The big news of the week was the U.S. Environmental Protection Agency’s proposed rule to limit greenhouse gases from existing power plants, a move that is intended to reduce carbon pollution by 30% by 2030. The regulation is a colossal move for the electric power sector, one that will overhaul the makeup of America’s power plants and strikes at the heart of the coal industry.
EPA chief Gina McCarthy went to great lengths to emphasize the fact that states will have flexibility to meet the targets, using both efficiency on site, but also investments in “beyond the fence” measures such as offsetting pollution by investing in renewable energy.
The mixed reaction by the electric power industry to the June 2 announcement was telling. Utility executives liked the fact that the EPA rule was not rigid; it gives broad leeway for them to find the cheapest way to achieve emissions reductions.
But more importantly, the mixed reaction was the result of how the EPA rule will create an interesting division of winners and losers. Utilities that have invested in renewable energy will be positioned well to meet the targets. Ditto for holders of nuclear power. Interestingly enough, the EPA’s plan depends heavily on a huge increase in consumption of natural gas – so natural gas generators were not exactly outraged at the limits.
The clear and unambiguous loser is coal. Coal producers, owners of coal-fired power plants, and their investors have a grim future.
According to EPA’s assessment, coal-fired generation is expected to decline by 20% to 22% by 2020 – that’s a significant drop off over the next five to six years. That equates to about 30 to 49 gigawatts of coal-fired capacity that becomes uneconomical due to the regulation. And just to be clear, that is the additional loss of coal capacity from the new rules – there were already around 60 gigawatts of coal plants expected to be retired by the end of the decade before EPA’s rule came out due to poor economics, according to U.S. government data.
Make no mistake – this is bad news for the coal industry.
It also comes at a time when the international coal market is already experiencing supply gluts on slowing demand in China and India. According to SNL, a financial analysis firm, weaknesses in the coal market are being felt across the world. Several Australian companies, including New Hope Corp. Ltd. and Wollongong…