If anyone ever asks about what you read in this column, tell them you heard it somewhere else.
Of course, I don't really mean that. Let me put it another way: The FORTNIGHTLY gets invited...
With the Clean Air Act Amendments of 1990 (CAAA) come many complex decisions for electric utilities. By now the majority of utilities have decided how they will comply with the clean air guidelines and acid rain program limits, at least for Phase I. But for those utilities that have selected coal switching as the preferred method of complying with the law, the task gets more complicated. Burn expensive low-sulfur coal and bank or sell allowances? Or burn just enough low-sulfur coal to meet the rules, and no more? Or perhaps burn high-sulfur coal and buy allowances on the open market?
Choices, options, and strategies abound.
Phase I of the CAAA required a sulfur dioxide (SO2) emissions reduction at many of the largest emitters beginning January 1, 1995. Phase II requires further reductions beginning January 1, 2000. The annual level of emissions for Phase I is approximately 2.5 pounds per million British thermal units (MMBtu). Phase II further restricts SO2 emissions, to approximately 1.2 pounds per MMBtu.
Title IV of the CAAA provides utilities with flexibility in selecting compliance methods. One such method of flexibility is the opportunity to trade emission allowances. For every ton of SO2 emitted at an affected unit, one allowance is consumed. Each utility must carry sufficient allowances to cover its annual level of emissions at affected units by the end of each year.
By now one would expect that most utilities have already determined the range of sulfur content for coal to be burned in each particular unit. This range can be affected by individual state laws or requirements, by precipitators or technology, and so on. However, within this range utilities retain the oppotunity to innovate in devising a least-cost approach of mixing and matching coal sulfur content to the price of allowances in order to develop the least-cost compliance methods.
The CAAA promotes a free-market approach to SO2 emission allowance trading. This approach encourages innovation by those utilities that have selected coal switching as the preferred method of complying with the CAAA, whether for one unit or for all units. One such innovative approach would be to integrate the cost of emission allowances in the coal bid evaluation process.
Coal Bid Evaluation
As coal bids are received, utilities typically evaluate price, ash, moisture content, chlorine, sulfur, and the like. Sulfur, beginning January 1, 1995, becomes more critical. An allowance will have a value. This value could climb as high as $2,000 (a penalty) or fall as low as the incremental cost of producing an allowance from a respective unit. The value could lie anywhere in between, determined by the free-market allowance trading.
The value of an emission allowance can be directly tied to the sulfur content of the coal being evaluated for purchase. This relationship is true especially in the case where coal switching is the preferred method of compliance. For units that are planning to coal switch, generally one pound of SO2 input to the boiler equipment will equal approximately one pound of SO2 output from the boiler equipment. As far as the Environmental