This article, from law and consulting firm ICF International, is authored by Dave Gerhardt and Chris MacCracken, both Principals at the firm.
The Environmental Protection Agency’s (EPA’s) final Clean Power Plan (CPP) rule will drive shifts in market prices and unit dispatch that will significantly impact generation asset values, especially in coal-intensive regions such as western PJM Interconnection LLC, Midcontinent Independent System Operator, and others.
To illustrate these potential effects, this Quick Take (a summary) provides a sample analysis using the assumption that each state adopts a state-based mass-standard which covers new sources to address EPA’s leakage requirement. Our analysis found a wide range of outcomes.
Key drivers of differences in asset value included
1) fuel type of the plant,
2) location of that plant,
3) scheme for the allocation of allowances,
4) carbon compliance strategy, and
5) type of carbon policy (i.e., mass rather than rate based).
In general, combined cycles (CCs), gas turbines, and renewables gain in value—and coal plants decline. CCs in regions with a high carbon intensity (i.e., in coal regions) gain the most relative to gas based regions. They can become a distressed asset play because these plants tend to be mid-merit without a carbon policy in place.
Renewables may play a spoiler role in that they tend to limit the potential upside on gas plants in certain markets. We also find that coal units show discounts in value across all regions, but with an allocation of allowance scheme, values could improve above their baseline.
The First Step: Capturing the Effect of Pricing Carbon Dioxide (CO2 ) into the Market Under a mass-based standard, affected sources must acquire allowances to cover every ton of CO2 emissions during a year or compliance period. The demand and supply of those allowances within a state determines the allowance price (i.e., cost) in dollars per ton that generators must pay. As a variable cost of generation, the CO2 price will be factored into the dispatch cost of generators, thereby impacting the market price for power, changing the margins and competitive positions of units within the market. A key point to recognize is that to the extent that a generator is setting the power price in a market, its margin will remain unchanged because the price will incorporate its full CO2 cost.
Inframarginal units, on the other hand, may see a reduction in their margin because their CO2 costs rise more than the power price, depending on their CO2 emission rate relative to the marginal unit.
Filed Under: News, Policy