ICF Consulting Forecasts that U.S. Natural Gas and Coal Prices Will Fall, but SO2 Allowance Prices Will Rise

Coal and natural gas spot prices will fall from their recent record levels over the next several years. While sulfur dioxide (SO2) allowance prices are more likely to decline in the near term—they will eventually escalate to more than double their current price—according to a new study released by ICF Consulting. ICF Consulting’s U.S. Emission and Fuel Markets Outlook 2005 provides a comprehensive, integrated view to enable energy market participants to capitalize on opportunities and help mitigate risks. ICF Consulting, one of the nation’s leading energy and environmental analysis firms, has been accurately forecasting allowance market trends since the 1980s.

The recent unprecedented price increases for natural gas, oil, and coal have brought into question long held core energy market views. In this rudderless market, prices for many energy commodities have risen above values supported by market fundamentals.

In coal markets, the elevated price of natural gas and oil, low coal stockpiles at utilities, and production and transportation problems have created a volatile market situation in which coal prices have risen well above production costs. “Our analysis indicates that as new coal mines come on-line and supply increases, coal prices will fall,” says John Blaney, a Senior Vice President at ICF Consulting. In natural gas markets, electric power will be the key demand driver. In the long-term, prices above $6/MMBtu would price natural gas out of the new generation market in many regions.

On the supply side, domestic gas supply will remain tight, as more production comes from unconventional sources (coal bed methane, deep water), which are remote and cost more to produce than conventional resources. “The key incremental supply will be liquefied natural gas (LNG), linking the U.S. gas market to world gas markets. Over time, LNG prices will be set by oil prices,” says Leonard Crook, a Vice President at ICF Consulting.

ICF Consulting’s analysis indicates that 2005 SO2 allowance prices are currently overvalued by approximately 40 percent. “Allowance prices will likely decline in the near- to mid-term,” says Chris MacCracken, an ICF Consulting Project Manager. While near-term SO2 allowance prices are too high, forward prices are too low. “Given that the Clean Air Interstate Rule (CAIR) will cut the total limit on SO2 emissions by 50 percent in 2010 and by 70 percent in 2015 in the CAIR-affected states, the SO2 allowance price decline in the current forward curve is unlikely to occur,” says Mr. MacCracken.

“Our study illustrates that the rapid depletion of the SO2 allowance bank since the beginning of Phase II in 2000 will be reversed,” says Mr. MacCracken.

For more information, visit http://www.icfconsulting.com/emissions.

ICF Consulting (http://www.icfconsulting.com) is a leading management, technology, and policy consulting firm. Drawing upon extensive industry knowledge, distinguished professionals, and innovative analytics, the firm develops solutions to complex defense, homeland security, energy, environment, social program, and transportation issues. ICF Consulting’s approach to these issues is strengthened by its expertise in information technology, organizational improvement, program management, and communications. Since 1969, ICF Consulting has been serving major corporations, government at all levels, and multinational institutions. More than 1,200 employees serve these clients from key business centers in the Americas, Asia, and Europe.