The Environmental Protection Agency’s (EPA) Mercury and Air Toxic Standards for power plants — commonly referred to as Utility MACT (for maximum achievable control technology) — were finalized recently, and while they cast a shadow on coal-fired generators, the stricter rules offer a brighter future for natural gas demand.

One power industry group has called them a “regulatory assault” and predicted widespread harm to power system reliability. Others have petitioned EPA to allow more time for compliance in order to soften the impact on the power grid. Estimates vary widely of how much generating capacity will be affected by the rule to the point that operators will retire units rather than pay for upgrades.

But for every coal-fired retirement, a gas-fired plant gets its wings. Dale Nesbitt, senior manager with Deloitte MarketPoint, said the restrictions on coal-fired power mean gas-fired generation will be going up, within the next two years, and there will be new building of gas-fired generation in the next two to five years.

“What’s going to have to get burned in order to meet power demand: gas…,” he said. “The problem with renewables is they don’t give you any reliability. So when you start shutting down these coal plants, we’re going to have to start building gas plants or we’re going to have reliability problems.”

Once reserve margins begin to shrink is when the market will start to see new gas-fired power generation built, he said. “Right now everybody’s got excess reserves because we’ve got a little recession on our hands, so…we’re long on supply. As you start shutting these coal plants down we get short on supply. When and if power demand starts to pick up, you’re going to have to run the gas plants a lot more because you’re going to run your coal plants a lot less. I would say within two years from now you’re going to have to start really seriously putting new gas plants into the mix, I’d say two to five years…everywhere there’s coal. Most of the coal is on the eastern Interconnect, roughly the Mississippi River East.”

Because gas-fired generators are more efficient than coal plants, for every Btu of coal demand that’s lost, approximately three-quarters of a Btu of gas demand will be gained, Nesbitt said.

While Utility MACT bodes well for gas demand, much of the low-hanging fruit available to gas-fired power has been picked, thanks to low natural gas prices. “Basically, with $3 gas, $3.50 gas, which is the ballpark that we’ve been in for a while, a good part of this generation from these coal plants has already been displaced over to gas-fired generation,” said ICF International Vice President Kevin Petak.

And going forward, the economy will play an equally important role in the growth of demand for gas-fired power, said ICF International Vice President Steve Fine.

“While we do see an increase in gas-fired generation say between 2014 and 2016, commensurate with the time we see a lot of those retirements, a lot of that increase in gas-fired generation, it’s attributable to losing that capacity, the coal capacity, but probably even more so attributed to the continued growth in demand,” Fine said. “At that point we’re presumably out of the recession, one would think, hope. And if we’re back to sort of ‘normal’ growth levels, that’s where you see a lot of the increase in gas generation coming from.”

But then again, if the economy doesn’t grow, “that’s a risk for the gas segment as well,” said Petak.

According to the Electric Reliability Coordinating Council (ERCC), “Utility MACT affects some 40% of baseload capacity and almost half of U.S. net generation.” ERCC made the statement in November while petitioning the Office of Management and Budget for a meeting on the pending rules.

ERCC referenced an analysis by the Federal Energy Regulatory Commission that “found that 81 gigawatts [GW] of generating capacity is ‘very likely’ or ‘likely’ to be taken off line by 2018 due to coal plant retirements and downgrades resulting from the rule.”

The council cited other analyses as well, including one by FBR Capital that found Utility MACT along with EPA’s Clean Air Transport Rule could force the retirement of 30-70 GW “of the lowest-cost electric generating capacity.

“NERC [North American Electric Reliability Corp.]…found that Utility MACT and other EPA rules could reduce electric generating capacity by 46-76 GW,” ERCC said. Analyses by other firms of Utility MACT and the air transport regulations show retirements of as much as 70 GW of capacity, ERCC said. Losing 56 GW, a mid range scenario, would be equivalent to the power generating capacity of Florida and Mississippi, the group said, citing a Wall Street Journal report.

The impact of Utility MACT on power generators is expected to be the greatest in the Midwest and in coal states such as Kentucky, Virginia and West Virginia. It’s doubtful that Utility MACT will drive a knife through the heart of King Coal as some have claimed. However, it is expected to stimulate the retirement of some coal-fired units and hasten the planned retirements of others. And this should bode well for gas demand for power generation as new and existing gas-fired units step in to take up the slack for the departing coal units.

The Cross-State Air Pollution Rule (CSAPR) and the Utility MACT rule “will likely prove to be the most onerous [for the power industry]…given the required investment in control technology and shortened compliance time frame” among EPA’s regulatory changes, said BNP Paribas commodity strategist Teri Viswanath last year (see NGI, Sept. 26, 2011).

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% in 2010, 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 report from ICF International. 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.

In a recent note Goldman Sachs analysts said they believe the second phase of CSAPR and Utility MACT will further boost gas-fired generation at the expense of coal.

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