On the day after MATS decision, Bernstein sees only a limited reprieve for coal units

In light of the U.S. Supreme Court ruling against the EPA's Mercury and Air Toxics Standards (MATS), AllianceBernstein (Bernstein), a global asset management firm, says the coal plant retirement bloodletting by 2020 won’t be quite as bad as previously forecast.
 
“However, we now assume that coal fired power plants whose retirement had not yet been announced but which lacked the emissions controls required to comply with MATS could survive,” Bernstein said in a June 30 assessment drafted by Senior Analysts Hugh Wynne and Bob Brackett among others.
 
“In this new base case, our analysis suggests that over 2015-2020 ~ 39 GW of coal fired capacity, generating ~135 million MWh annually, will be retired, versus 46 GW and 155 million MWh in our prior forecast,” Bernstein said.
 
“Were this loss of 135 million MWh of coal fired generation to be entirely offset by increased generation from gas fired plants, utility gas burn would have to increase by some 2.5 Bcf/day over 2015-2020, versus 3.0 Bcf/day in our prior forecast,” according to Bernstein.
 
“Conversely, we are now expecting utility consumption of eastern coal to decrease by an estimated 29 million tons over 2015-2020 (versus 35 million tons on prior forecast), and utility consumption of western coal to decrease by an estimated 17 million tons over the same period (unchanged versus our prior forecast),” Bernstein said.
 
Bernstein has “also created a created a best case scenario for coal plant retirements, where we assume that plants whose retirement has already been announced are also the able to delay their beyond 2020.”
 
In this scenario, Bernstein estimates that only 19 GW of coal fired capacity, generating roughly 65 million MWh annually, will be retired over 2015-2020 driven by primarily by the need to comply with the Cross State Air Pollution Rule.
 
“Were this loss of 65 million MWh to be entirely offset by increased generation from gas-fired plants, utility gas burn would have to increase by only 1.1 Bcf/day over 2015-2020,” Bernstein said in the analysis.
 
Bernstein thinks Southern (NYSE: SO) could be among the largest beneficiaries of the Supreme Court decision, 2.5 GW of coal-fired retirements or 5% of its current installed capacity. Other publicly-traded power companies that stand to benefit include AES (NYSE:AES), American Electric Power (NYSE: AEP), SCANA (NYSE:SCG) and Duke Energy (NYSE: DUK), Bernstein suggested.
 
“Similarly, based on our new forecast, we estimate that, among NERC [North American Electric Reliability Corp.] assessment areas, the SERC-SE region would benefit the most, avoiding 2.5 GW of coal-fired retirements or 3% of its installed capacity,” Bernstein said. Also benefiting would be the Midcontinent ISO (1.3 GW or 1% of installed capacity), PJM Interconnection (1.3 GW or 1%), and SERC-N (1.1 GW or 2%).
 
Bernstein thinks D.C. Circuit will now vacate MATS
 
On June 29, the Supreme Court reversed the decision of the U.S. Court of Appeals for the District of Columbia Circuit in Michigan v. EPA, a key legal challenge to the EPA's MATS rule, and remanded the case to the D.C. Circuit Court for reconsideration.
 
The D.C. Circuit issued its decision in Michigan v. EPA on April 25, 2014, finding that the EPA acted reasonably when it concluded that it need not consider costs in making its determination that it is "appropriate and necessary" to regulate hazardous air pollutants (HAPs) emitted by electric generating units.
 
The panel of three judges on the D.C. Circuit Court that originally heard the case, and which upheld EPA's position in a 2-1 decision, will now be required to reconsider their decision in light of the legal guidance provided by the Supreme Court's decision.
 
“Given the Supreme Court's finding that EPA had failed properly to consider costs, we would expect the panel to reverse its original decision and vacate the Mercury and Air Toxics Standards,” Bernstein said.
 
“It is also possible, but we believe unlikely, that the panel does not vacate MATS but rather requires EPA to document its "appropriate and necessary" decision, providing an assessment of the costs of regulating HAPS emissions from power plants,” Bernstein said.
 
“While this course of action would allow EPA effectively to re-promulgate MATS, the EPA's cost-benefit analysis would itself likely draw legal challenges,” Bernstein said. “In particular, we would expect opponents of MATS to point out that the health benefits from regulating the HAPs emissions of power plants are, by the EPA's own admission, difficult to calculate and, where they can be calculated, very small,” Bernstein said.
 
EPA had included in its calculations another expected benefit of MATS: a material reduction in power plant emissions of fine particulate matter (PM2.5). “Critically, however, PM 2.5 is not classified under the Clean Air Act as a hazardous air pollutant. Rather PM 2.5 is regulated under a separate section of the Act, the National Ambient Air Quality Standards (NAAQS).”
 
“It is unlikely, we believe, that the Supreme Court's decision in Michigan v. EPA will have a material impact on EPA air emissions regulations promulgated under other sections of the Clean Air Act,” Bernstein went on to say.
 
New York-based AllianceBernstein is a global asset management firm providing investment management and research services worldwide to institutional, high-net-worth and retail investors. AllianceBernstein and Bernstein Research are affiliated with Sanford C. Bernstein & Co., LLC.

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