Potential Consequences from Recent Drop in SO2 Allowance Prices

Implications:     The recent plunge in SO2 allowance prices may affect the decisions of coal-fired power plant owners.

Analysis:     SO2 allowance prices have plunged over 60% in six months.  This plunge in prices is believed to be from lack of interest from generators more worried about procuring the physical coal in the current high-priced and difficult to secure environment, lost interest from traders, and the outstanding lawsuit challenging the EPA’s authority to change the surrender rate on these SO2 allowances to 2 to 1 in the Eastern states starting in 2010 under the Clean Air Interstate Rule.               

    SO2 allowances were approximately $1,600 in December 2006 and $550 in November 2007.  They are currently approximately $200 each.
 
     This low SO2 allowance price could cause a delay in environmental capital spending by coal-fired generators for scrubbers that remove SO2 emissions.  The $200 SO2 allowance price is well under the capital costs of installing a scrubber and the fixed/variable O&M costs of operating the scrubber (reagent and parasitic load with the consequent lost power sales).  Said differently, it is currently more economic for coal plants currently without scrubbers to maintain the status quo and delay scrubber retrofits and instead emit SO2 and utilize SO2 allowances.
 
     Also, this low SO2 allowance price is at a point where it is actually more economic for a coal plant to emit SO2 and use SO2 allowances, rather than incur the variable O&M costs of reagents and lost power sales from the parasitic load to run the scrubber.  It is unlikely, however, that a generator would risk the public relations fallout from not operating a scrubber and instead emitting SO2.
 
     The last item is the potential risk that comes from a generator that was going to sell its long position of SO2 allowances created from installing scrubbers that remove 90 to 95% of the SO2.  The 60% drop in the last six months alone has dropped the value of the SO2 allowance book of several generators by hundreds of millions of dollars; affecting the potential source of money that was going to be used to pay for the announced scrubber retrofits by these generators.