Coal Power Regulation Uncertainty

In the United States, about 45% of the electricity consumed, almost 4 trillion KWh, is produced by coal power plants [1]. The abundance of coal power would make us think that investing in the construction of a coal power plant must be easy; however, building and maintaining one that meets the changing environmental standards is quite economically risky. According to [2] a “500-megawatt (MW) conventional coal-fired power plant may cost over a billion dollars to construct,” and this doesn’t take into account the fuel, maintenance, and upgrading costs over the plant’s lifetime. The biggest risk for an investor: not recouping the construction costs. There are different ways in which an investor can lose his investment and one of them, surprisingly, has nothing to do with economics but with politics.

The Environmental Protection Agency (EPA) is a United States agency that is partly in charge of implementing federal environmental laws and regulations [3]. These regulations affect the way coal power plants are built and the upgrades that need to be added in order for the plants to meet these standards. Given the  importance and cost of building coal power plants and the amount of power they generate, one would think that these regulations would be somehow predictable or investor-friendly. However, according to the article “Tangled up in green tape” in The Economist, environmental rules set forth by the EPA are quite volatile [4]. The article explains that the EPA has not been consistent with the way it passes environmental rules (depend heavily on presidential political views) and the actual adoption of these rules is, uncertain due to court decisions. One example of this happened in 2011, when a court halted the adoption of new interstate pollution regulations established by the EPA two days before the rules were expected to take action [4]. Also, the EPA “proposed tightening restrictions in ozone” in 2010 when the rules for this matter were not supposed to be reviewed until 2013, which was not expected by power plant investors.  The Obama administration rejected the ozone rules, and unhappy environmentalists sued for passage of stricter environmental regulation. After all the commotion, the case will be reopened in 2013 as a requirement of the Clean Air Act.

Power plants have to be very conscious of possible changes/additions to environmental rules. The article states that “[t]he new mercury standards will cost businesses $10 billion a year”, the passing of the interstate pollution rule would cost them about $2.4 billion a year and the new ozone rule would cost them about $20 million a year. Following these rules has a huge economic impact on power plants, so much that some are shut down. As a result it is expected that electricity prices will rise by 3% per year.

So, how can we take care of our environment and still protect necessary investments in power plants? I believe that relying on a standard cost-benefit analysis for the creation of environmental rules, as discussed in [5], would be more beneficial and predictable than redefining what is best for the environment during each presidential election.

[1] http://www.eia.gov/energyexplained/index.cfm?page=electricity_in_the_united_states

[2] http://www.westernresourceadvocates.org/energy/pdf/Investment%20Risk.pdf

[3] http://www.epa.gov/aboutepa/whatwedo.html

[4] http://www.economist.com/node/21547804

[5] http://www.economist.com/node/21547772

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1 Comment

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One response to “Coal Power Regulation Uncertainty

  1. yuki451

    Generally, 3Es (Economy, Enviroment, Energy security) are said to be important when we think about electricity supply. From this perspective, coal is necessary energy resource in terms of economy and energy security because coal is cheap and coal power plant plays a role as base load. On the other hand, environment should be considered as well. Especially pollutions will bring critical impact on our society. If we try to balance those three Es, I think it is difficult to avoid increasing electricity price. Although electricity cannot be seen and touched, I believe “quality” of electricity can be reflected to the price. For example, the level of pollutions such as mercury, SOX and NOX can represent quality of electricity and pass their cost on to customers. Now US is one of the country that provides cheaper electricity in the world, but I think people might be required to discuss whether to raise the bill in exchange of safetiness.

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