On March 25, the US Supreme Court will hear arguments concerning the Environmental Protection Agency’s (EPA) consideration of costs when drafting the Mercury and Air Toxics Standards (MATS). The case was brought forth by 22 states and a number of industry groups who argue that EPA overstepped its powers under the Clean Air Act. The rule has helped spur a dramatic shift in the nations generation stack away from coal and has been the main proponent in the retirement of many gigawatts of coal fired power plants. The possibility that the Supreme Court may rule against the EPA is real, but what would the effects be on coal and natural gas?
The MATS rule was finalized in December of 2011 and targets the air pollution from coal and oil-fired power plants by requiring plant operators to either install the necessary environmental control technologies that would limit the amount of hazardous air pollutants they emit or retire the unit.
According to EIA data, at the end of 2012 70% of coal generating units in the United States had either installed the needed environmental controls to comply with MATS or were planning on doing so. The remaining 30% had either not made a compliance decision or had submitted plans to retire at that time.
With the compliance deadline on April 15 of this year, some 13GW of coal is slated to retire while over 20GW of new utility scale generation is set to come online, according to EIA. This 13 GW of coal ran at a weighted capacity factor, a metric of how fully utilized a particular plant is, of 26% in 2013, compared with an industry average of 60%. EIA also notes that the coal plants set to retire are older and have an average summer nameplate capacity of 158 MW compared to the average of 261 MW for all other coal plants. Assuming this lost generation will be replaced with only natural gas combined cycle gas units, the US could see roughly 600 MMcf/d in additional natural gas consumption.
According to a February article in Midwest Energy News, Kathiann M. Kowalski considered the implications of a ruling against EPA. Quoting American Electric Power spokesperson Melissa McHenry, “for the units scheduled for retirement, we have been investing in, operating and staffing the generating units scheduled for retirement in a way that would not support their continued operation past their planned date of retirement.” McHenry also notes that energy companies such as FirstEnergy have made hundreds of millions of dollars in investments in environmental control technology. One possibility of a reversal on MATS is that “certain aspects of the operation of those controls after installation” would change. Essentially, a utility or plant operator could choose to not use the already installed controls on certain days, or ever, in order to recoup capital expenditures at a faster rate.
The EPA is also currently proposing the Clean Power Plan (CPP), which would further limit the use of coal in the United States. With stricter regulation on emissions from power plants looming, it seems that most utilities are planning for the long term decline of coal use in the United States. A reversal of MATS could undermine the EPAs ability to implement the CPP, but it would be surprising if a reversal on the rule had any dramatic effect on planned retirements or new natural gas builds. The majority of coal plants set to retire in 2015 are older and small capacity units, increasing the likelihood that newer combined cycle natural gas units could compete on an economic basis. Even if some coal plants decide to remain open, their ability to penetrate the generation stack would be weakened, pushing King Coal closer and closer to the edge of his throne.