US gas demand could rise as much as 3.5 Bcf/d by 2014 should new regulations from the Environmental Protection Agency go into effect starting next year as coal-fired generators bring their operations into compliance with the new regime, a BNP Paribas analyst's report stated Friday.
Given that some federal regulations are likely to get shot down or, at the very least, delayed, BNP's Teri Viswanath projects gas demand to increase 1.5 Bcf/d next year, followed by an increase of between 1.5 Bcf/d and 2 Bcf/d in 2014.
Two rules that should prove particularly onerous to the US coal fleet are the proposed Power Plants Mercury and Air Toxics Standards and the controversial, recently finalized, Cross-State Air Pollution rules because of their "required investment in control equipment and shortened compliance time frame," Viswanath stated.
She noted the former regulation --- which would compel older units to conform to industry reduction levels for mercury and other air pollutants or cease operations by 2016 --- would have an annual compliance cost of $11 billion, according to estimates from the EPA and Congressional Research Services.
The offshoot for gas from this rule, Viswanath said, "suggests heavier gas demand during the shoulder months of the compliance period, as coal units install control equipment, with incremental demand thereafter, as gas generators capture market share forfeited by the early retirement of older, less efficient coal units."
But it is the Cross-State rule that could be the most disruptive to the coal-generation sector, she said.
The regulation calls for power plants in 28 states to reduce emissions. By 2014, the program is expected to reduce total US emissions of sulfur dioxide and nitrogen oxide by 73% and 54%, respectively, from 2005 levels. But a number of states --- including Texas, where generators and the state's electric operator are already protesting the guidelines --- would have to begin reducing SO2 emissions January 1.
With the rollout coming in four months, Viswanath wrote the industry would increasingly depend on fuel-switching to meet the new requirements.
She noted, however, Texas could well be a sticking point in the implementation of the Cross-State regulation.
On September 12, Texas power producer Luminant sued the EPA to stop the rule from taking effect in January, arguing the federal regulator excluded the state in its proposed rule a year ago, but then issued mandates on the state in its final rule in July. The company also contended the EPA failed to provide fair notice and the opportunity to comment on the final requirements for Texas.
Should Texas get excluded from the regulation, Viswanath still projects gas demand for next year could increase nearly 1.1 Bcf/d.
Even absent these rules, she noted gas has steadily gained power-generation market share over coal since the 1990s.
According to BNP and Energy Information Administration estimates, coal provided an average of 56% of the US' electricity in the 1990s, compared to 45% last year.
This is due to both the relatively cheaper price of gas and also the aggressive build-out of gas-fired generators in that decade, she said.
"In our view the merchant development frenzy of the past decade, which added an enormous amount of efficient natural gas-fired generation to the grid, is largely responsible for the nation's shift from coal to natural gas," Viswanath stated.
According to BNP estimates, the build-out added nearly 350 GW of gas-fired generation between 1990 through this year. Coal-fired generation, however, added less than 50 GW during the same time frame.
Gas prices, meanwhile, have settled about 50 cents/MMBtu lower than coal prices on average --- after taking into account transportation and emissions costs --- over the past two years, she stated.
"While allowing that the new EPA regulations will in fact reduce the amount of generation contributed by coal plants, we think these policies simply accelerate an underlying trend that has already gathered steam because of the availability of cheap gas," Viswanath wrote.
