Fast forward to today’s partially deregulated electric power markets. Wholesale electric energy often is traded in various central markets, as well as among individuals in bilateral transactions....
Clearing the Air On Emissions
How utilities can take a portfolio-management approach to environmental compliance.
holistic viewpoint taking account of abatement costs, price and dispatch uncertainty, and different technology alternatives such as renewables, nuclear, IGCCs, carbon sequestration, and unit-retirements. Other important factors include the impact of changing legislation, emission-control technology improvements, and security of supply and emissions trading alternatives. An ongoing evaluation of changing regulation and solution approaches is essential where both the cost and environmental implications are potentially enormous.
But where does one begin the strategic process? Corporate officers and strategic-planning departments must first evaluate the impact of environmental regulation on the broader region before assessing the impact of compliance to their specific energy portfolio. Questions include:
- What are the key components of existing and proposed environmental regulations?
- What elements of these regulations are relevant to electric generators and utility portfolios?
- How is the broader region or deregulated electricity market going to react to the regulation?
- What environmental strategies will the different market players ( i.e., competitors) adopt?
- Will they focus on responsible and efficient use of fossil fuel-based assets or modify their portfolio mix to include renewable and alternative forms of energy?
- How will environmental compliance costs impact wholesale power prices and spark spreads?
Some basic steps can be taken to turn these wide-ranging questions on market and environmental drivers into an actionable strategy:
1) Build Environmental Scenarios.
A thorough knowledge of existing and potential legislation as well as the political landscape obviously is critical to building appropriate environmental scenarios. It is important at this stage to focus on the market and the market feedback. For instance, one utility may find one piece of legislation reasonable, while such regulation irreparably and dramatically could affect another. Credible scenario analysis cannot be performed without incorporating an impact analysis of different market players.
This strategic assessment gets more complex for energy portfolios that have assets operating in different regulatory environments, ISOs, and RTOs across North America and the rest of the world. The analytical support in these high-level exercises often is provided through deterministic structured scenario planning where identified risks and effects can be quantified using any fundamentally based, market-analytics model.
2) Incorporate Emissions Into Forecasts of Fuel Prices and Electricity.
A key process to incorporating a broad enterprise-wide portfolio management (EPM) framework for managing emissions includes a fundamental forecast of fuel prices as well as electricity. This process also should include robust scenario and uncertainty analysis of fuel markets (coal, natural gas), scenario analysis of fuel prices, and it should have that information automatically cascade into the process that simulates wholesale power prices.
This process, typically undertaken by the market analysis or strategic planning departments within organizations, also should allow for the incorporation of unit-level emission costs for pollutants such as NO x, SO 2, Hg, and PM. This affects the commitment and dispatch of units to ensure they do not exceed their allocated annual emission limits. A complementary equilibrium model that is employed as part of a downstream process can be used to compare overall excess emissions from power generating units above and beyond the national limits, with the supply and demand of