by Bob Shively, Enerdynamics’ President and Lead Instructor

There is still time for things to change but as of now the Environmental Protection Agency (EPA) is scheduled to implement significant new environmental rules that will require electric generators in 27 states to cut Nitrogen Oxide (NO_x) and Sulfur Dioxide (SO₂) emissions beginning in 2012. The rule, called the Cross-State Air Pollution Rule (abbreviated CSAPR and commonly pronounced “casper”) will implement multiple new cap-and-trade programs with significant reductions in allowed emissions.

These new regulations will increase the cost of coal generation by adding the cost of allowances to the variable fuel and operations/maintenance (O&M) costs.  The rule may also result in the closing of marginal coal units that are too expensive to upgrade with new emissions control equipment.

The result? An increase in the marginal cost of coal generation and additional use of gas-fired generating units.  A recent webinar sponsored by GDFSuez featuring a presentation by Andy Weissman, Publisher of Energy Business Watch, made a key point suggesting that implementation of the rule will increase natural gas and electric prices throughout the U.S., not just in the states covered by the regulations.  Most observers expect that CSAPR will increase the cost of electricity in the regulated states, but they give little thought to the potential impacts on natural gas prices that are currently at the lowest level in a decade.

According to Weissman, gas prices are being set by the market at a level that is low enough to keep gas-fired generation competitive with certain low-efficiency coal units.  So once the cost of running these coal units go up, the price of natural gas will go up, too.  And given the continental nature of the North American gas market, this will result in gas prices rising across the U.S.  This means that generators in California and the rest of the West will see higher costs of operation even though they won’t need to buy NO_x or SO₂ allowances.  And if this does occur, the result will be higher electricity prices throughout the U.S.

We’ll be exploring the new CSAPR rules along with the coming carbon cap-and-trade regulations in California in our next Energy Insider issue available at http://www.enerdynamics.com/energy-insider-news.asp before the end of the year.