Externality impact discountedin EIA case study report

Issue 2 and Volume 100.

environmental notebook

Externality impact discounted in EIA case study report

Ann chambers

Issues involving energy and environmental impact and regulations have been discussed in this magazine for many years, predominantly in “Environmentally Speaking,” a column written by former Managing Editor R.C. Rittenhouse. Rittenhouse has moved on, but the issues remain, and they are growing more complex and more vital to the industry with each passing year. Power Engineering will continue to monitor and discuss these issues, both in feature stories and here, in this new spin on an old standby, “Environmental Notebook.”

Studying externalities

The Energy Information Administration (EIA) recently completed a report, “Electricity Generation and Environmental Externalities: Case Studies,” which took a close look at three states using monetized externality values in the integrated resource planning process. Of the three states–Massachusetts, Wisconsin and California–it should be noted that Massachusetts no longer requires inclusion of externalities during resource planning.

The report states, “The requirement to incorporate externalities in the resource planning process had negligible impacts on the planned resource mix of the utilities in each of the three states. The scope of demand-side management activities was also largely unaffected by externality considerations.

EIA noted four major contributing factors:

1. Current low natural gas prices result in natural gas being the fuel of choice to meet the future demand for electricity, with or without the consideration of environmental externalities;

2. Little need for new capacity;

3. Utilities have little experience with renewable technologies, other than hydroelectric power; and

4. Inter-jurisdictional issues make it difficult for utilities operating in more than one state to secure concurrence from all regulatory authorities.

Only seven states have established monetary values for externalities. They are California, Massachusetts, Minnesota, Nevada, New York, Oregon and Wisconsin (see Table).

In each of these states, externality values were used in integrated resource planning, with externality values required in utilities` evaluation of procured energy and demand-side resources along with any new capacity requirements.

The report found that many federal policies, including the Clean Air Act, have affected utilities` resource plans because the costs of compliance have been fully internalized.

“The general consensus seems to be that no single device such as a tax will eliminate the divergences caused by externalities in private and social costs. Moreover, the application of even well-defined economic principles often faces problems in practice.”

EIA projects that as conditions change, environmental externalities may need to be incorporated into resource planning procedures and may affect the role energy efficiency or renewable technologies can play in the future.

The 100-page report is available from EIA at (202) 254-5392.