Optimizing Compliance Cost for Coal-Fired Electric Generating Facilities in a Multipollutant Control Environment

Higher natural gas prices have increased the importance of coal-fired generation at a time when environmental uncertainty is raising the risks of operating coal-fired units. The likely need for increased investment in environmental control technologies comes at a time when many electricity generators are under great financial stress. This combination of forces makes a structured and comprehensive approach to assessing compliance strategies essential to managing generating assets. The approach needs to incorporate the high degree of uncertainty that can be otherwise buried in key assumptions, such as regulatory requirements, market pricing of allowances, plant capacity factor, wholesale electric prices, etc. The approach should also facilitate testing of assumptions under a range of scenarios to allow for flexibility in possible compliance strategies. In this paper an approach for evaluating compliance risks and quantifying the potential costs under various scenarios will be described. The approach integrates market-based compliance mechanisms with capital improvements in control technology while providing methods to address the uncertainty of key assumptions. The approach facilitates optimizing the balance between market-based and technology-based compliance approaches so that the environmental compliance risk profile can be tailored to the specific situation. A unique feature of this approach is that it incorporates the effects of the market risk associated with emissions markets along with market derivative instruments designed to manage risk, while also incorporating comprehensive technology analysis so that costs and risks can be well quantified under any regulatory scenario. The approach lends itself to active scenario review to facilitate flexibility in decision making while avoiding premature commitments.