Externalities: The Hidden Costs
Externalities are real costs that are borne by members of the public rather than by the generator or consumer of the electricity. Under current practice, regulators do not consider these very real costs when evaluating utilities’ plans for meeting demand.
Statement of Issue
Including Human Health Costs in the Integrated Resource Plan
Although electricity provides well-known benefits, the generation of electricity often has significant adverse effects that are not reflected in its market price. These effects, usually on human health and the environment, are considered "hidden costs" or "externalities." Externalities are real costs that are borne by members of the public rather than by the generator of the electricity.
Under current practice, regulators do not even consider these very real costs when evaluating utilities’ plans for meeting demand. As a result, generation resources like fossil fuels that offer low costs to the utility but high costs to society in the form of public health costs tend to be favored over resources like renewable energy that may cost more for the utility but have a lower total cost once the externalities are considered. This distorts the results of the Integrated Resource Plans (IRP) and causes them to fail at meeting their core requirement "to promote reasonable prices and environmental responsibility."
These effects, usually on human health and the environment, are considered “hidden costs” or “externalities.” Externalities are real costs that are borne by members of the public rather than by the generator or consumer of the electricity.
Background
Following re-regulation of the electric utility industry in Virginia, legislation was introduced to require utilities to submit an IRP that forecasts their load obligations for the ensuing 15 years and how they plan to meet those obligations. They are required to update their plan every two years and submit it to the State Corporation Commission (SCC) for approval. Both Dominion Virginia Power and Appalachian Electric Power submitted IRPs in fall 2011.
Following introduction of demand side management incentives for Virginia's utilities, the legislature updated the Code to require utilities to include demand side resources in their IRPs. Now that the legislature has introduced renewable resource incentives for Virginia's utilities, the legislature should also update the Code to require they be analyzed on a level playing field with all fuel resources by including externalities in the IRPs. This requirement is modeled on a comparable directive of the Delaware Public Service Commission, Order 7628.
When presenting the Integrated Resource Plan, both Dominion and Appalachian Power consider a variety of scenarios that include a base plan, an Environmental Impact Plan (which takes into account new environmental protections) and a Renewables Plan.. The scenarios with large negative externalities show up as cheaper and more desirable than they in fact are. Environmentally responsible resources that not only have no negative externalities, but also have positive externalities, are unfairly disadvantaged. This fails to satisfy two of the core requirements of the IRP to "promote reasonable prices and environmental responsibility."
How large are the externalities? To answer this question, Congress requested the National Academies "to define and evaluate key energy externalities not included in pricing or not fully addressed by government policies." They published a report in 2010, Hidden Costs of Energy - Unpriced Consequences of Energy Production and Use, which determined the impact of air pollution emissions for each type of generation. The vast majority of damages were health damages, with premature mortality being the single largest health-damage category. The average non-climate damages for coal-generated electricity is 3.2 cents per kilowatt-hour. This is equal to one-third the cost of electricity in Virginia.
The American Lung Association of Virginia reports that more than half of Virginia's jurisdictions earned a failing grade for ozone, and three of our largest jurisdictions earned a failing grade for particle pollution. This results in 2.3 percent of children and 6.9 percent of adults in Virginia who suffer from asthma. The impact is indeed widespread.
Externalities should be monetized, wherever possible, but otherwise described qualitatively. It is anticipated that the formulas used to monetize damages in the National Academy's report could be adapted for use in the IRP analyses.
1. Virginia Code, §56-598
2. http://depsc.delaware.gov/orders/7628.pdf
3. Their model included some environmental regulatory costs that its consultants forecasted would be required within the fifteen year period. These costs, however, are not externalities, by definition, because they will be reflected in market prices.
4. http://www.nap.edu/catalog.php?record_id=12794
5. Newer coal-fired plants generate lower damages than older plants that lack pollution control equipment.
6. http://www.stateoftheair.org/2010/states/virginia/
Recommendations
The legislature should modify the Code of Virginia to explicitly require utilities to incorporate public health costs in their integrated resource plan analyses. Doing so will level the playing field and enable the integrated resource plan to meet its core requirement “to promote reasonable prices and environmental responsibility.”