U.S. CO2 legislation threatens future of coal in power generation
Standard & Poor’s affirmed Wednesday that carbon dioxide emissions caps now being considered by the U.S. Congress could make domestic coal plants more expensive to build and operate.
Although coal prices have dropped significantly since early 2006, S&P’s analysis suggests that ”we see moderation, not disaster in coal prices going forward.” Primary Credit Analysts Thomas Watters emphasized that ”coal’s position in the domestic energy spectrum is well entrenched with abundant reserves and its lower cost versus other competing fuels.”
Watters suggested that coal’s potential to be used as an alternative fuel source should also be considered. Therefore, he stressed, ”Longer-term fundamentals remain intact and should be supportive of coal prices.”
Nonetheless, S&P claimed that ”not all coal producers will enjoy the party. Credit quality for Central Appalachia coal producers remains largely negative given the many issues faced by producers in that region. Extremely difficult geologic and operating conditions, an inexperienced labor force, legacy liabilities, and onerous permitting issues have combined to sharply increase operating costs, rendering many Central Appalachia producers insolvent.”
Needless to say, Central Appalachia coal producers rated by Standard & Poor’s are at the low end of the credit spectrum.
Meanwhile, S&P Primary Credit Analyst Ralph DeCesare noted that one of five bills now in Congress could finally this year become the first U.S. federal law limiting CO2 emissions from power plants. ”Because coal burning for electricity contributes about one-third of the CO2 emitted in the U.S., any new law will have a significant impact on coal-burning electric utilities,” he suggested.
If a federal cap-and-trade system is enacted, DeCesare said it could cause utilities to use less coal either by retiring older coal-burning plants or building new non-coal power plants.
”Any such legislation would change the economics of burning coal for electricity, increasing the expense of operating a coal plant”, he noted. ”The Clean Air Act of 1990 had a similar effect. Utilities are still spending money to remediate SO2 emissions, though they have been largely successful in passing these costs through to their customers.”
”Should CO2 legislation become law, utilities will try to get regulator approval to pass those costs on as well, DeCesare said. ”Under almost any CO2 legislation scenario, utilities with a majority of nuclear power as their fuel source seem to be the obvious winners.”
DeCesare proposed that nuclear plant construction ”could make a comeback. But even if a utility announced plans today to build a new nuclear plant, it would take at least seven years before power could be generated.”
Integrated Gasification Combined-Cycle (IGCC) uses coal to generate a clean-burning gas and make it easier and more economical to capture CO2. While the process costs more than traditional coal burning, DeCesare advised that IGCC could keep coal in the picture. Utilities will also emphasize energy conservation to reduce the need for more power plant construction, he suggested.
DeCesare concluded that current conditions ”do pose a threat to coal’s growth rate and will affect its future market share of U.S. electricity generation.”