Integrating environmental and competitive considerations in electric utility operational planning

Two emerging trends--environmental compliance and competition among electricity suppliers--promise to change the way electric utilities operate in the future. These trends have been expressed most recently in the 1990 Clean Air Act Amendments (CAAA) and the 1992 National Energy Policy Act (NEPA). The 1990 CAAA impose reductions in the emissions of SO{dollar}sb2{dollar} by awarding electrical utilities annual allocations of allowances--one allowance representing the right to emit one ton of SO{dollar}sb2{dollar}--which may be consumed, saved, or traded in a national market. The 1992 NEPA encourages independent power production and eases access to utility transmission systems with the ultimate aim of making the generation of electricity a more competitive business.; These two trends raise a number of questions regarding the way in which environmental and competitive considerations should be integrated with utility long-term and short-term operational planning and regarding the implications these considerations have for the utility's optimal operation. These questions are addressed by formulating the utility operational planning problem, modified to include the environmental and competitive considerations, as a minimum cost optimization problem subject to constraints. As part of the formulation, short-term cost functions, derived from the Unit Commitment Problem, relate total operating cost to SO{dollar}sb2{dollar} emissions, heat-input, and generation and non-linear constraints establish upper and lower bounds on the permissible levels of SO{dollar}sb2{dollar} emissions and heat-input.; Using a hypothetical utility, the formulation is applied in a test case. The conditions which make it profitable to buy and sell allowances and electricity at the market are explored, the parameters which influence allowance inventory policy are identified, and the value of using the allowance market is estimated. Findings indicate that the states representing combinations of buying and selling allowances and electricity are separated by boundaries which can be expressed as various functions of the marginal cost of generation, the marginal cost of emissions, the market price of allowances, and the market price of electricity. Finally, the value of using the allowance market is estimated to average about 2.5 percent of the hypothetical utility's annual operating cost.