New summer nitrogen oxides (NOx) regulations, set to go into full effect in 2004, will result in widespread increases in electricity prices throughout the nation’s eastern markets, according to a new study issued by ICF Consulting, although at least for the short term, the rules are expected to assist in easing electric price pressure this summer in the Northeast.

At issue are new Environmental Protection Agency (EPA) rules designed to reduce emissions by establishing a market for emission permits. The ICF study states that the EPA’s call for State Implementation Plans (SIP Call) effectively establishes a new allowance market aimed at reducing NOx emissions from electric and industrial sources in the East. By targeting interstate transport of NOx, the EPA hopes to assist local non-attainment areas in getting into compliance with national ambient air quality standards for ozone.

The new program, which will go into full effect on May 31, 2004, expands the geographic scope of the existing Northeast NOx market to cover large, fossil-fired facilities throughout a 19-state Midwest, Northeast and Southeast region. Under the rules of the trading system, every ton of NOx emitted between May and September requires a NOx allowance to be retired. EPA and the affected states allocate the NOx allowances ahead of time and companies are able to buy and sell allowances to achieve compliance with the emission standard at the lowest cost to industry, according to ICF.

“The good news is that these new regulations will lower NOx allowance prices for summer 2001, helping to soften electric price pressure in the Northeast,” said John Blaney, managing director of ICF’s energy industry environmental practice. “However, as the new NOx regulations are implemented, they will tighten electric markets and drive up prices,” he added.

The NOx study, which ICF publishes annually, projects allowance prices and market dynamics for the existing Northeast NOx market, the upcoming SIP Call market and potential national NOx trading programs. “We see a NOx market that is highly overvalued in the near term and we expect NOx prices to collapse by the end of 2001,” Blaney said. “However, with the tighter, larger-scope of the SIP Call arriving in 2003-2004, we predict a dramatic run-up in NOx allowance prices and correspondingly high electric prices,” he added. “The apparent disconnect between the near-term NOx supply glut and the mid-term shortage is primarily a function of the regulatory restrictions on banking between the two separate trading programs.”

Last week, the U.S. Court of Appeals for the D.C. Circuit upheld the EPA’s ruling that power plants in the Midwest and Southeast portions of the country are significant contributors to smog in the Northeast. Also, the court’s ruling further upheld EPA’s order that the power plants in question must lower their emissions by May 2003 to a level that does not result in significant pollution in the Northeast.

At the same time, the court asked the EPA to flesh out electricity demand growth projections that the agency utilized to determine state-by-state pollution limits. The court also wants the EPA to explain why it has categorized cogenerators as electricity generating units.

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