New restrictions on power plant emissions on the horizon will have a significant impact on the nation's coal-fired power generating fleet, forcing many gigawatts of capacity into retirement, RRI Energy Inc. CEO Mark Jacobs told financial analysts Friday. And that could yield a significant boost to natural gas demand from the power sector.
"Nationwide, we believe that new environmental regulations could lead to the retirement of 40 GW of capacity," Jacobs said during an earnings conference call. That number could go as high as 90 GW depending on the economics of coal-fired versus gas-fired generation, he said.
The Environmental Protection Agency's (EPA) recently proposed Clean Air Transport Rule (CATR) 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. Equity analysts at Barclays Capital predict that CATR could yield 20-30 GW of potential coal-fired plant retirements, according to a recent note (see Daily GPI, July 29). Others are predicting retirements totaling as much as 60 GW, the analysts noted.
Whatever the number, it will be a lot, according to Jacobs.
"...[T]he key point is that retirements could lead to significantly tighter supply-demand conditions over time, which in turn would lead to higher capacity and energy prices," Jacobs said. "The second point is it would have a material impact on the commodities the industry uses as fuel. Retirements [of coal plants] at the upper end of the range I mentioned would translate into an additional 8-plus Bcf/d of demand for natural gas."
And demand for coal would decline, likely resulting in higher gas-coal spreads, Jacobs said. "The bottom line is that the industry retirement of marginal coal plants would likely lead to improved economics for the assets that remain in the stack."
But getting through the retirements will be a challenge for the industry "because you don't have nearly that much capacity in the pipeline to replace it," he said. "And the other point, when you look at the...economic landscape, it doesn't really support...the construction of new generation assets today."
Also on the regulatory front but having a far less significant impact on RRI than emissions restrictions is the recently enacted financial reform legislation (see Daily GPI, July 22). Provisions of the law relating to derivatives clearing and settlement will have little to no impact on RRI, Jacobs said, as "most of RRI's derivatives activities are cleared on an exchange, and we don't see a material near-term impact on our business from the legislation."
RRI is in the process of merging with Mirant Corp. in a $1.62 billion stock deal to create the country's second largest independent power producer. The transaction is on track to close by year-end, Jacobs said.
The company blamed a weak economy and depressed commodity prices for a second quarter loss of $172.1 million (minus 49 cents/share), compared with profit of $803.6 million ($2.29/share) in the year-ago quarter. Second quarter revenue was $400.2 million, up from the year-ago period when it was $389.8 million.
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