The end for coal?

Proposed emission rules for new power plants unveiled by the US Environmental Protection Agency (EPA) on March 27 spell the gradual demise of coal-fired power generation and entrench the current cost advantage for natural gas.

The agency's proposed rule, signed yesterday, would set a standard well within the capability of modern gas-fired plants but impossible for coal-fired units to meet unless they employ (unproven) carbon capture and storage (CCS) technology.

EPA has been careful to downplay the consequences. The agency emphasizes it applies only to new power plants, not the existing fleet, and there is a transitional exemption for any new units that have acquired a complete preconstruction permit by the time of this proposal and commence building within 12 months.

Because natural gas is currently so much cheaper than coal, the agency projects gas-fired units will be the facilities of choice until at least 2020.

"Energy industry model ling forecasts uniformly predict that few, if any, new coal-fired power plants will be built in the foreseeable future," according to the proposed rule.

The key word is "foreseeable". No one can predict the economics of natural gas as far ahead as 2020, let alone 2030. Recent development of abundant gas reserves through fracking may have caused prices to plunge, leading to a "golden age of gas", but just seven years ago the industry was gripped by panic about gas production peaking and thought America stood on the brink of needing to import increasing quantities of expensive gas.

The main effect of the proposed rules is therefore to entrench the current financial advantage of natural gas. It confers a substantial benefit on gas producers and ensures the coal industry will remain shut out of the power generation system even if gas prices eventually rise.

Not quite all of the above

President Barack Obama has been touting his administration's "all of the above" strategy of blending fossil fuels and clean technology to meet future energy needs in an affordable manner.

But while the president has sounded enthusiastic about clean tech, happy about gas and even cautiously supportive of oil, he has been silent about coal, which generates by far the highest carbon emissions. Now it is apparent why.

The decision to tilt the market against coal is quite deliberate. As EPA chief Lisa Jackson hinted, it is part of a broader strategy to remake the energy industry by limiting the use of coal in the power stack and substituting cleaner burning gas or zero emission wind and solar.

Because gas prices are currently so low and no new coal-fired plants are expected to be built, EPA thinks the "proposed rule will not have direct impact on US emissions of greenhouse gases". But "it provides assurance that emission rates from new fossil fuel-fired generation will not exceed the level of the standard and will send a strong signal both domestically and internationally.

"Domestically, this proposed rule can further stimulate investment in CCS and other clean coal technologies by making it clear that such technologies do provide a clear path forward for new coal-fired generating capacity. Internationally, this rule may encourage others to consider less GHG-intensive forms of power generation."

Congressional reaction

EPA's decision to tilt the market against coal is sure to draw a furious reaction from miners, coal state senators and congressional Republicans, who are already incensed by the EPA's tendency to push through rules requiring substantial economic shifts as part of its regulatory process.

Rather than trying to build bridges with a restive Congress, EPA appears intent on raising the stakes in the poker game.

In this instance, EPA is picking a fight with coal-state Democrats. But the administration is already embroiled in a fight with oil-state and conservative Democrats as well as congressional Republicans over routing for the Keystone XL pipeline.

The agency's aggressive push to control emissions through the regulatory process, despite the demise of cap and trade, is multiplying its congressional enemies and inviting a backlash from angry legislators.

As the proposed new source standards work their way through the rule-making process, it is likely lawmakers will hit back by cutting the agency's funding, attempting to pass a congressional resolution of disapproval vacating the rule, or trying again to amend the Clean Air Act to curb the agency's powers.

The rule confers some important benefits for power producers as well as the oil, gas and clean technology sectors.

In effectively banning new coal-fired plants unless they use CCS, EPA's new rule would provide much-needed certainty to underpin big investments in gas production and gas-fired generation.

The rule ensures gas will still remain the fuel of choice even if prices rise significantly in the years ahead. It shuts the door against a coal revival and guarantees a rising market share for natural gas producers, currently struggling with rock-bottom prices and a massive surplus.

To the extent that it provides a strong financial incentive to make CCS work, it could also help a technology that is currently struggling to become commercial.

The main drawback is that the new rule would buy greater certainty at the cost of reducing flexibility. In particular, if the golden age of gas fails to live up to expectations or gas prices rocket again, there will be no way to relieve the pressure by reverting to coal-fired production.

The other problem is no one has been able to make CCS work commercially yet. According to EPA, "New coal-, coal refuse-, oil- and petroleum coke-fired boilers and IGCC units should also be able to meet this standard by employing carbon capture and storage technology.

"While a coal unit with CCS may be more expensive to construct than NGCC generation, for reasons explained below, we expect the difference to decrease over time as CCS becomes more mature and less expensive."

Rather disingenuously, EPA goes on to say that despite the rule, "We recognize that some owners/operators may nevertheless seek to construct new coal-fired capacity. This may be beneficial from the standpoint of promoting energy diversity, and today's proposal does not interfere with construction of new coal-fired capacity.

"At present, while CCS would add considerably to the costs of a new coal-fired power plant, there are sources of funding available to support the deployment of CCS, including a limited number of government demonstration programs.

"We expect that the costs of CCS will decline in the future as CCS matures and is utilized more widely."

The problem is that the most promising technology - integrated gasification and combined cycle with carbon capture and storage (IGCC-CCS) - is nowhere in commercial use at present. Various demonstration projects have run into trouble or been scrapped.

Necessity is the mother of invention, however. "The proposed rule will assist the deployment of CCS technology for new coal-fired power plants and reinforce incentives for the use of efficient natural gas-fired generation," EPA wrote.

"The standard established in this proposal would help create the regulatory certainty that CCS is the path forward for new coal-fired generation."

But the restrictions on new coal-fired units and mandate for CCS also are something of a technical leap in the dark.

EPA's ambition to cut greenhouse gas emissions is praiseworthy. There is something disturbing, however, in using the rulemaking process to remake the entire energy industry, making distributional decisions about winners and losers, without any input from Congress.

Yet opponents cannot say they were not warned. In 2009-2010, the administration threatened that if Congress did not act on the cap and trade bill, it could achieve most of the same objectives through EPA rulemaking. Now the EPA is making good that promise.