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Utilities Unbundled - New rules of the environmental game - EY - Global

Utilities Unbundled    issue 12

New rules of the environmental game

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With two of the most significant new US emissions rules in decades nearing adoption, American power producers face some major challenges.

US power generation companies have cut emissions by nearly 70% since 1990, even as energy use climbed by 38% and real GDP rose by 65%1. But they will soon be asked to do even more.

The US Environmental Protection Agency (EPA) is now introducing the Mercury and Air Toxics Standards (MATS) rule to limit mercury, acid gases and other toxic pollution from power plants and the Cross-State Air Pollution Rule (CSAPR or Casper), which requires states to further reduce power plant emissions that contribute to ozone and/or fine particle pollution.

Better than uncertainty
The EPA has issued its final rule on MATS, but CSAPR has been delayed due to a last minute court decision. For some including NRG Energy (NRG), one of the larger investor-owned power companies in the US, getting certainty around regulations allows the company to effectively plan for change. “It's difficult to have an environmental capex plan when you really don't know what you have to do to comply,” says Mauricio Gutierrez, COO of NRG.

As a publicly traded energy company, the risks of uncertainty are high for NRG: “We're not a utility. We don't have the luxury of passing our environmental costs through a rate base to our customers,” says Gutierrez.

Whatever the final outcome regarding CSAPR, Gutierrez feels NRG is well prepared to face the future.

Earlier state-led initiatives that affected a number of NRG’s coal plants had already led the company to accelerate its environmental program. In addition, most of NRG’s fleet already burns low-sulfur coal, which Gutierrez sees as a competitive advantage in a market that will be further shaped by the clean air regulations.

Tracking the impact on coal
Other power generation companies are moving ahead as well, in response to the new rules and today’s ultra-low natural gas prices, according to Daniel Chartier, Director of Environmental Markets and Air Quality Programs at Edison Electric Institute in Washington, D.C.

EEI has tracked public announcements indicating that 53GW of coal plant capacity will be retired over the next two years, a little less than one sixth of total coal capacity in the US. “A number of companies have essentially said, ‘We've done our compliance planning, we looked at what these air quality and other environmental regulations are going to cost, and the best thing we can do for not only our customers but for our shareholders is to retire that unit today,’ ” says Chartier.

Flexibility on when companies have to comply with MATS has been an issue.

Diversity at risk
US power generation may face other forces, too. One of the biggest is that if the non-compliant coal plants retire soon, Gutierrez expects it may lead to more natural gas plants, which are much cheaper to build and run right now than coal or renewables. A low price for gas, he says, “trumps every other potential form of generation and makes it not economically viable to build other forms of power generation.”

If the gas price stays low, this could have a negative impact on America’s power diversity. “Diversification is one of the most important attributes that we have as an industry,” Gutierrez says.

NRG, however, is not abandoning renewables. Instead, it is trying to capitalize on its existing commitments to renewable generation by developing America’s largest portfolio of large-scale solar projects and building up a branded green energy business.

For more information, contact:

Americas Power & Utilities Leader
Global Power & Utilities Transaction Advisory Services Leader
New York, US
+ 1 212 773 3382
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Assurance Partner
Iselin, US
+ 1 732 516 4681
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1 According to the Edison Electric Institute (EEI)

 


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