Impacts on least cost planning and system operations of monetizing environmental externalities

This paper reports that least cost planning is being redefined through a change in the objective function to be minimized. Lowest present worth of utility costs is being changed to lowest present worth of societal costs. The difference is explicit valuation of the costs of residual emissions from power plants - those emissions remaining after complying with all federal and state environmental requirements. By assigning monetized values to these environmental externalities, their costs can be added to the costs to construct and operate fossil-fueled power plants. The impact on resource acquisition decisions is easy to understand. Environmental costs affect fossil-fueled resources almost exclusively. As such, a bias is introduced which favors renewable resources and demand side management programs over fossil-fueled resources. Further, coal-fired generation is penalized more heavily than gas-fired generation. Finally, conservation-oriented programs are more attractive than peak shifting programs. These changes to the resource selection process ultimately result in an increase in rates to pay for the environmental benefits obtained from favoring cleaner resources. The unanswered question is whether or not this is the least cost means of achieving these environmental benefits. However, it is clear that monetizing environmental externalities helps achieve the goal of increased conservation and energy efficiency