The frenzy over gas-fired power generation is well off the boil as developers turn their attention to coal-fired and nuclear plants as well as renewables. However, the specter of carbon dioxide regulation casts doubt on coal-fired generation economics, potentially favoring alternatives, including gas.

Carbon dioxide regulation is coming and the power industry better be planning for it now, especially where investment in new capacity is concerned, said consulting firm ICF International, which believes “CO2 regulation on a federal level is nearly certain within the next five to six years.”

There have been at least six federal initiatives dealing with CO2 emissions introduced in the Democratically controlled Congress since the first of the year, and there are increasing regional plans to control CO2 in both the eastern and western U.S, ICF noted Thursday. Several of the proposed bills include provisions specifically designed to discourage the development of new conventional coal plants. The proposed leveraged buyout of TXU, with the accompanying pledge that eight of its 11 planned coal-fired power plants be canceled, is just the latest sign from industry that CO2 is becoming the driving factor in power sector decision-making.

Power companies have announced plans to develop more than 140 new coal-fired plants between now and 2025, not including TXU’s original 11. As many of the plants employing conventional pulverized coal technology are reconsidered in the face of CO2 regulation, TXU’s potential new owners, utilities and regional power systems will have to address how best to replace that capacity with other sources. ICF’s 2006 Emission and Fuel Markets Outlook projects that a CO2 policy will displace 150 GW of new coal-fired capacity, worth more than $300 billion, which made economic sense under current regulations. A diverse portfolio of generation and demand-side management technologies will be required to replace that displaced coal capacity.

“New coal plays an important role in a CO2-constrained market,” said Steve Fine, an ICF vice president. “In the near-term pulverized coal is one of the few reliable baseload technologies available. But over time new coal will need to be capable of capturing its CO2 emissions and will be built along with a mix of new nuclear, renewable, and gas-fired capacity to meet demand growth, which will need to be at least partially offset by greatly expanded energy efficiency efforts. Pursuing plans to build new electric generation capacity without considering the impact of potential CO2 policy on fuel allowance and electric markets could, therefore, be a very costly mistake.”

ICF’s projections show that CO2 regulations will impact existing coal-fired generators as well. While capacity factors of existing coal units may not be significantly impacted except under the most stringent proposed policies, margins will decline and affect the overall value of those assets. In addition, the new economics of those plants will make billions of dollars in three-pollutant control investments no longer cost-effective under a CO2 policy.

“By 2020, a CO2 policy could make $6 billion in scrubber investments resulting from current regulations unnecessary,” said Chris MacCracken, a project manager at ICF. “Existing coal plants will continue to generate a substantial portion of the nation’s power in the coming years, even under a CO2 policy, but getting the most from them financially and operationally means factoring CO2 into the operational and investment decisions regarding those plants, as well as factoring in the potential value of investments in renewables and end-use efficiency.”

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