June 3 (Bloomberg) -- Coal-dependent power companies from American Electric Power Co. to Duke Energy Corp. face billions of dollars in added costs from the Obama administration’s proposed climate rules. Renewable-energy backers and nuclear generators like Exelon Corp. stand to gain from the effort to shift the foundations of the U.S. energy industry.
The regulations will be felt from the coal mines of West Virginia to natural gas wells in the Marcellus Shale as the U.S. moves toward cleaner fuel sources. A clampdown on emissions from coal-fired plants, the largest source of electricity, will force state regulators to determine whether consumers will foot the bill for reducing gases that contribute to climate change.
The redrawing of the U.S. energy map stems from the Environmental Protection Agency’s proposal yesterday to cut power-plant emissions -- the nation’s single largest source of carbon dioxide -- by 30 percent from 2005 levels. The reductions give the Obama administration ammunition as it seeks to convince developing nations from India to China to join a global agreement needed to avert dangerous climate change that’s affecting cities worldwide.
“The rule is going to speed the transition away from coal into natural gas and renewables and potentially increase the role nuclear electricity plays in the U.S.,” said Christopher Knittel, director of the Center for Energy & Environmental Policy Research at the Massachusetts Institute of Technology. “Twenty or thirty years from now, we should expect coal to play a more modest role.”
Supporters of the regulations say they will help public health and cut power bills an average of $103 per household annually in 2020 because of more energy efficiency. Opponents say the measures will threaten reliable grid operations by forcing the shutdown of additional coal-fired power plants, which have historically been among the cheapest sources of U.S. electricity.
The proposed regulation will permit states to achieve reductions in climate-warming pollutants by promoting renewable energy, encouraging greater use of natural gas, embracing energy efficiency technologies or joining carbon trading markets. The regulations will apply to existing power producers. Separate regulations governing new plants have already been proposed.
American Electric, Duke and Southern Co., which have each struggled with new technologies to burn coal with fewer emissions, may be forced to seek an additional $1 billion from customers if they’re required to pay for carbon permits, according to one estimate.
“It’s a critical issue for us not to strand all that investment that we made and secondly to make sure the grid can operate in a reliable fashion through this transition,” American Electric Chairman and Chief Executive Officer Nick Akins said in a May 28 interview.
American Electric is the biggest carbon emitter among U.S. power producers, followed by Duke and Southern, according to a report last month by M.J. Bradley & Associates LLC, a Concord, Massachusetts-based environmental consulting group.
“While we expect investor owned utilities, public power, and cooperative utilities to recover these higher costs from end users, the financial strain could result in weaker financial metrics and flexibility and downward rating pressure,” Fitch Ratings said in a statement yesterday.
Power sellers like Dynegy Inc., which don’t have the ability to pass costs on through regulated customer rates, will also suffer under the rules, said Julien Dumoulin-Smith, an analyst for UBS AG.
Southern and Duke have faced cost overruns and delays at plants designed to burn coal with fewer emissions. American Electric in 2011 ended a pilot project to capture carbon dioxide from a plant in West Virginia, saying the technology didn’t make economic sense without federal carbon regulations.
Assuming a $10 per-metric-ton price for emitting the gas, the companies would each face at least $1 billion in added costs, translating to 7 percent to 12 percent increases on customer bills, according to an April 16 research note written by a group of Sanford C. Bernstein & Co. analysts led by Hugh Wynne.
“Our evaluation of the proposed rule will include a thorough examination of potential compliance costs our customers will ultimately bear,” said Chad Eaton, a spokesman for Charlotte, North Carolina-based Duke. Southern and American Electric are also studying the proposal.
Change has already been under way in the utility industry. About 60 gigawatts of coal plants, or 6 percent of the nation’s total capacity, is expected to be forced out of business by the end of the decade to meet mercury emission standards and other existing rules, according to the Energy Information Administration.
Gas prices that fell to a 10-year low in 2012 because of added U.S. output have spurred the largest coal-consuming utilities to use more of the fuel, which produces about half the CO2.
The Obama proposal is less aggressive than expected and the government is giving individual states “considerable flexibility” in how to meet the requirements, Kit Konolige, a New York-based analyst with BGC Partners LLC, said in an e- mailed note.
The EPA’s target is “eminently doable by 2030,” Wynne said in an interview yesterday. CO2 emissions, down 15 percent from 2005 levels in 2012, will decline another 5 percent by 2018 based on already planned coal plant retirements. The remaining drop could be achieved by running existing gas plants more frequently, reducing the need for coal, he said.
“You’re eventually going to have to order some gas turbines to replace the coal-fired plants,” said Nicholas Heymann, a New York-based analyst at William Blair & Co. That could prove a boon to turbine makers like General Electric Co., Siemens AG and Alstom SA. “We think those orders are going to start to shape up sometime late this year and early next year.”
In places where wind power is competitive, opportunities exist for some of the capacity lost from coal shutdowns to be replaced with renewables, Bloomberg New Energy Finance wrote in a May 23 report.
Nuclear plants, which emit no CO2 to generate power, may see a boost from the regulations. Exelon and Entergy Corp., the two largest nuclear plant owners, could enjoy “material earning gains,” as the price of power rises on competitors’ needs to purchase emissions permits, the Bernstein analysts wrote.
Exelon, based in Chicago, has long supported federal rules to limit carbon emissions, at one point leaving the U.S. Chamber of Commerce, the largest business lobbying group, because of a disagreement over global warming policies. The company said it was pleased the draft rule recognizes the importance of nuclear power.
With 23 nuclear reactors and 44 wind-power projects, it has much to gain from carbon regulations. Exelon may see a $1.3 billion gain in its generation gross margin, adding about 97 cents of earnings per share, according to Bernstein.
The company has suffered in recent years, announcing its first dividend cut in February 2013 after lower gas costs caused power prices to drop. Its shares have rebounded this year, gaining 33 percent.
“Exelon is clearly the biggest beneficiary here,” said Dumoulin-Smith, who rates the company a hold and doesn’t own the shares. “This is all about keeping the nukes around.”
--With assistance from Richard Clough in New York.