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Clearing the Air On Emissions

How utilities can take a portfolio-management approach to environmental compliance.

Fortnightly Magazine - August 2005

In March 2005, the Environmental Protection Agency (EPA) issued the final Clean Air Interstate Rule (CAIR) and Clean Air Mercury Rule (CAMR). Assessing the impact that these and other environmental policies have on the whole organization reveals implications for the corporate process at all levels.

As legislation to limit greenhouse-gas emissions is batted about at federal, state, and local levels, those of us involved with electric utilities increasingly are concerned about the effect that future greenhouse-gas regulation could have on inudstry plans to comply with existing CAIR and CAMR requirments. The central issues and questions are:

  • How does an organization compose an environmental management strategy to ensure overall optimal performance while meeting pollutant-reduction targets?
  • How will the consideration of emissions issues affect and influence generation portfolio choices?
  • What methodology should one employ to coordinate regional emissions analyses with both the planning and short-term operations horizon?
  • How do the impending legislative issues affect the portfolio selection of an energy organization, and what analytical framework should the utility adopt to assess adequately the long-term financial impact of upgrading older power plants to meet modern plant-emission standards?

The importance of a company's emissions profile as it affects asset value, company liabilities, and cash flow, will continue to grow in significance regardless of legislative twists and turns. This article speaks to the importance of taking an integrated corporate-wide approach to environmental management, and it outlines a framework for integrating emissions into the overall utility portfolio management process.

The industry is now working to develop and implement compliance plans optimized for a three-pollutant world, but these plans may not be optimum in a future four-pollutant regulatory regime (nitrogen oxides [NO x], sulfur dioxide [SO 2], mercury [Hg], and carbon dioxide [CO 2]). If regulations governing the fourth pollutant are mandated, some investments may be stranded or diminished in value. Thus, companies' investment decisions in long-lived assets directly are afffected by the policies that will be in effect during the 40 years or more of an asset's life. Of course, a company's own voluntary commitments also must be factored into the analysis.

For instance, an investment that may look brilliant and obvious given today's market conditions may turn sour very quickly if environmental policies change or if there are revolutionary improvements in power generation technology. Integrated gasification combined-cycle (IGCC) power plants represent a prime example of this type of trade-off. Although this technology appears very promising today, it has yet to be tested in a full-scale commercial environment. There are only two production-grade, coal-based IGCC plants in the United States and in Europe. Also, higher capital costs compared with conventional coal or gas technologies may not be justifiable if gas prices decline dramatically or if the federal government backs down from current emission-reduction targets.

Getting Started: Creating Your Strategy

A corporate-emission strategy must be developed from a