SO2 ALLOWANCE PRICES TO REMAIN VOLATILE

Between October and December 2005, sulfur dioxide (SO2) allowance prices skyrocketed almost 80 percent from $900 to $1,600 before falling back to $900 in February. The SO2 allowance market remains susceptible to continued volatility over the next several years until additional flue gas desulfurization (FGD) retrofits are brought online.

- CERA believes that the marginal cost of required FGD investments establishes an allowance price floor of $800 to $1,000 per ton for spot allowances.
- The SO2 allowance market remains subject to tight supply and strong demand as companies manage compliance with the existing Acid Rain Program through 2009 and prepare for the more stringent Clean Air Interstate Rule limits in 2010.
- In the short run a variety of factors can contribute to allowance price volatility including changes in natural gas and coal prices, electricity demand, and regulatory uncertainty. The influence of these factors can be amplified in the SO2 market because it is thinly traded.

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