WASHINGTON, DC, July 24, 2002 – By depleting SO2 allowance banks now, power companies will accelerate their need to spend billions on SO2 controls under impending multipollutant regulation, according to a new study released by ICF Consulting, one of the nation’s leading energy and environment analysis firms.
The recent heightened focus on cash flow and earnings brought on by the ENRON debacle is forcing some power companies to sell excess SO2 allowances driving down near-term prices. This emphasis on near-term earnings and the continued uncertainty over future air regulations will accelerate the need for SO2 controls and tighten SO2 allowance markets for years to come.
Proposed multipollutant regulations such as the Bush Administration’s Clear Skies Initiative (CSI) will slash the SO2 supply, leaving companies with depleted allowance banks and at the mercy of a very tight market.
“ICF Consulting recommends a buy and hold strategy for SO2 allowances,” says John Blaney, director of ICF Consulting’s energy environmental practice, which authors the annual study.
Exhausting the allowance bank prematurely under a policy such as CSI will shift the need for controls forward in time. With the timing of new control installations pushed forward, power companies will experience a sudden and significant hit to their balance sheets far earlier than anticipated if current depletion rate of the bank continues.
“The current allowance market does not adequately reflect the cost of complying with existing regulations in the future, and substantially undervalues the cost of complying with increasingly likely additional SO2 emissions reduction requirements,” Blaney says. “This disparity between SO2 allowance prices and their value provides a cost-effective opportunity for proactive companies to hedge future regulatory risk.”
Sharp cuts in the SO2 emissions cap and other components of multipollutant policies will have a profound impact on coal markets. More importantly, such policies will not affect regional coal markets uniformly.
“New regional production patterns will emerge as mercury premiums and SO2 scrubber installations change the economics of coal choice-these new patterns will alter existing business plans for suppliers, transporters, and end-users,” explains Blaney. He adds, “The rosy outlook for Powder River Basin (PRB) coal production is definitely at risk.”
For more information about ICF Consulting’s allowance market views, this study, and other environmental and energy consulting services, please visit www.emissionstrategies.com.
ICF Consulting (www.icfconsulting.com) is a management, technology, and policy consulting firm. Drawing upon extensive industry knowledge, distinguished professionals, and innovative analytics, the firm develops solutions to complex energy, environment, emergency management, community development, and transportation issues. ICF Consulting’s approach to these issues is strengthened by its expertise in information technology, organizational improvement, program management, and communications.
Since 1969, ICF Consulting has been serving major corporations, government at all levels, and multinational institutions. More than 1000 employees serve these clients from key business centers in North America, Europe, and Asia. ICF Consulting recently acquired two major consulting divisions of Arthur D. Little, Inc. (ADL). These divisions focus on environment, risk, and public sector program management; they add important dimensions to ICF Consulting’s existing competencies.