Externality Valuationin the Energy-Generating Decision

Making ProcessBrenton Spiker

West Michigan Environmental Action CouncilGrand Valley State University Master of Public Health

Agenda Overview of the Issue Define External Costs Economics of Energy Resources Effects of Energy Generation Externalities Case Studies

Minnesota Public Utilities Commission Holland Board of Public Works

Michigan’s Electricity Profile Integration of Externalities into Michigan’s Energy

Facility Decision-Making Process

Overview of the Issue Unaccounted costs

Environmental Health/Social

New electric generating plant decision-making, in Michigan SB 437

Sec. 6s (1) Establish requirements of

Integrated Resource Plan (IRP) HB 4298

Sec. 6s. (5) The commission can consider other costs associated with electricity generation

External Costs Economical

Costs/benefits affecting a party who did not choose to incur those costs/benefits (Buchanan & Stubblebine, 1962)

Not reflected in market price (Helbling, 2012)

Social & Environmental Costs Adverse Health Outcomes Environmental Damage Climate Change

Economics of External Costs

Fossil Fuel: Underpriced

Renewable Energy Sources: Overpriced

Efficient Market Optimally priced

D – Demand S – Individual SupplyEC – External Cost(s) SC – Social Cost CurveE* - Market Equilibrium O* - Optimal Market p1 – Actual Market Price p2 – Optimal Priceq1 – Actual Quantity q2 – Optimal Quantity

Effects of Air Pollution

Health Excess morbidity Premature

mortality (CDC, 2014; Goodkind & Polasky, 2013; EPA, 2015)

Coal Plants in MI 68,000 asthma

exacerbation cases

180 premature deaths, annually (EH&E, 2011)

Airbetter.org

Effects of Air Pollution

Environmental Forests/Trees Agriculture/Crops Wildlife Water/Aquatic Life

Mercury accumulation Geospatial Effects

(EH&E, 2011; Goodkind & Polasky, 2013; EPA, 2015)

Air Pollution Components Criteria Pollutants

Particulate Matter Ground-level Ozone Carbon Monoxide Nitrogen Oxides Sulfur Dioxide Lead

Other Components Carbon Dioxide Mercury

Particulate Matter Distribution from MI

Externality Valuation in Other States Nevada Massachusetts New York Oregon California Vermont Arizona Minnesota

Other States: Key DifferencesState (Department)

Statute/Order Notes

Oregon (OPUC) Order No. 93-695 Consider costs of CO2, NOx, SOx, Hg; no values established

Arizona (ACC) Arizona Administrative Code Title 14, Chapter 2, Article 7

Analyze/address environmental impacts related to air emissions, solid waste, and other environmental factors; no values

Vermont (VPSB) 30 V.S.A. § 218c Consider CO2, NOx, and SOx emissions, along with any other enviro. impacts; loosely defined, no values

Minnesota (MPUC) Stat. § 216B.2422 Range of external costs for: SO2, PM10, CO, NOx, Pb, CO2; values defined by MPUC

Case Study:

Case Study: MPUC Total Costs-Minimization Approach Minn. Stat. § 216B.2422 (1993)

“…to the extent practicable, quantify and establish a range of environmental costs…

“A utility shall use the values established by the commission in conjunction with other external factors…when evaluating and selecting resource options...”

How? Integrated Resource Plan (IRP)

What is an Integrated Resource Plan? Integrated Resource

Plan (IRP) Road map

Long-term planning tool Time- and resource-

intensive

pnm.com

MPUC Case Study: Process

Interim Values – (1993–1994) SO2, NOX, VOCs, PM10, CO2

Expedited process

“Final Values” – (1994-1997) Formal evidentiary hearing

Contested case hearings

MPUC Case Study: Process (continued) Environmental values quantified (Jan 3,

1997) SO2, PM10, CO, NOx, Pb, CO2 Geographically sensitive values

Using the values: Apply Without Apply Minimum Range Values Apply Maximum Range Values

Update values as necessary

MPUC Case Study: Xcel Energy Decision Xcel 2010 Resource Plan

Capacity Increase Necessary Scenario Comparison

Include externalities Decision

Solar and Purchase Power Cost-Effectiveness

MPUC Case Study: Benefits of Externality Valuation

• Declining Aggregate emissions

• Declining GHGs• Many Factors• Governmental Standards• Grants for MN Businesses• Reduce VOCs

(Minnesota Pollution Control Agency, 2015)

MPUC Case Study: Benefits of Externality Valuation

• Power plant emissions

• ~70% reduction since 1990

(Minnesota Pollution Control Agency, 2015)

