New EPA Regulations May Add to Power Costs

By June 14, 2011 News

New EPA regulations that are set to go into effect later this decade may cause many older natural gas fueled plants to permanently retire rather than face the cost of upgrading equipment to meet the new requirements. A recently issued report by ERCOT, the Texas electric grid operator, is likely indicative of the situation that will be faced in many ISOs. The report concluded that approximately 8,000 MW of generation capacity was likely to be retired by 2015 due to the new EPA requirements. The vast majority of the expected retirements were older gas steam generating units that are usually used to meet peak summer demand in Texas. It is quite likely that we will see similar impacts in other regions and states that rely heavily on natural gas fueled generation to meet peak demand needs, including Pennsylvania, California, and New York. As one would expect, the wholesale market in Texas reacted to the prediction of a tighter supply/demand balance by pushing up forward power prices and heat rates for 2014 delivery and beyond. We may see similar impacts in other markets as the implications of the new requirements are realized. Longer term, if the retiring units are replaced by newer, more efficient units in the same location as the retiring units, costs could actually come down, but this scenario will take a while to play out. The other issue created by these potential plant retirements is transmission reliability. Many of the plants cited in the ERCOT report were near major load centers, and losing them could necessitate upgrades to transmission infrastructure, but these needs won’t be known until plant owners begin the shutdown process. This subject bears watching in the coming months as it could significantly impact power costs in 2014 and beyond.