The Environmental Protection Agency’s New Source Review (NSR) routine maintenance rule, which was issued last month, may remove some of the emission requirement burdens from utilities, but it could play havoc with natural gas markets and send prices “much lower than currently expected,” according to a new study by Strategic Energy and Economic Research Inc. (SEER).

The rule, issued as part of an overhaul of the Clean Air Act’s NSR mandates, created a category that will exempt utilities and other industries from complying with some pollution mandates if they are performing routine maintenance, repair and replacement activities (see Power Market Today, Aug. 28). Before the ruling was made, the Act required power plant and oil refinery operators to install the best available technology to control pollution whenever a plant was modified or expanded. It also required controls for periodic maintenance, repairs or routine upgrades, but the language was ambiguous and utilities had long lobbied for clarification.

In a report issued Thursday, analyst Ron Denhardt said the rule likely will be challenged by the courts, and indicated “there is a strong chance that it will be overturned.” However, with the exception of Illinois, most of the states with substantial coal-fired generation — Ohio, Michigan, Indiana, Kentucky, Tennessee and Alabama — “are likely to support the rule,” which would work to their favor for utilities to expand their coal capacity. And that in turn he said, could dramatically impact gas-fired generators.

“The likelihood that the ruling will be overturned may well cause some plant owners to defer expanding capacity. Still, some companies are likely to go ahead with the expenditure under the assumption that they will not be forced to undo any ‘maintenance,'” Denhardt said.

Under the NSR rule, 110 GW of coal generation capacity “could be expanded by 15% to 25%; approximately 70 GW of which, within a year and the remainder, within three years.” Using an average 20% capacity expansion, Denhardt found that 14 GW of additional coal generation capacity could become available within a year and 22 GW within three years.

“At a 8,000 Btu/kWh heat rate and an 85% capacity factor, the expanded coal generation capacity would be equivalent to 3.6 Bcf/d of gas consumption,” he said. “Natural gas consumption is expected to grow at approximately 1 Bcf/d per year. Thus, this expansion could displace an equivalent of 3.6 years of natural gas consumption growth.”

Denhardt cautioned that his estimates are only about the “potential” impact of the NSR rule because it’s still unclear whether the ruling might be overturned nor is it known how many of the covered power plants actually might expand their coal capacity. “However,” he said, “the ruling could have a major impact on natural gas markets. It could dramatically reduce the need for additional gas supply and cause prices to be much lower than currently expected by most analysts.” Consequently, he said, the ruling “needs to be carefully monitored.”

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