Externality valuation versus systemwide analysis : identifying cost and emissions reduction strategies for electric service

Abstract

In an effort to require electric utilities to assess the environmental impacts of their activities, public utilities commissions nationwide have been turning to the use of environmental externality valuation as a tool in integrated resource planning. To date, policy discussions have focused predominantly upon the correct value and calculation of externality adders, rather than their use and applicability as a planning tool. This paper discusses the use and utility of externality valuation for identifying low-cost, low-emissions electric service strategies. Using data obtained from a broad based examination of New England's electric service options, this paper compares the externality valuation concepts with the information generally obtained from electric power system simulation and production-costing analyses. While a valid economic concept, the application of externality values is of little use in identifying which strategies are both low-cost and low-emissions, or the specific policy options required to ensure their implementation. Externality valuation should therefore be used only as a last step, to select from among low-cost, low- emissions strategies once the aggregate cost and emissions impacts of those strategies have been identified.