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Analysts: Cap-and-Trade 'Neutral' for Gas

Climate change legislation approved last month by the House Energy and Commerce Committee would likely be neutral for natural gas but would certainly make renewable energy technologies big winners. Coal would be the loser, according to analysts at Raymond James & Associates Inc.

Across the board, the legislation would have minimal near-term impact but would be "very impactful long term," the analysts wrote in a note last Tuesday.

Energy sources with zero carbon dioxide (CO2) emissions would obviously be big winners with emissions caps. Coal stands to lose, but it's got some room to give. "...[C]oal is such a cost-effective fuel source for electric power, and such a large portion of the U.S. power generation mix, that it will remain a central component of the power market for decades to come," the analysts wrote. Natural gas comes out in about the middle between coal and the zero-emission sources, the analysts noted.

"...[T]he reality is that this is one of the most far-reaching pieces of energy legislation in U.S. history, and energy investors should be aware of the key points...The two main provisions -- a carbon cap-and-trade system and a renewable power standard, both being first-ever such policies at the federal level -- are bound to influence how the U.S. energy markets will evolve over the next decade and beyond," the analysts wrote.

Because of its complexity, the analysts wrote that they still expect cap-and-trade to be dealt with later and separately from the larger energy bill "to delay this political hot potato." They said a cap-and-trade policy isn't likely until at least 2010.

The bill (HR 2454), co-authored by Committee Chairman Henry Waxman (D-CA) and Rep. Edward Markey (D-MA), cleared the committee by 33-25, with four Blue Dog Democrats from southern and western states voting against the legislation. All Republicans on the panel, with the exception of Rep. Mary Bono Mack of California, voted against the measure (see NGI, May 25).

Raymond James noted that the proposed caps on greenhouse gas (GHG) emissions are "very back-end loaded, with only token cuts for 2012 and roughly half the cuts [happening] beyond 2030." Despite the slow start -- which they noted is necessary to avoid shocking the weak economy -- "the 2050 target of an 83% cut is on the aggressive end relative to targets in other industrialized countries and is even a bit steeper than the 80% [President] Obama proposed in his campaign."

What remains to be seen in particular, the analysts noted, is how initial credits will be distributed -- will they be handed out for free or auctioned? A compromise by House Democrats stipulates that 85% of credits would be handed out while the remainder would be auctioned. Electric utilities would get 35% of the free credits, followed by energy-intensive manufacturers at 15%. "Seeing as how tens of billions of dollars annually are at stake, the haggling over who gets what is by no means over," the analysts wrote.

They noted, too, that the Environmental Protection Agency is poised to begin regulating CO2 emissions if Congress doesn't act (see NGI, April 20).

The legislation also includes the first-ever national renewable portfolio standard (RPS), they said. Again, the plan "is very back-end loaded," with the target gradually rising to 15% by 2020. "The bill requires all covered utilities to sell renewable power, not produce it themselves. That's a key distinction," the analysts said.

Wind power is slated to be the big winner from an RPS due to "its scalability and the fact that it's already at grid parity in most of the U.S.

"The long-term results are almost impossible to quantify at this stage, but directionally, the winners are nuclear and especially renewables," the analysts wrote. "Coal economics are negatively impacted, but federal support for carbon capture and plenty of time for transition will help the industry adapt to the new policy framework. As far as natural gas goes, the bill is relatively neutral."

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