Strategic Planning for Electric Utilities Under CO2 Emissions Regulations

The expected greenhouse gas (GHG) emissions regulations in the United States are likely to transform the electricity generation business in the coming decades. While preparing for a carbon constrained future, electric utilities face a far more complex capacity planning task than they are used to. This complexity stems from uncertainty in the nature of future carbon regulations as well the cost of capital-intensive and/or market-based compliance strategies.

Independent researchers have pointed out that the current analytical tools employed by utilities are inadequate for formulating an optimal long-term capacity and compliance planning portfolio under such uncertainty. Additionally, current methods do not allow the explicit modeling of tradeoffs between the usually conflicting goals of minimizing expected portfolio costs and minimizing the uncertainty in portfolio costs. This poses a significant risk to electric utilities and their stakeholders since long term planning is a critical aspect of the utility business due to the long economic lifetime (30-60 years), long development and lead-time, and large capital costs of the generation and transmission infrastructure. The plans that are being drafted today must consider the impact of GHG emissions regulations because optimal portfolios of generation capacity with and without such considerations are likely to be significantly different from each other.

In this report, we describe a novel patent-pending integrated capacity planning framework to aid utilities doing long term capacity planning under the uncertainties of a carbonconstrained future. Our framework has the capability of modeling uncertainties in the inputs to yield a portfolio with the least expected costs within the risk tolerance of a decision maker. Unlike most current planning approaches that rely on the analysis of a relatively small number of scenarios or portfolios, our tool is aimed at generating optimal risk-modulated portfolios based on optimal abatement investments and their timings. We believe that electric utilities would need this capability for effectively planning their long-term capacity and environment compliance activities.

By: Stuart Siegel; Jayant Kalagnanam; Anshul Gupta; Dharmashankar Subramanian

Published in: RC24609 in 2008


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