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The Change in Profit Climate

How will carbon-emissions policies affect the generation fleet?

Fortnightly Magazine - May 2007

plant is assumed to operate at the margin and set a market price equal to its dispatch cost of $50/MWh, allowing coal and nuclear plants to earn net revenues of $25/MWh and $45/ MWh, respectively. The right side of Figure 1 shows what happens when an emission penalty of $20/ton of CO 2 is imposed. The coal plant is assumed to have a CO 2 emission intensity of about 1 ton/MWh, so its dispatch cost increases $20/MWh, while dispatch cost at the gas plant—which has about half the emissions intensity—rises $10/MWh. As a result, the market-price increases to $60/MWh, which still allows the coal plant to earn net revenues of $15/MWh and increases nuclear-plant revenues to $55/MWh.

Actual regional markets, of course, contain numerous generating units, which are dispatched in the order of their production costs, from lowest to highest, as shown in Figure 2. Nuclear and renewable energy plants have the lowest marginal costs and are dispatched first, followed by coal plants, which in this example represent the largest single part of the supply curve. The sharply rising right-hand portion of the curve represents natural-gas and oil plants, which have considerably higher dispatch costs. For each hour of the year, the market price is established by where the amount of load intersects the supply curve. Plants to the left of that point are dispatched, and those to the right do not operate for that hour. Net revenue for each plant is determined by the difference between its marginal cost and the market price.

When the net revenues for each plant are summed over all the hours of a year, those toward the left end of the supply curve earn the most, both because they have lower costs and because they are dispatched more often. Assuming no CO 2 emission penalty, further analysis shows that nuclear units at the far left would earn annual net revenues above $300/kW-year, while income for the coal units in the middle would range from $100/kW-year to $250/kW-year. Oil and gas units at the far right would have much smaller annual net revenues, approaching zero in the extreme.

Impact of CO 2 Price on Net Revenues

Now suppose a CO 2-emission price of $25/ton is imposed on power plants in the region represented in Figure 2. The result, shown in Figure 3, is to boost the dispatch prices of the fossil-fueled plants in proportion to their emissions rates. The effect is most dramatic on the coal plants, which experience an approximate doubling of production costs, to roughly $50/MWh. Gas plants, which produce about half the amount of CO 2 per megawatt-hour as coal plants, have smaller cost increases. Production costs for non-emitting nuclear and hydro plants at the far left of the curve remain unaffected.

Further analysis shows that the overall effect of adding the $25/ton CO 2 emission penalty is to raise the average wholesale price for the region by $21/MWh. As a result, coal plants are able to recoup most of their cost increases, with more efficient plants experiencing the least decline in net