May 28, 2002 — Power companies may be prematurely sinking billions into nitrogen oxide (NOx) pollution control equipment in the face of tremendous financial, regulatory, and market uncertainty, according to a new study released by ICF Consulting, an energy and environment analysis firm.

NOx emissions are a major cause of smog problems in many U.S. cities.

U.S. EPA has announced recently new regulations that utilize a market-based approach for controlling NOx emissions from power companies and other stationary sources. ICF Consulting’s NOx Emissions Outlook 2002 reviews recent regulatory developments, assesses market trends, and forecasts future NOx market movements. The results of the analysis indicate that power companies should consider employing a strategy that emphasizes flexibility and postpones capital investment.

Nate Collamer, Principal in ICF Consulting’s Energy Practice, which authors the annual study, explained power companies are squeezed between the need to control emissions and demands from rating agencies and shareholders to reduce debt loads and increase earnings. “The balance sheet implications of EPA’s new eastern NOx trading program (the NOx SIP Call) and upcoming multipollutant legislation are substantial, but following traditional capital-intensive control strategies could push more companies into junk bond territory,” he said.

“Power companies can deliver shareholder value by deferring NOx pollution control investments, thereby reducing debt, maintaining near-term earnings, and preserving flexibility to respond to the uncertain air regulatory future,” Collamer said. “However, pursuing a capital investment deferral approach requires good NOx market intelligence and a strong risk management strategy.”

Fall of Enron, Regulatory Uncertainty Contributes to Boom-Bust NOx Allowance Pricing

The combination of high near-term NOx compliance costs and downward medium-term price pressures on such costs is resulting in a boom-bust cycle for the NOx market. Investments of more than $5 billion for selective catalytic reductions (SCRs) have been committed already, with an additional $5 billion in investments likely by 2006. These investment dollars come at a significant premium because the Enron debacle has increased rating agency scrutiny of power company investments (resulting in higher debt costs) and because the scramble to comply has inflated the cost of NOx control technology.

The likely bust in NOx allowance prices will be driven by the return to a more stable financial climate for power companies, resolution of future air regulations, and falling NOx control costs. Given the considerable regulatory and technological uncertainty, the results of the ICF Consulting analysis indicate that roughly $1 billion of NOx control investments could be delayed in anticipation of lower-cost removal options and greater regulatory/market certainty.

Collamer says that power companies need to have a comprehensive understanding of NOx market dynamics in order to make the right investment decisions. “The risks of over-investment can be far greater than those of under-investment. Financially stressed power companies must understand future NOx markets to deploy successful capital deferral strategies and strengthen balance sheets.”

ICF Consulting has been forecasting allowance market trends since the 1980s and began publishing the annual NOx Market Outlook in 1998.

For additional information on the NOX Market Outlook 2002, ICF Consulting’s complete suite of emission market outlooks (Carbon, SO2, Texas NOX, and Carbon Europe), and its European Wholesale Power Outlook, contact Nathan Collamer at (703) 218-2554 or subscriptions@icfconsulting.com, or visit www.emissionstrategies.com.

ICF Consulting (www.icfconsulting.com) is a management, technology, and policy consulting firm.