1. Coal & Environmental Policy: The View from 50,000 Feet
Mark S. Brownstein
Director, Enterprise Strategy
Global Power and Gas Leaders Conference
Merrill Lynch & Co, Inc.
September 29, 2004

2. At the national level, air quality policy is contentious, with the utility industry
working the federal regulatory process to play for time.
National Probability:
Air & Climate Policies High
Low
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
II
NOx I
MA NH NC
NY
I II
NC
SO2 MA NH NY
I II
Mercury CT MA MA
NJ
N. EAST
CO2 MA NH
CO2
NOx SO2 Mercury
Stabilizing CO2
45% reduction 50% reduction 55% reduction
Phase I
emissions at year
Phase II 55%- 65% reduction 65%- 75% reduction 70%- 85% reduction 2000 levels)
* Percent reduction from current emission levels
Driven by local politics, individual states are moving forward with state-specific
or regional initiatives to address issues such as fine particle pollution, acid rain,
and climate change.
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3. Marginal Eastern coal units, otherwise challenged by rising prices for fuel,
transportation, and internalization of environmental costs, remain competitive as a
consequence of rising natural gas price.
Coal - Natural Gas Price Comparison
7,338 Btu/kWh CCGT w/ burner tip gas at:
ASSUMPTIONS NAPP CAPP
$60
Today’s gas price
$6.50 COAL SPECS (Btu/lb,%S) 13,869,2.1%S 12,942, 0.9%S
$50
DISPATCH COST ($/MWH)
HEAT RATE (Btu/kWh) 10,200 10,100
$5.00
$40
COAL Transportation $10/TON $7/TON
3.31
5.91
$30 5.85
$3.50 4.70 SCR OR Scrubber? NO NO
$2.75
$3.69
5.91 3.31
$20 SO2 Emissions (lb/MMBtu) 2.50 1.30
5.85
4.70
$2.75
$3.69 $23.57
$21.38 SO2 COSTS ($/Ton) $500 $500
$10
$11.79
$11.06
NOX Emissions (lb/MMBtu) 0.26 0.5
$0
NAP P Co ntra c t CAP P Co ntra c t NAP P S po t CAP P S po t
NOX COSTS ($/Ton) $2,300 $2,300
$ 30 / to n $ 30 / to n $ 5 8 / to n $ 6 0 / to n
CoalPrice per MWH Transportation per mwh
Nox per MHW Sox per MWH
Coal beats gas absent a significant and sustained drop in current natural gas
price.
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4. By 2008, the competitive landscape begins to change, as coal and natural gas
race to capture the current BTU premium.
Coal - Natural Gas Price Comparison
7,338 Btu/kWh CCGT
2008 ASSUMPTIONS NAPP CAPP
w/ burner tip gas at:
COAL SPECS (Btu/lb,%S) 13,869,2.1%S 12,942, 0.9%S
$40
$5.00
$35 HEAT RATE (Btu/kWh) 10,200 10,100
$4.20
$5.18
$3.80 $5.23
DISPATCH COST ($/MWH)
$1.08
$30 COAL Transportation $10/TON $7/TON
$1.35 $4.60
$25 SCR OR Scrubber? NO NO
$8.93
$7.58
$20 SO2 Emissions (lb/MMBtu) 2.50 1.30
$3.98 $2.73
$15 SO2 COSTS ($/Ton) $700 $700
$3.68
$10 NOX Emissions (lb/MMBtu) 0.26 0.5
$15.48
$11.20
$5 NOX COSTS ($/Ton) $3,000 $3,000
$0
Hg Emissions (lb/Tbtu) 7.54 6.13
NAPP 2008 $30/ton CAPP 2008 $40/ton
Hg COSTS ($/LB) $35,000 $35,000
CoalPrice per MWH Transportation per mw h Nox per MHW
CO2 Emissions (lb/MMBtu) 205.1 205.2
Sox per MWH Hg per MWH CO2 per MWH
CO2 COSTS ($/Ton) $5 $5
The second variable is environmental policy, with mercury and CO2 regulation
as the major wildcards.
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5. The third variable is market structure. Investment in control equipment is a
decision to shift environmental costs from variable O&M to capital.
Coal - Natural Gas Price Comparison
7,338 Btu/kWh CCGT 2008 ASSUMPTIONS NAPP CAPP
w/ burner tip gas at: COAL SPECS (Btu/lb,%S) 13,900,2.1%S 12,900, 0.9%S
$40 $5.00 HEAT RATE (Btu/kWh) 10,600 10,600
$35
DISPATCH COST ($/MWH)
COAL Transportation $10/TON $7/TON
$30
$3.50 $5.44 SCR OR Scrubber? YES YES
$25 $0.66
$0.81 $5.44 $0.15
$20 $2.88
$0.32 SO2 Emissions (lb/MMBtu) 0.15 0.07
$0.60
$2.20
$3.81
$0.60
$15 $2.90
SO2 COSTS ($/Ton) $400 $400
$2.20
$10
$16.30
NOX Emissions (lb/MMBtu) 0.06 0.06
$2.40
$11.61
$5
NOX COSTS ($/Ton) $1,900 $1,900
$0
NAPP 2008 $30/ton CAPP 2008 $40/ton Hg Emissions (lb/TBtu) 2.26 1.84
CoalPrice per MWH Variable O&M Cost /Mwh Transportation per mwh
Hg COSTS ($/LB) $35,000 $35,000
Nox per MHW Sox per MWH Hg per MWH
CO2 Emissions (lb/MMBtu) 205.1 205.2
CO2 per MWH
CO2 COSTS ($/Ton) $5 $5
$250M capital investment for a 500MW plant
The question is whether capital is recovered directly through ratepayers or
indirectly through wholesale market prices. The former depends upon a stable
regulatory environment, the latter on the continued evolution toward liquid,
transparent wholesale markets. Either is a bet on the future.
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6. Key Takeaways
There is a range of future legislative/regulatory outcomes for
environmental policy with a high likelihood of tighter environmental
restrictions over time.
From the perspective of a marginal coal unit, the dramatic rise in natural
gas prices over the past several years more than compensates for any
recent increase in delivered coal prices or environmental adders.
Current conditions are not necessarily indicative of future performance.
Plausible scenarios exist where coal and efficient gas-fired units compete
at the margin.
The primary question is who will be quicker to capture the current BTU
premium: coal or natural gas?
Mercury and CO2 are the wildcards in future environmental policy with
competitive effects on coal playing back into setting future environmental
standards.
Finally, investment in control technology for marginal coal units entails
regulatory and market risks not easily resolved in the near term, giving
support to emission allowance markets over the next several years.
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