If one believes the shale gas story -- that North America is swimming in the stuff -- then it's obvious that the market needs a sponge to soak up the supply. Gas-fired power generation is easily the largest and most likely, but its absorbency will be dictated by constraints on coal-fired power emissions that have yet to be worked out, let alone understood.

Cap-and-trade is one big issue, but more imminent -- and more promising for gas, according to some -- is the Environmental Protection Agency's (EPA) recently proposed Clean Air Transport Rule (CATR). It would cut sulfur oxide emissions by 71% from 2005 levels and nitrogen oxide emissions by 52% from 2005 levels, beginning in 2012 for compliance in 2014.

Analysts differ on how "bad" this would be for existing coal-fired generating units and how "good" it would be for gas-fired generators -- and gas producers.

Equity analysts at Barclays Capital predict that CATR could yield 20-30 GW of potential coal-fired plant retirements, according to a recent note from the firm. But Credit Suisse's Teri Viswanath, director of commodities research, this week pointed out that 20 GW of retirements by 2020 have already been announced.

"A closer inspection of the age and efficiency of the installed coal fleet suggests that the amount of retirements could actually climb to nearly 40 GW during this period," Viswanath wrote in a note published Tuesday. She said she expects gas to take "the lion's share" of that retiring coal-fired capacity (see Daily GPI, July 28).

While the Barclays team noted that some are saying as much as 60 GW of capacity could be retired due to CATR, the analysts are less convinced that coal plants will be such a pushover.

"So far, the amount of capacity that has been announced for retirement is quite small," the Barclays team said in a note Tuesday. "If history is any indicator of the future, the amount of coal capacity that will be shuttered will fall below forecasters' expectations, and the closures will be strung out longer than anticipated."

Barclays analysts said plant retirements likely will be concentrated in a few market regions. States with the largest shortfall of sulfur dioxide (SO2) allowances are likely to be Pennsylvania, Georgia, Ohio, Indiana and Alabama. Combined, these states account for 53% of the total allowance shortfall among states whose SO2 emissions will be constrained by CATR, Barclays said.

"In percentage terms, however, the steepest cuts in emissions would have to be achieved by Massachusetts, Maryland and Delaware, each of which would be required to cut SO2 emissions by over 75% from 2008 levels by 2012," the analysts said.

They noted that choosing to add emissions controls or to shut down a coal plant is not a straightforward decision. "Considerations range from economics, to reliability, to local policy on energy infrastructure, to energy costs, to the end-users and many more."

The analysis also often includes a comparison of the economics of coal- versus gas-fired generation. "While gas may be the default choice for capacity replacement, [state] regulators are still very hesitant to turn to natural gas," the Barclays team said.

One member of the team recently attended a conference of the National Association of Regulatory Utility Commissioners and reported back that "gas prices are still viewed as being volatile; therefore, regulators are skeptical that gas will be a cheap alternative for new power generation. The memory of the gas price volatility of 2005 and 2008 is perhaps too recent. Coal prices, on the other hand, are viewed as stable, and stability has a strong advantage from the perspective of the regulators."

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