take time to review the 645-page document, which is currently in a public comment period.

For instance, it’s unclear whether the 32 percent reduction for Pennsylvania emissions is using the 2005 baseline, said John Pippy, CEO of the Pennsylvania Coal Alliance. “Pennsylvania has seen a loss of over 5,000 megawatts within the last 10 years from plant retirements,” he said. “That’s 11 percent of the total power generation in Pennsylvania.”

It’s important that those power plant retirements be counted toward Pennsylvania’s emission goal, Mr. Pippy said.

“If we don’t get credit for the plants that have closed in the past and the emission reductions that have already occurred, we’re going to see competitive plants that are now at risk because of carbon dioxide, even though they meet the other pollution requirements,” he said.

As for reducing greenhouse gases to help combat climate change, it’s not just up to the U.S., he said.

“We can set the lead with the best available technology, rather than do something that will eliminate coal from our portfolio when China, India and Germany are growing their [coal] fleets,” Mr. Pippy said. “This doesn’t have a global impact.”

In Pennsylvania, nearly 63,000 men and women, including 8,100 miners, work in jobs supported by the coal industry, according to Gov. Tom Corbett’s office.

“This is a significant ruling that will have a significant effect on Pennsylvania jobs,” said Patrick Henderson, energy executive for Pennsylvania.

“What we’re going to want to see is what impact this has on the other energy sources that are anticipated to step up for generation that may be lost. What’s the federal approach on nuclear and natural gas? All three together provide the baseload energy we need,” Mr. Henderson said.

Pennsylvania’s electricity generation in 2012 was composed of 39 percent coal, 33 percent nuclear, 24 percent natural gas, 1 percent hydro, 1 percent biomass and 0.9 percent wind.

“We’re going to see some shifting there,” Mr. Henderson said. “That doesn’t mean alternative and renewable energy doesn’t play a component, but they’re not baseload generation.”

Moody’s said the ultimate effect of the new EPA rule will depend on how states plan to meet the reduction goals. Still, the firm’s “initial reading of the proposals suggests over 20 percent reduction in coal consumption by 2025 from 2013 levels.”

According to data from the U.S. Energy Information Administration, there were 1,308 coal-fired generating units in the U.S. totaling 310 gigawatts of capacity at the end of 2012. In 2012 alone, 10.2 GW, or 3.2 percent, of coal-fired capacity was retired.

A hit to the pocket book

NRG Energy, a Princeton, N.J.-based electricity supplier, said it is concerned “that EPA’s dramatically varying state emission targets may derail these [greenhouse gas reduction] objectives by adversely impacting electricity reliability [for] consumers in certain states.”

NRG also said the regulations may introduce uncertainty and legal challenges to the objective of reducing greenhouse gas emissions. 

Gary Slagel, government affairs specialist for Canonsburg, law firm Steptoe & Johnson expects the rules to hit the consumer’s pocket book.

“Whether you’re talking about jobs or energy costs, some aspects are going to be very impactful for the population of the U.S. The big concern I have is whether we’re prepared for what this means down the road. The job impacts won’t just be limited to the coal regions but will also be felt by the associated industries that are losing that revenue stream.”

While natural gas, which has lower emissions than coal, is poised to take more of coal’s market share, Mr. Slagel said the long term might yield a different story.

“In the short term, it benefits gas producers, but how long lived will that be?” he said. “If what we see happening to coal is successful, is the next turn going after natural gas for the same reasons?”  

“We’re going to continue to see demand growth in energy. Are we prepared to meet that in the most realistic and practical way possible?”

An aging fleet of coal-powered plants

According to the EPA, fossil fuels will continue to play a role in electricity generation. “Coal and natural gas would remain the two leading sources of electricity generation in the U.S., with each providing more than 30 percent of the projected generation,” the EPA said in its proposal.

To date, the average age of a coal-fired generating fleet is 42 years old, and 11 percent are more than 60 years old. By 2025, the average age will grow to 49 with 20 percent of units 60 years or older.

“Even without the agency’s proposal, states and utilities will continue to make plans to modernize the aging of current assets and infrastructure,” EPA said.

Still, the proposed regulations “would lock the U.S. coal industry into a steeper secular decline than it faced already,” Moody’s said.

“Without the carbon dioxide limits, total coal consumption by the power sector would have remained relatively flat, with other fuel sources capturing growth in electric generation and coal’s 39 percent share of the power-generation fuel mix in 2013 slipping towards mid-30s percentages over the next decade,” the ratings firm said.

“The proposed rule — aiming for further 15 percent reduction in carbon dioxide emissions from 2013 levels  — would almost certainly mean more coal plant retirements and an even greater decline in the power sector’s reliance on coal, reducing coal’s share of power generation closer to 30 percent over the next decade,” Moody’s said.

Stephanie Ritenbaugh: sritenbaugh@post-gazette.com or 412-263-4910

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