MPUC Case Study: Benefits of Externality Valuation

• Largest decline of GHG emissions by Electric Utilities(Minnesota Pollution Control Agency, 2015)

Case Study: Holland

Case Study: Sustainable Return on Investment

Sustainable Return On Investment (SROI): Comprehensive analysis

Cost-benefit and financial analysis Engages many stakeholders Compares different scenarios

James De Young Power Plant in Holland, MI

Case Study: SROI

www.hdrinc.com

Case Study: HBPW July, 2011: Discussion

Potential costs/benefits & values

 Financial, social, economic, environmental, health impacts

Capacity Needs

Holland’s Community Energy Plan

A driving force of the SROI process Provide residents/businesses with

efficient, reliable, clean energy

SROI Framework

Case Study: HBPW - Scenarios

Case Study: HBPW - SROI

Case Study: HBPW - Decision

Recommendations: Combined-cycle natural gas

technology New Location Renewable Energy - Wind Retire JDY unit 5

Decision: Approved by City of Holland 2017 anticipated completion

Design of New Natural Gas Power Plant in Holland, MI

Case Study: HBPW – Potential Benefits Improved Efficiency Reduced Emissions Holland-Specific Benefits:

Downtown snowmelt system Potential district heating Other

At a Glance: Michigan’s Electricity Profile

Top 10 Electricity Generating Plants (MWh) Coal Powered:

#1 #6 #7 #8(EIA, 2015)

53%

27%

12%

8%% Energy Source

Coal Nuclear Natural GasOther

At a Glance: Michigan’s Electricity Profile Emissions Profile

SO2: 237,091 short tons (2013)

5th highest in US 4.5 pounds/MWh

3rd highest in US

NOX: 86,058 short tons (2013)

8th Highest in US CO2: 67,193 short tons

(2013) 10th highest in US

(EIA, 2013)

PM2.5: 44,470 short tons

(2011)

PM10: 46,501 short tons

(2011)

Economic Valuation – Applied using current knowledge Using Minnesota

Externality Values: NOx:

$4.86bil - $9.24bil PM10:

$135mil - $196mil CO2:

$30k - $131k = Unaccounted Costs!

Integration into MPSC Process Senate Bill 437 Introduced July 1, 2015

Senator Nofs Sec. 6s (1) “…establish statewide parameters for

integrated resource plans…” (E) “Establish the modeling scenarios and assumptions each

electric utility must use in developing its integrated resource plan…including…”

(vi) The projected costs of different types of fuel…” Need to include ALL costs

Direct costs External costs

Integration into MPSC Process HB 4278 Introduced March 5, 2015

Rep. Nesbitt Sec. 6s. (5) The commission may consider any other costs or

information related to the costs associated with the power that would be supplied by the existing or proposed electric generation facility or pursuant to the proposed purchase agreement or alternatives to the proposal raised by intervening parties.

“Other Costs” Externalities – environmental/social costs

Integration into MPSC Process

Possible stakeholder process: Start from Scratch

Why?! Build from others’ successes:

Minnesota’s Approach Holland Board of Public Works

Involve numerous stakeholders

References [Incomplete –as of 1/15/16] Buchanan, J. M., & Stubblebine, W. C. (1962). Externality. Economica, 29(116), 371–384. http://

doi.org/10.2307/2551386 Centers for Disease Control and Prevention. (2015). Air quality. Retrieved from http://

www.cdc.gov/air/default.htm Goodkind, A. L. & Polasky, S. (2013). Health and environmental costs of electricity generation in

Minnesota. Retrieved from http://www.minnpost.com/sites/default/files/attachments/Polasky%20report%20on%20externality%20costs.pdf

Helbling, T. (2012). Externalities: Prices do not capture all costs. Retrieved from http://www.imf.org/external/pubs/ft/fandd/basics/external.htm

Minnesota Pollution Control Agency. (2015). Air quality in Minnesota: 2015 report to the legislature. Retrieved from http://www.pca.state.mn.us/index.php/view-document.html?gid=22170

Principles of Economics and Business. (2014). Positive externalities vs. negative externalities. Retrieved from http://principles-of-economics-and-business.blogspot.com/2014/10/microeconomics-externalities.html

United States Energy Information Administration. (n.d.). Glossary. Retrieved from http://www.eia.gov/tools/glossary/index.cfm?id=E

United States Energy Information Administration. (2015). Michigan electricity profile: 2013. Retrieved from http://www.eia.gov/electricity/state/michigan/index.cfm

United States Environmental Protection Agency. (2015). Why should you be concerned about air pollution? Retrieved from http://www3.epa.gov/airquality/peg_caa/concern.html