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To: ms.smartest.person who wrote (1544)	10/6/2006 4:10:06 PM
From: ms.smartest.person	Respond to of 3198

US Utilities' Costs Of Cutting Pollution Spiral Upward Wednesday October 4th, 2006 / 22h48 By Matthew Dalton Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Cutting pollution at US power plants has become significantly more expensive than expected and could increase industry spending on environmental requirements by billions of dollars. A massive effort by the U.S. and China to cut pollution from hundreds of coal-burning power plants has sent demand soaring for the labor and services of engineering firms that build emissions control equipment. Power plant owners must also shoulder the cost of record prices for the raw materials needed to build these multimillion-dollar devices. A few U.S. power companies have already reported higher costs as they scramble to comply with new federal rules that take effect in 2010 that limit smog and soot pollution. NRG Energy Inc. (NRG) and Allegheny Energy (AYE) recently increased their cost estimates for installing equipment to reduce sulfur dioxide emissions, while American Electric Power Co. (AEP) said it will defer some installations until after 2010, when it expects costs will be lower. The price of installing pollution control equipment "literally has gone through the roof over the past year," NRG Energy chief executive David Crane said Sept. 26 at a conference in New York. NRG more than tripled its cost estimates for emission control spending by 2010, from $275 million to over $900 million. NRG's stock fell 4% Sept. 26, to $44.82 a share. NRG shares were trading Wednesday at $45.06 Allegheny Energy earlier this month increased its environmental compliance costs 35% at two of its coal-fired power plants, Fort Martin and Hatfield's Ferry, from $888 million to about $1.2 billion. "It's a supplier's market right now," said Allegheny spokesman David Neurohr. Allegheny shares hardly responded to its disclosure of higher costs. Shares were trading Wednesday at about $40.17. Government Investigates Prices The U.S. Environmental Protection Agency is investigating reports of rising prices to determine whether complying with the agency's regulations is leading to excessive costs. "We're in the process of trying to determine how true that really is," said Sam Napolitano, head of the EPA's Clean Air Markets division. "Many people we know who are building aren't saying anything at all." Equipment suppliers say the price hikes are real. Babcock & Wilcox, a major engineering firm that's installing pollution-control equipment for Allegheny, told its utility customers in late September that projects will take longer to complete and cost more than in years past. "All market indicators point to sustained higher material prices, constrained labor supply and longer lead-times," Babcock wrote in a letter to customers. "For the near term, lead-time will be a more significant issue than price." According to projections by Bob McIlvaine, an environmental consultant for utilities, the number of U.S. power plants adding scrubbers, which cut sulfur dioxide pollution, will spike upwards in the coming years, from 1,572 megawatts of capacity in 2005 to 46,733 megawatts in 2010. McIlvaine also forecasts a smaller but still significant increase around 2009 in construction of selective catalytic reduction units, which control nitrogen oxides. "Anybody who's in the middle of construction right now, it would be amazing if they didn't have cost over-runs," McIlvaine said. Rising prices for steel and nickel - which is crucial for the corrosion-resistant alloys used to make this equipment - have been a driver behind the higher prices. The U.S. Department of Labor estimates that the producer price index for steel mill products, which use the same materials, reached its highest level in August since at least 1980. The index is up 23% over the last 12 months. Competing With China An unexpected force driving up costs has been growing demand from China for environmental equipment for its large, expanding fleet of coal-burning power plants. China is competing with U.S. utilities for service from the same U.S. and European engineering firms that are among the few capable of making and installing environmental equipment. "That is a completely unforeseen event," McIlvaine said. "There's this tremendous demand over there." China plans to install scrubbers on all of its coal-fired power plants, McIlvaine said. The country is seen adding 40,000 megawatts of new power plant capacity equipped with scrubbers each year through 2001, dwarfing the rate of U.S. scrubber installations. By 2011, China will have 50% more scrubbers installed than the U.S. "What we're advising utilities is that China is going to change the whole world picture," McIlvaine said. "It's going to cause further delays in the U.S." Deadline Fuels Demand The Bush administration enacted rules last year that will tighten emission caps for sulfur dioxide and nitrogen oxides through existing emission reduction markets run by the EPA. Power plants must submit allowances to the agency each year to offset their annual emissions. Companies that cut their pollution through equipment installations can make money by selling their allowances to other generators that need to cut their emissions. The rules, which take effect in 2010, will force the industry by 2015 to cut its sulfur dioxide emissions more than 70% and nitrogen oxides by more than 60% compared with 2003 levels. The cost of emission controls is a major factor in determining the price of the allowances. The EPA says the fair value of sulfur dioxide allowances - the most costly pollution market for utilities - should be about $600. But others say this figure fails to account for the major cost increases of installing pollution controls. Higher costs and more delays are expected as utilities find that engineering firms can't meet their demand for equipment installations, said Gary Hart, an independent consultant and until recently the manager of Southern Co.'s (SO) emissions allowance trading unit. Hart predicted the industry would have difficulty completing its announced scrubber installations for 2008, which amount to 25 gigawatts of capacity in that year alone. "I just don't think that's a physical possibility," Hart said. "I think that's way too optimistic. That may put upward price pressure on the (sulfur dioxide) market in the 2008 time frame." NRG may rely on its large bank of sulfur dioxide pollution allowances to comply with EPA rules instead of installing pollution control equipment during the peak of installations around 2010. If other companies take the same step, demand for such allowances should increase. "The lack of capability to build these systems will mean a lot of people will be out looking for credits who thought they'd have these systems operating," McIlvaine said. -By Matthew Dalton; Dow Jones Newswires; 201-938-4604; matthew.dalton@dowjones.com easybourse.com