Future Carbon Regulations and Current Investments in Alternative Coal-Fired Power Plant Designs
Author(s)Sekar, Ram C.; Parsons, John E.; Herzog, Howard J.; Jacoby, Henry D.
This paper assesses the role of uncertainty over future U.S. carbon regulations in shaping the current choice of which type of power plant to build. The pulverized coal technology (PC) still offer the lowest cost power— assuming there is no need to control emissions of carbon. The integrated coal gasification combined cycle technology (IGCC) may be cheaper if carbon must be captured. Since a plant built now will be operated for many years, and since carbon regulations may be instituted in the future, a U.S. electric utility must make the current investment decision in light of the uncertain future regulatory rules. This paper shows how this decision is to be made. We start by describing the economics of the two key coal-fired power plant technologies, PC and IGCC. We then analyze the potential costs of future carbon regulations, including the costs of retrofitting the plant with carbon capture technology and the potential cost of paying charges for emissions. We present the economics of each design in the form of a cash flow spreadsheet yielding the present value cost, and show the results for different scenarios of emissions regulation. We then discuss how to incorporate uncertainty about the future regulation of carbon emissions into the decision to build one plant design or the other. As an aid to decision making, we provide some useful benchmarks for possible future regulation and show how these benchmarks relate back to the relative costs of the two technologies and the optimal choice for the power plant investment. Few of the scenarios widely referenced in the public discussion warrant the choice of the IGCC technology. Instead, the PC technology remains the least costly. The level of future regulation required to justify a current investment in the IGCC technology appears to be very aggressive, if not out of the question. However, the current price placed on carbon emissions in the European Trading System, is higher than these benchmarks. If it is any guide to possible future penalties for emissions in the U.S., then current investment in the IGCC technology is warranted.
Abstract in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/).
MIT Joint Program on the Science and Policy of Global Change
Report no. 129
Report no. 129