Gas prices are likely to increase in response to proposed Environmental Protection Agency (EPA) rules that would require coal-fired power plants to lower emissions in coming years, but it is less certain how high prices will go, according to BNP Paribas commodity strategist Teri Viswanath.

“I think that U.S. gas prices are going to rise” in response to the new rules, but — at least in 2012 — growing production from shale plays will largely offset increased demand resulting from the EPA changes, Viswanath said during a conference call Friday.

“In our view, 2013 is actually the turning point for U.S. supply-demand balances. It is at this point we expect escalating well depletions will edge out lower-cost shale contributions. So the combination of strong structural growth and electric power demand — mostly due to these rules — coupled with stable-to-declining supplies will lead to higher prices.”

Over the longer term, expansive growth of the resource base will encourage a less volatile price environment, enabling large-scale demand growth, Viswanath said. “Based upon our view that substantial low-cost reserves can be called upon quickly to meet growing demand, we expect U.S. natural gas prices to remain largely range-bound, gradually rising from $4.50 in 2012 to $6.50 by 2015.” If all emissions reductions are made by replacing high-emitting coal plants with gas-fired combined cycle units, BNP Paribas estimates that gas demand would increase by 7 Bcf/d by 2014. But that scenario isn’t realistic, since it ignores more economic options for meeting the reductions, according to Viswanath, who said she expects gas demand to actually increase by 1.5 Bcf/d in 2012 and another 1.5-2 Bcf/d in 2014.

Those estimates echo a recent analysis by Bentek Energy LLC, which said EPA’s ruling could lead to a 35% increase (7 Bcf/d) in gas demand from power by 2014 and would force 50 GW of coal-fired power units to either be retired or converted to burn natural gas (see NGI, Aug. 29).

The EPA is developing nine major regulations that will likely impose new requirements on coal-fired power plants and boost the use of cleaner-burning natural gas-fired generation. One of those proposed rules may have been derailed when President Obama earlier this month requested that EPA withdraw its controversial draft Ozone National Ambient Air Quality Standards (see NGI, Sept. 5).

Among the other proposals, the Cross-State Air Pollution Rule (CSAPR) and the Utility Maximum Achievable Control (MACT) rule “will likely prove to be the most onerous…given the required investment in control technology and shortened compliance time frame,” Viswanath said.

MACT carries with it an estimated annual compliance cost of $11 billion, and CSAPR “is likely to be the most disruptive of the rules in development by the EPA” because of the short timeframe between finalization (see NGI, July 11). and compliance, she said. CSAPR, which would replace EPA’s 2005 Clean Air Interstate Act, would require 27 eastern states to significantly improve air quality by reducing power plant emissions that contribute to pollution in other states.

“We think this rule is extraordinarily important and will have a lasting impact on gas demand in this country…These Clear Air Act rules aimed at curbing emissions are going to be as impactful as it was to get the lead out of gasoline,” Viswanath said. The EPA rules are likely to accelerate a fuel-switching trend at power plants that has been going on for more than a decade, according to Viswanath. Coal-fired power plants provided 56% of the nation’s electricity in the 1990s, but only 45% last year, she said.

Older, smaller coal-fired plants will likely fade away as the EPA implements rules to carry out the Clean Air Transport Rule, the Air Toxics Rule, coal combustion residuals, and cooling water intake structure standards, according to a recent report from ICF International (see Daily GPI, May 12). Natural gas could take as much as two-thirds of the market for new power generation over the next 20 years, including load gains from the retirement of more than 50 GW of coal-fired power generation capacity, according to the consulting firm.

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