Cross-State Air Pollution rule trading and generation fuels
-
Upload
carriesisto -
Category
Documents
-
view
319 -
download
4
Transcript of Cross-State Air Pollution rule trading and generation fuels
Cross-State Air Pollution Rule trading
and generation fuels
Ross Allen
Carrie Sisto
15 November 2011
London, Houston, Washington, New York, Portland, Calgary, Santiago, Singapore, Beijing,
Tokyo, Sydney, Dubai, Moscow, Astana, Kiev, Hamburg and Johannesburg
Today’s Agenda
• Development of the SO2 market
• Cross-State Air Pollution Rule requirements
• Compliance options and costs
• Building CSAPR in to fuel quality adjustments
From the Acid Rain Program to CSAPR
• Acid Rain Program
– Created by 1990 amendments to Clean Air Act
– SO2 allowance defined as 1 short ton of SO2 emitted
– Emissions well below the nationwide 8.95mn st cap
• Clean Air Interstate Rule
– Uses Acid Rain SO2 allowances
– Eastern generators surrender two allowances/st
• Cross-state Air Pollution Rule
– Created by judicial fiat – CAIR replacement
– New SO2 allowances are created for two new trading programs
Clean Air Interstate Rule
SO2 allowances must
be worth a full ton
Reduce upwind states’
emissions
Meet deadlines for
decades-old
standards
CAIR’s downfall
CAIR allowance prices
collapsed after a federal
court in 2008 found the
rule violates the Clean
Air Act
Cross-State Air Pollution Rule
• Takes effect in 2012
• New allowances
– Cannot use banked allowances
• Limits on interstate trade
– Two SO2 groups, with separate allowances
– No trading between groups
• Destruction of value for existing SO2 allowances
– Acid Rain Program allowances dent Q3 2011 results
• Dominion wrote down $60mn in allowances down to “fair
value” of less than $1mn
• NRG wrote off $160mn in SO2 allowance value in the quarter
• Lost value carved $133mn out of GenOn’s profits
Cross-State Air Pollution Rule States
SO2 groups
Compliance strategies for 2012
• No time to build new control technology
– Long project lead times, short compliance deadlines
• Increased operation of existing controls
– Mild increase in consumables costs, parasitic loads
– Diminishing returns and slight differences
• Coal switching
– Powder River Basin coal is low sulphur…
– …but not all PRB coal is low enough
– And capital costs for logistics and handling changes are high
• Optimizing dispatch
– But optimizing dispatch for emissions control means less
perfectly optimizing dispatch for economics
Group 1: nearly 670,000 allowances short
State2010
Emissions
2012
Budget
Percent
change
Ohio 572,119 304,022 -46.9
Pennsylvania 413,438 273,070 -34.0
Indiana 412,552 276,855 -32.9
Kentucky 271,380 218,699 -19.4
Michigan 243,411 224,710 -7.7
Missouri 236,193 203,312 -13.9
Illinois 220,088 223,135 1.4
N. Carolina 120,387 125,927 4.6
State2010
Emissions
2012
Budget
Percent
change
Tennessee 118,722 145,188 22.3
Wisconsin 109,430 75,501 -31.0
W. Virginia 109,066 135,943 24.6
Iowa 104,666 104,944 0.3
Virginia 93,389 67,986 -27.2
New York 49,565 33,793 -31.8
Maryland 29,947 29,514 -1.4
New Jersey 15,270 9,613 -37.0
Group 1 2012 SO2 emissions limits
0.049
0.085
0.184
0.271
0.277
0.293
0.295
0.369
0.391
0.414
0.415
0.428
0.441
0.470
0.486
0.500
0 0.1 0.2 0.3 0.4 0.5 0.6
New Jersey
New York
Maryland
Wisconsin
Virginia
West Virginia
North …
Pennsylvania
Illinois
Kentucky
Indiana
Ohio
Iowa
Tennessee
Missouri
Michigan
SO2 emissions rate (lb/mmBtu)
Group 1 fuel switching not feasible from 2014
0.035
0.051
0.172
0.137
0.137
0.152
0.125
0.148
0.207
0.189
0.235
0.189
0.310
0.186
0.389
0.315
0 0.1 0.2 0.3 0.4 0.5 0.6
New Jersey
New York
Maryland
Wisconsin
Virginia
West Virginia
North …
Pennsylvania
Illinois
Kentucky
Indiana
Ohio
Iowa
Tennessee
Missouri
Michigan
SO2 content (lb/mmBtu)
2014
Group 2: more than 230,000 allowances short
State2010
Emissions
2012
Budget
Percent
change
Alabama 204,197 211,715 3.7
Georgia 218,911 155,345 -29.0
Kansas 45,251 40,694 -10.1
Minnesota 41,574 41,139 -1.0
Nebraska 64,184 62,448 -2.7
