Cross-State Air Pollution Rule (CSAPR) ozone season NOx allowances have declined considerably this month, retreating from record price increases earlier in the year as market participants continue grappling with planned changes to the program.
Group 3 allowances have soared this year, rising to a record high of $48,000/short ton last month after beginning 2022 at $2,500/st. But the allowances have since retreated and finished last week at $16,000/st.
Allowances in the Group 2 program — which involves a less stringent NOx emissions cap — have experienced similar but less dramatic price shifts this year, rising to $4,500/st from $275/st at the start of the year before retreating to $4,000/st in recent days.
Regulatory uncertainty
The allowances increased largely in response to a proposal from the US Environmental Protection Agency (EPA) that wouldexpand the scopeof the CSAPR program. Under current plans, EPA would grow the Group 3 program from 12 to 25 states and set more aggressive NOx caps in an effort to help downwind states achieve the 2015 National Ambient Air Quality Standards for ozone.
In the eight Group 2 states poised to join the Group 3 program next year, power plant owners have also had to contend with the costs of joining the more stringent market. They may be able to collectively carry forward only about 18,500 allowances, if EPA requires them, as planned, to convert Group 2 allowances into Group 3 at a 5.9:1 ratio.
In future years, EPA has also proposed setting a daily NOx emissions rate limit for power plants, adding certain industrial sources into the program, and recalibrating the allowance bank each year to reduce surplus allowances. The program updates could up the costs of coal generation and make it harder for regulated entities to plan around potential future fluctuations in allowance prices, industry groups have argued.
Allowance prices also began to increase against the backdrop of Russia's invasion of Ukraine, which put upward pressure on natural gas prices. Higher natural gas prices often lead utilities to dispatch more coal-fired generation, which could have induced more demand for seasonal NOx allowances. One industry group also predicted in a public comment that supply chain woes exacerbated by Covid-19 and the war in Ukraine could delay retrofits that would make it easier for plants to comply with the new rules without having to buy allowances.
Market interest ebbs
But as ozone season nears its end this week, bids and offers in the market have declined and allowances are trading at a lower value.
High allowance prices earlier this year — and uncertainty over how much they would increase — may have made coal less cost-competitive even as natural gas prices remained high. Coal generation was more expensive this summer for reasons besides the proposed CSAPR updates, including other regulations impacting coal plants and coal supply shortages across the US.
But while some power plant owners were starting to consider whether the surging allowance prices would force them to curtail or cease operations in the future, for many generators the market conditions were favorable. The combination of higher power prices and more demand allowed coal units to operate with "very lucrative margins," according to a market source, and they could easily cover the higher NOx price.
Power plant NOx emissions in states affected by CSAPR were also lower during the first two months of this year's ozone season compared to the same time last year, according to preliminary EPA data. Ozone season runs from 1 May-30 September.
NOx emissions in the ten current Group 2 states declined slightly to more than 40,900st in May and June from 41,400st the same time a year ago, putting most states on track to remain within their emissions budgets. And while Group 3 states confront more stringent limits this year, their NOx emissions declined by nearly 17pc over the same time period, likely reducing the need for allowances.
Regulated entities have until June next year to meet their 2022 CSAPR obligations.
