Joint Environmental and Cost Efficiency Analysis of the Electricity Production Industry: Applying the Materials Balance Condition GCP-09-03

Eric Welch and Darold T. Barnum

The views expressed in this report represent those of the author(s) and not necessarily those of the Great Cities Institute or the University of Illinois at Chicago.

The electricity generation industry produces a substantial proportion of the greenhouse gases that contribute to climate change in the United States and globally. Yet, little research has been done to examine what the economic and environmental tradeoffs currently are for electric power plants. This paper demonstrates a new method, developed by Coelli, Lauwers, and Van Huylenbroeck [4,1,3], to calculate the optimal allocation of carbon containing fuel inputs and consideration of economic costs of electricity production. Using EIA 906 and FERC 423 data, the paper estimates cost/carbon tradeoffs facing two sets of plants: those that use coal and gas inputs and those that use coal, gas and oil inputs. Findings show that for the three input case, there is a 78.9% percent increase in cost for moving from the cost efficient point to the carbon efficient point, while there is a 38% increase in carbon to move from the carbon efficient point to the cost efficient point. These findings, while based only on a subset of electric power plants, indicates that the policy gap between efficient cost and environmental production is wide and will require substantial government and market incentives, as well as restructuring of the industry before it can be narrowed. The paper also identifies some plants that are super inefficient: they can improve both cost and carbon efficiency by changing their mixture of carbon inputs.

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