Acid Rain Emission Allowances and Future Capacity Growth in the Electric Utility Industry

Abstract

While the new source emission offset provision contained in recent acid rain proposals would result in increasing utility costs over time, the demand for emission offsets from new powerplant units should be satisfied even under conditions of high future growth in electrical generating capacity. This is because the amount of emissions from new generating units will be small relative to the quantity of offsets that could be made available in the emission “allowance” market.

Under the President’s July 1989 proposal, most utilities would be able to reduce their emissions well below their allowance levels via fuel switching, the installation of control technology, or the use of other emission reduction techniques, in order to create more “headroom” for the construction of new generating units. Retirements and decreasing utilization of existing power plants over time would liberate other emission allowances for use by new units. Industrial sources could “opt in” to the acid rain program and provide allowances for new generating units as well. A number of provisions in the recently passed Senate and House bills would make still further sources of allowances available to offset emissions from new generating capacity.

Hoarding of allowances by utilities is unlikely to be a problem since allowances would be distributed to at least 88 utilities in 34 states, and many of these utilities would have the ability to cost-effectively free up more allowances through “overcontrol” than they would need to cover their own future growth. Even a relatively small number of utilities in a limited number of states would have the ability to supply all of the allowances needed to cover new capacity growth from those entities that could not otherwise provide their own offsets. At projected prices of up to $800/ton, the incentives for utilities to sell allowances would be considerable. Moreover, if hoarding did begin to occur, the price of allowances would respond by rising to higher levels and the incentives for utilities to sell allowances would become even more compelling, as greater opportunities would develop for reducing costs (and electricity rates).