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Marketing & Competing

Fortnightly Magazine - May 1 1995

Protection Agency is concerned, compliance coal is any coal plus or minus emission allowances that allows the respective unit and utility to meet its compliance obligations.

It would appear that either the coal companies or the utility could bundle allowances to satisfy sulfur variations in the coal being purchased. This is why it is so important to be flexible and innovative in coal versus allowances decisions. Consider the following example:

Assume that an electric utility operates only one generating unit subject to the CAAA rules. It decides to employ coal switching to comply with the CAAA, beginning January 1, 1995. Because of state emission laws and operational constraints, the utility determines that it can burn coal in its plant falling within a range of sulfur emissions between 2.5 pounds SO2 per MMBtu as the lower emission limit and 5.2 pounds SO2 as the upper limit. It might be assumed, then, that a coal with an average SO2 emission of 2.5 pounds per MMBtu marks the best choice to qualify under Phase I. But this isn't necessarily the case.

Keeping in mind that the two primary concerns are least-cost operations and meeting the provisions of the CAAA, any coals providing emissions between 2.5 and 5.2 pounds SO2 per MMBtu could be used. This range assumes, of course, that all other criteria, such as ash and chlorine, have been met. For simplicity's sake, assume the utility has solicited coal bids allowing the coal suppliers to offer coals between 2.5 and 5.2 pounds SO2 per MMBtu. Two bids are received:

s Bid No. 1: 2.5 lbs SO2, valued at 125.00 cents per MMBtu delivered.

s Bid No. 2: 5.0 lbs SO2, valued at 99.00 cents per MMBtu delivered.

The evaluation question becomes: Is the 5.0 pound SO2/MMBtu coal equivalent to, cheaper than, or more expensive than the 2.5 pound SO2/ MMBtu coal, when one considers together both the cost of coal and the cost of emission allowances?

The first step is to determine the quantitative difference in physical SO2 emissions (5.0 lbs minus 2.5 lbs = 2.5 lbs). Next, determine the difference in unit cost (heat equivalents) between the two coals (125.00 cents minus 99.00 cents = 26.00 cents). This calculation indicates that the utility must pay a 26-cent premium per MMBtu to garner an SO2 reduction of 2.5 pounds per MMBtu.

The second step converts the SO2 premium to an emission allowance cost. One emission allowance represents 2,000 pounds of SO2 emissions. Consequently, the 26-cent premium must be divided by the 2.5-pound difference in actual emissions between the two coals to arrive at an equivalent cost per pound of SO2 of 10.4 cents. Then multiply this 10.4-cent figure by 2,000, producing a representative allowance cost of $208.00.

In this example, if emission allowances in fact sell for $208.00, the costs of the two coals are effectively equivalent, when integrated with clean air compliance. Thus, assuming that market prices for SO2 emission allowances fall below this figure of $208.00, the utility should find it cost-effective to purchase and use the 5.0-pound coal rather than the