Last week, the EPA issued their very first draft rules limiting carbon dioxide emissions from future coal and natural gas power plants in the United States (EPA).

Source: ZE

Source: ZE

The new rules will limit the carbon emissions of all future coal-fired plants to 1100 pounds of carbon dioxide per megawatt-hour (lbs CO2/MWh) and to 1000 lbs CO2/MWh for all future gas-fired plants (Bloomberg). These rules are not only significant to the global effort to mitigate global warming, but also in terms of being the first rules the EPA has ever issued to regulate CO2 emissions from power plants (Washington Post).

Naturally, the coal industry has something to say about that, because the rules proposed will mainly constrain the development of coal plants; gas-fired plants will be able to meet this target easily enough. The EPA estimates a gas-fired plant averages 1135 lbs CO2/MWh, whereas the average U.S. coal plant currently emits 2249 lbs CO2/MWh (EPA). Even the latest supercritical pulverized coal-fired plant emits about 1773 lbs CO2/MWh (UCS). In order to obtain a permit from the EPA to build a coal-fired power plant, the plant would first have to figure out how to generate energy from coal without the extra 600 lbs CO2/MWh. What this means for future coal-fired power plants is that they have no future, unless they are willing to spend on equipping their plants with Carbon Capture and Sequestration (CCS) technology. (To read more about Carbon Capture and Sequestration, see our related blog on Canada’s Carbon Capture and Storage Solution.)

Prohibitive Costs

Given the current state of CCS technology, a coal-fired power plant with CCS would cost 75% more than the traditional coal-fired power plant (Washington Post). The IEA estimates that the total cost of CCS could range from US$50-100 per tonne of CO2 today to $25-50/tonne by 2030. This would mean that the average coal-fired plant emitting 2249 lbs CO2/MWh would have to factor in a cost of about $50-$100/MWh. For reference, Alstom, an engineering firm that hopes to build CCS plants, thinks a full-scale coal-fired plant equipped with CCS would cost about $1.3 billion (The Economist), while the Kemper County Integrated Gasification Combined Cycle (IGCC) currently being built in Mississippi is estimated to cost about $4.7 billion (Bloomberg). In comparison, the cost of building an advanced pulverized coal power plant is only $2-4 million (EIA).

Beyond the cost of constructing a new power plant, another cost to consider is the price of fuel. With the price of natural gas on par with coal, there is almost no business case to build a coal-fired power plant. The EIA estimates that a coal-fired power plant would only be economical if the price of natural gas rises above US$7/MMBtu (Washington Post), and it projects that prices will stay under $6/MMBtu for the next two decades. Figure 1 shows the trends of natural gas and coal prices in the past 9 months; the price of natural gas is still under $4/MMBtu.

Prices of Natural Gas versus Coal

Figure 1. An analysis of natural gas and coal prompt contract prices shows how the two fuel generation sources have been competing for a price advantage in the last 3 years. (Graph created in ZEMA using NYMEX Future Settlements data.)

Time to Face the Music?

As emissions continue to rise and efforts to curb them become more urgent, regulations will only get more stringent. The EPA’s rules, as they are now, are likely just the tip of the iceberg, and those whose livelihoods depend on coal will have no choice but to adapt. The fact is, despite their protests over the costs of CCS, the coal industry did in fact lobby against legislation that would have raised up to $60 billion in support of CCS development and deployment by 2035 (Reuters).

The Waxman-Markey bill, which would have created a carbon cap-and-trade system for the United States, would have set aside a certain portion of emission permits to fund CCS. The bill passed the House in 2009, but a companion died in the Senate in 2010 (Reuters). Had a carbon market been created, paying for carbon at $36/tonne—the peak carbon price traded on the European Union Emissions Trading Scheme (EESI)—would also have been more forgiving compared to the cost of a CCS installation priced at $50/tonne.

For the rest of the country, the impact of the EPA’s new rules will be fairly small and unlikely to affect a majority of power producers—or the planet, for that matter. These rules do not apply to the existing 6500 coal-fired power plants in the United States that are responsible for 40% of American CO2 emissions (Washington Post). And, as shown in the graph below, coal-fired power installations have been decreasing since the mid-1990s, and there aren’t many being planned for the future.

Figure 2. Additions to Electricity Generating Capacity in Gigawatts (1985-2040). Source: EIA.

Figure 2. Additions to Electricity Generating Capacity in Gigawatts (1985-2040). Source: EIA.

The EPA has also factored in some leeway for coal-heavy utilities and independent power producers to transition to stricter emission controls. Coal-fired plants can phase in the limits over a seven-year period as long as they average 1050 lbs CO2/MWh over that period (Washington Post).

In the meantime, there are still 50-some odd days remaining to the comment period for the EPA rules, which won’t be finalized until next year. Afterwards, it will be interesting to see whether the EPA will impose similarly strict standards when they start drafting new rules for existing coal-fired power plants.