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

Fortnightly Magazine - May 15 1998

12 years in the future. Eight years later, we find full implementation of the Phase II cap still to be about nine to 12 years away. Thus, forecasts of the ultimate total costs of Title IV remain a long-run projection (em not something that anyone can state with confidence even today.

Overall the range has narrowed among the most up-to-date estimates of ultimate costs for Phase II. This narrowing can be illustrated by work at EPRI and Resources for the Future. However, the range still overlaps with the low end of earlier estimates.

EPRI's updated estimates of total Title IV costs factor in lower FGD, lower sulfur coal prices and a range of uncertainties (see Table 2). As with pre-implementation estimates, the key uncertainty comes from load growth (em or, more specifically, the demand for coal-fired generation, which are shown in separate rows in the table. Looking into the future, arguments can be made for either higher or lower levels of fossil plant use. Higher growth could stem from higher economic growth generally, and from electrification, as well as possibly from lower prices from deregulation. Lower demand growth could develop from conservation and end-use efficiencies. Furthermore, future regulatory initiatives, such as controls for particulates or carbon dioxide, could dramatically alter demand for coal-fired generation. That prospect supplies the primary impetus for EPRI's "low-demand" scenario (bottom row, Table 2).

The middle row of Table 2 shows EPRI's long-run average and marginal cost estimates using an updated base-case demand for coal-fired generation. The base-case range depends mainly on whether control investments are amortized over 10 or 20 years. With lower assumptions for coal plant utilization (which EPRI does not consider a likely outcome unless there are significant new regulatory initiatives), the marginal costs could be as low as $275 per ton. These estimates take into account all of the various cost reductions that have been observed, including lower costs for low-sulfur coals and reduced costs for FGD, reflecting reduced backup requirements and cheaper technology.

EPRI's best judgment of the additional cost to achieve Phase II is $0.8 billion to $1.4 billion per year. (If coal-fired generation demand growth rates were reduced by half, that figure would drop to $0.4 billion per year.) Adding these estimates to the $0.7 billion per year cost to achieve Phase I, EPRI now figures the total cost for Title IV compliance will be $1.5 billion to $2.1 billion per year (or as low as $1.1 billion per year with lower coal plant use, which EPRI does not consider a likely outcome).

Researchers affiliated with Resources for the Future are developing an econometric model of SO2 reduction costs that differs from the engineering approach seen in all the studies cited in Tables 1 and 2, particularly in that it estimates endogenous rates of change in cost parameters and demand. The RFF model is particularly interesting because it fairly closely reproduces the early engineering cost estimates of Table 1 when applied using the assumptions about demand, prices, and technologies that were accepted around the time of those studies. It also tracks