In utility regulation there are two ways of looking at the costs of electricity production. The most direct and familiar method looks at the cost of fuel stocks (coal, natural gas, wind, sunlight) as well as the costs of converting them into electrons (physical plant, payroll, pollution control, profit margin) and comes up with the price to be paid by ratepayers for the power they use.
The second way looks at the “externality” costs associated with electric generation, primarily in terms of pollution (smog, greenhouse gases) and public health impacts (asthma, heart disease) to come up with an estimate of the price paid by everyone — ratepayers, non-ratepayers and taxpayers.
The first kind of calculation is always in the news as utilities respond to markets’ ever-changing prices for coal and gas. When those prices go up, wind and solar power look better on the balance sheet; when they go down, short-term numbers work against long-term investment in renewables.
The externalities calculations always favor renewables over fossil fuels; also, they add more value to long-term investments compared to short-term purchases. And for nearly 20 years now, the Minnesota Public Utilities Commission has been required to factor external costs into its reviews of utilities’ future plans for power generation.
Estimates of those costs have been rising steadily since the PUC made its first calculations in response to a 1993 directive from the Minnesota Legislature, as the public-health impacts of air pollution, especially, and the threats of global warming have become clearer.
Still using 1996 calculations
The commission, however, has not updated its calculations since 1996 except to adjust them for inflation. That may be about to change.
On Wednesday the Minnesota Center for Environmental Advocacy (MCEA) and several allied groups petitioned the PUC to undertake a revision of its externalities calculations that are obviously outdated and “no longer scientifically defensible,” in the words of MCEA attorney Beth Goodpaster, who prepared the groups’ petition.
The petition focuses on three products of fossil-fuel production for which the PUC has set cost figures — sulfur dioxide, nitrogen oxides and carbon dioxide — and another, critical one for which it did not: fine particulate matter, meaning soot particles and aerosol droplets with diameters smaller than 2.5 microns.
Research since the 1990s has found that these particles, known by the shorthand PM2.5, cause a range of heart and respiratory diseases, especially asthma. The PUC’s table of externalities, however, still concerns itself only with particulates four times that size and known as PM10.
It seemed strange to me that the Legislature had directed the PUC to make these calculations without also requiring that they be updated periodically, and also that the commission hadn’t thought it necessary to do so on its own.
Inflation adjustments only
Goodpaster told me that, in fact, the PUC had been asked to reconsider its externalities figures for carbon dioxide in 2001, during review of Xcel Energy’s future resource plans, and also to set figures for the first time for PM2.5 and mercury. But the commission declined to do more than make inflation adjustments, preferring to wait for actions thought to be pending at the U.S. Environmental Protection Agency.
The new petition relies on a 2010 analysis of externalities in energy production prepared at Congress’ direction by the National Research Council, an arm of the National Academy of Sciences, as interpreted by Steven Polasky, a professor of applied economics at the University of Minnesota.
As you might expect, there are numbers aplenty in the PUC’s externalities tables as well as the NRC and Polasky reports, with health impacts calculated in a range from low to high, and also for urban, suburban and rural areas, and so on.
To keep things simple, here’s a comparison of what the PUC considers the high cost of a pollution factor to be for an urban area, in 2012 dollars per ton, and how Polasky’s report suggests it should be revised:
- Carbon dioxide: PUC’s figure is $4.37; Polasky’s analysis suggests it should be $55.
- PM2.5: PUC’s figures is, again, zero; Polasky puts it at $30,800.
- Nitrogen oxides: PUC’s figure is $1,379; Polasky puts it at $3,400.
- Sulfur dioxide: PUC sets the figures at zero, the Polasky analysis puts it at $13,600.
(I found this zero figure from PUC somewhat amazing, given sulfur dioxide’s role in acid rain and the heavy investments in scrubbing it out of power-plant emissions; Goodpaster explained to me that the commission had set some figures for SO2 in earlier years but had it falling to zero by 1996 because of control technologies being adopted: “But, obviously, the emissions haven’t fallen to zero, and neither have the problems it causes.”)
Impact on energy bills
It’s important to note that while these revised calculations make coal- and gas-derived electricity much more “expensive” compared to power derived from wind, solar and other renewables, when full costs are taken into account, the changes sought by MCEA and its partners would have no direct effect on rate-setting by the utilities regulated by the PUC.
They would, however, shift the mix of resources used by those utilities significantly toward renewables, by counting the full costs of power generation by alternative methods.
That, in turn, would begin to make the costs of power generation, and the price of electricity, less dependent on volatile markets for coal and gas, and more reliant on long-term investments in energy sources that, after initial capital costs, are essentially free.
MCEA is joined in its petition to the PUC by Fresh Energy, the Izaak Walton League’s Midwest Office, the Sierra Club, the Center for Energy and Environment, and the Will Steger Foundation.
For further reading: The National Research Council report on the externalities of energy production is here (registration required); the petition by MCEA and allies is here and the Polasky report on externalities in Minnesota is here.
