Burning wood pellets for US electricity generation? A regime switching analysis

Applying a regime switching model under the theoretic framework of real options, we inspect the optimal timing boundaries for coal and coal mixed wood pellets as two alternative fuels for a power plant in Georgia, United States. Results indicate that cofiring wood pellets with coal is generally not a commercially viable option. However, lower-level (with wood pellets < 15%) cofiring could have been feasible during the infancy period (2009–2011) when wood pellet price was declining. Sensitivity analysis shows that our conclusions are robust and the most important factors are relative prices of coal and mixed fuel. Therefore, we reject the null hypothesis that cofiring is economically feasible and suggest using policy vehicles to stimulate the bioenergy market and meet the greenhouse gas emission reduction target. In particular, a subsidy of $1.40/mmbtu to the 10% mixed fuel or a tax of $1.50/mmbtu on coal would prompt the conversions of coal-only power plants to cofiring ones, and a subsidy of $0.45/mmbtu to the 10% mixed fuel or a tax of $0.50/mmbtu on coal would maintain existing cofiring power plants in the status quo. - Highlights: • Cofiring wood pellets with coal is generally not a commercially viable option. • Using policy vehicles is necessary to stimulate the bioenergy market. • Estimated government spending is $8 or $2.7 billion to prompt or retain 10% cofiring. • Subsidy to wood pellets cofiring is comparable to those of solar and wind energy.