S. Carolina 94,656 86,848 -8.2
Texas 461,661 301,817 -34.6
0.130
0.190
0.200
0.294
0.315
0.395
0.437
0.0 0.1 0.2 0.3 0.4 0.5
Texas
Kansas
Minnesota
Georgia
South Carolina
Alabama
Nebraska
SO2 emissions rate (lb/mmBtu)
Low-sulfur mines in the PRB
Mine
2010
production
(mn st)
SO2/
mmBtu
N. Antelope
Rochelle105.8 0.45
Antelope 35.9 0.59
Black
Thunder115.2
0.55/
0.6/≥0.8
Cordero
Rojo38.5 0.69
Caballo 23.4 0.8
Belle Ayr 25.7 0.77
Rawhide 10.6 0.89
Low sulfur, limited supply
Wyoming coal production 2006-June 2011
Ultra-low sulphur share averaged just 37pc of production
147,000 152,607 162,059 160,644 167,424
83,096
284,078 283,905 289,627256,462 260,987
122,426
0
100,000
200,000
300,000
400,000
500,000
2006 2007 2008 2009 2010 H1 2011
mn
st
Ultra-low sulfur Other Wyoming production
Costs of new generation: Plant options
Plant Types, Characteristics and costs
Capacity
(MW)
Heat Rate
(Btu/kWh)
Capex
($/kW)
Fixed O&M
Cost
($/kW-yr)
Variable O&M
Cost
($/MWh)
Advanced PC 650 8,800 3,167 35.97 4.25
Dual Unit Advanced
PC1,300 8,800 2,844 29.67 4.25
Single Unit IGCC 600 8,700 3,565 59.23 6.87
Dual Unit IGCC 1,200 8,700 3,221 48.90 6.87
Conventional NGCC 540 7,050 978 14.39 3.43
Advanced NGCC 400 6,430 1,003 14.62 3.11
Note: Costs in $2010 Source: EIA
Valuing SO2 in generation fuels
• Acid Rain Program SO2
– One market, one price
• Clean Air Interstate Rule
– Two markets, two prices
• Cross-State Air Pollution Rule
– Three markets, three prices
Correlating markets: Trends between groups
Group 1 and Group 2 prompt SO2
0
500
1,000
1,500
2,000
2,500
3,000
30-Aug 19-Sep 6-Oct 25-Oct 11-Nov
$/s
t
Group 1 Group 2
Valuing SO2 under CSAPR
• Fragmented SO2 markets
– Price variance between group 1 and 2
– Negligible prices for Acid Rain Program
• Uncertainty
– Rule changes/court decisions
– Market size vs. cap stringency
Market development
• Regional trade until 2014?
– Larger variability limits
• Lack of liquidity providers
– Burned by CAIR
• Natural players are
conservative
– Hesitant at first
– Also burned by CAIR
– Will find opportunities to
trade
Key dates in CSAPR implementation:
26-Aug-11Argus launches vintage 2012 and 2013 CSAPR SO2 group 1, SO2 group 2, annual NOx and ozone season NOx
assessments
30-Sep-11Argus launches vintage 2012 CSAPR SO2 group 1, SO2
group 2, annual NOx and ozone season NOx monthly indexes
1-Dec-11 Last CAIR ozone season NOx compliance deadline
2-Dec-11Argus ceases CAIR ozone season NOx assessment
No change in CSAPR assessments
1-Jan-12 CSAPR SO2 and annual NOx programs launch
1-Mar-12 Last CAIR annual NOx and SO2 compliance deadline
2-Mar-12
Argus ceases pre-CAIR SO2 and CAIR annual NOx
assessments
Acid Rain Program SO2 assessment continues, with 2012 as prompt
No change in CSAPR assessments
1-May-12 CSAPR ozone season NOx program launches
1-Dec-12 First CSAPR ozone season NOx compliance deadline
2-Dec-12Vintage 2013 becomes prompt Argus ozone season CSAPR assessment
1-Mar-13 First CSAPR SO2 and annual NOx compliance deadline
2-Mar-13
Vintage 2013 becomes prompt Argus CSAPR SO2 and annual NOx assessment
Acid Rain Program SO2 assessment continues, with 2013 as prompt
States with proposed changes
SIPs planned for 2013
Legal hurdles
Potential paths for change
DC Circuit Court of
Appeals
Congress EPA
Take aways
• CSAPR changes the game for coal-fired generation
– Impossible engineering deadlines
– Tough fleet decisions
• Regulatory and judicial relief unlikely to be
comprehensive
– Around the edges changes possible
– But impossible to bank on
• Argus CSAPR indexes are key tools to manage this risk
– Forward trading kicked off in August, liquidity improving
– Market prices point to growing comfort with compliance options
including fuel switching to natural gas and low sulphur coals
For more information:
www.argusmedia.com
+1 (202) 775-0240
London, Houston, Washington, New York, Portland, Calgary, Santiago, Singapore, Beijing,
Tokyo, Sydney, Dubai, Moscow, Astana, Kiev, Hamburg and Johannesburg