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The Cost of Reducing SO2 (It?s Higher Than You Think)

Fortnightly Magazine - May 15 1998

are shown in Table 2.

MIT researchers find that the actual total costs of SO2 control measures in Phase I were $0.7 billion per year in 1995, for a reduction of 3.5 to 3.9 million tons of SO2 relative to what would have occurred without Title IV. Thus, the actual long-run average costs of Phase I appear to be about $187-210 per ton.

MIT's analysis indicates there have been errors in expectations during the market start-up that have raised costs above the minimum achievable. A key cause appears to have been inability to anticipate economic displacement of midwestern high-sulfur coal by western low-sulfur coal, combined with the fact that many of the control decisions involved irreversible capital investments with 3- to 4-year lead times, or fuel contract rigidities. Scrubber-related bonuses and outright political pressure to use flue-gas desulfurization added to the market-information gaps to bias compliance strategies towards FGD. The result was aggregate "overcompliance" with the cap was greater than had been expected when companies were first making their decisions on (and financial commitments to) compliance strategies.

At the same time, costs have fallen for individual control measures. For example, FGD now appears to cost about half what it cost in 1990. %n7%n Low-sulfur coals are also substantially cheaper, particularly delivered to parts of the Midwest that have access to coals from Wyoming (Powder River Basin, or "PRB" coal), made cheaper due to railroad productivity improvements and heightened competition that has occurred since the mid-1980s. However, the flexibility built into Title IV allowed owners to take advantage of the suddenly cheaper low-sulfur coals as a compliance option, increasing incentives for FGD manufacturers to reduce costs to retain what they could of their expected market. Further, the flexibility of Title IV increased the number of ways in which technology costs could be reduced: FGD could now be installed without costly backup systems that would have been essential if 95-percent control levels were mandated. Instead, a much less costly version of FGD has been made possible (e.g., single large vessels), where any failures of the control equipment could be paid for via additional allowance consumption rather than insured against through more costly capital investment.

Rethinking Phase II:

What Demand for Coal Generation?

How much do we now think Title IV ultimately will cost in light of new information about load growth patterns, market performance, and technological improvement?

The ultimate costs of Phase II are still unknown, but

pre-implementation estimates ranged between $1.5 billion to $6.5 billion per year, with average costs between $225 and $500 per ton (Table 1). The lower ends of the ranges were associated with lower levels of coal-fired generation. Using these assumptions, the lower end of the range was $225 to $350 per ton.

Because of the unexpectedly large allowance bank (whose final size is uncertain), full implementation of Phase II remains almost as far in the future as it was at the time that original Title IV cost estimates were being made. That is, in 1990, Phase II was expected to be fully implemented by about 2002, or about