The Environmental Protection Agency (EPA) Clean Power Plan for existing plants, proposed in June, could have a dramatic impact on the power sector’s demand for coal and natural gas, according to Bernstein Research.
In an analysis drafted for clients, Bernstein estimates that demand for coal could shrink by almost a quarter by 2020 and demand for natural gas could increase dramatically. The analysis, led by Senior Analyst Hugh Wynne, was issued July 23.
“EPA's heavy reliance on coal to gas switching to meet its 2020 target for fossil plant emissions of CO2 has important implications for the structure of regulation that states are likely to adopt in their SIPs” or State Implementation Plans, according to Bernstein Research.
“To achieve its 2020 CO2 emissions target, EPA proposes a radical re-dispatch of the nation's fossil generating fleet, decreasing coal fired generation by ~25 percent, while increasing the output of the combined cycle gas turbine fleet by almost a third,” according to Bernstein.
“We estimate that as a result utility coal burn would decrease by 204 million tons by 2020, a reduction of 24 percent versus 2013, while utility gas burn would increase by 7.2 Bcf/day or 32 percent (equivalent to 10 percent of national demand for gas in 2013).”
“Whether in regulated or competitive power markets, the dispatch of the power generating fleet has historically been determined by the relative cost of operating different types of power plants, with generating units dispatched in rising order of variable cost to meet prevailing demand,” Bernstein said in its analysis.
Because coal-fired power plants emit 2.5x as much CO2 per MWh generated as do combined-cycle gas units, such a change in cost could be achieved by introducing a price for CO2 emissions, the firm said.
In the United States, California and the states in the Regional Greenhouse Gas Initiative (Maryland, New York and the six New England states) have introduced cap and trade schemes which, by limiting CO2 emissions and creating tradable permits to emit up to this limit, have resulted in a market price for CO2. Among the Canadian provinces, Quebec has chosen to join California's cap and trade approach.
The use of cap and trade to regulate emissions of CO2 was of course pioneered by the European Union with its EU Emissions Trading System, which now covers the emissions of 31 European countries. China has introduced regional carbon markets in several areas.
Other countries (including Denmark, Finland, Ireland, the Netherlands, Norway and Sweden and briefly Australia) have elected to tax CO2 emissions, according to the Bernstein analysis.
By far the largest earnings impact from the EPA's proposed carbon rule, will be felt by the competitive generators, for whom there can be no assurance that the cost of compliance will be recoverable in revenues, according to Bernstein.
Two companies are expected to benefit from both increases in power output as well as price induced improvements in gross margin per MWh. These are Calpine (NYSE:CPN) and Dynegy (NYSE:DYN), according to Bernstein.
Bernstein Research is an affiliate of Sanford C. Bernstein & Co., a leading Wall Street sell-side research and brokerage firm.