ICF Consulting forecasts that U.S. natural gas and coal prices will fall, but SO2 prices will continue to escalate

WASHINGTON, D.C., July 14, 2004 — Coal and natural gas prices will fall from their recent record levels over the next several years, but sulfur dioxide (SO2) allowance prices will continue to escalate, according to a new study released by ICF Consulting, one of the nation’s leading energy and environmental analysis firms. ICF Consulting’s U.S. Fuel and Emissions Market Outlook 2004 utilizes a detailed and integrated analysis of electric power, coal, natural gas, and emission allowance fundamentals to provide a unified vision of these rapidly converging markets.

Natural gas, coal, and SO2 allowance prices have risen dramatically over the past year, and power companies are struggling to adjust their fuel procurement and capacity expansion strategies to respond to what many analysts conclude is a permanent high cost reality. However, “ICF Consulting sees a very different future for fuel and SO2 emission allowance markets,” says John Blaney, Director of ICF Consulting’s Environment and Fuel Practice. “As markets have more time to respond to the rapid rise in prices, supply and demand forces will drive natural gas and coal prices lower,” Blaney continues.

The study concludes that natural gas prices will fall steadily over the next few years as recent drilling and exploration bring new reserves to the market and Liquefied Natural Gas (LNG) imports continue to expand. “The turning point for gas markets was actually set in motion in 2003, when drilling investment turned upward and companies pushed to permit LNG regasification facilities,” says Nate Collamer, a Principal with ICF Consulting. “Strong economic and power sector demand growth are likely to keep prices high in the very near-term, but added production and falling oil prices will push prices down as early as 2005,” Collamer continues.

Despite concerns in the coal market about depleting reserves, permitting problems, transportation bottlenecks, and record high international coal prices, the study predicts that the current high coal prices will bring a strong supply response in the coming years that will force prices down.

ICF Consulting’s analysis shows that even though existing low sulfur coal reserves in the key Central Appalachia market are being rapidly depleted, there are still sufficient coal resources available from new mines in this region to sustain current production capacity for more than 50 years. Blaney adds, “Low sulfur coal from Central Appalachia will become less important as power companies install pollution controls to comply with the U.S. Environmental Protection Agency’s new air emission regulations and shift to medium- and high-sulfur coals from other regions.” The study further reveals that these same regulations will drive SO2 allowance prices even higher than their current record-levels. Blaney concludes, “For years we have told our clients that SO2 allowances were the best investment in energy markets available?SO2 prices will continue to escalate, eventually rising to $1,000 per ton and higher.”

ICF Consulting’s Fuel and Emissions Market Outlook 2004 is a first-of-its-kind, fully integrated power and fuel study. “We know that many planners and analysts are working with inconsistent market projections and spending a great deal of time and ultimately failing to develop a single unified market view from which to analyze investments,” says Collamer. “Strategy, valuations, and business planning were suffering, so we created a study that provides an integrated analysis of these converging markets,” Collamer continues.

ICF Consulting has been forecasting allowance market trends since the 1980s, and these annual reports have proven consistently accurate year in and year out. This year’s study provides forecasts of natural gas, coal, SO2, NOX, mercury, and CO2 under a range of policy and market scenarios. For more information visit www.icfconsulting.com/emissions.

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