Making Clean Energy Sweeter To Utilities

What's the value of a clear blue sky? Should you pony up a few cents a month on your heating bill to fight global warming? Clean up a lake? Plant some carbon dioxide-gulping trees? Complex issues, these, but in early June, California's Public Utilities Commission commanded the state's utilities to deal with them when planning power projects. The approach is called "environmental least-cost pricing." The idea is to levy a paper penalty on relatively dirty forms of fuel to reflect their environmental costs and thereby force utilities to look to cleaner fuels when adding new sources of power.

Putting a dollar value on pollution is the latest and most ambitious twist in a new trend: using market forces rather than regulations to keep the environment clean. Least-cost pricing works in this way: As they always have, utilities seeking new power analyze where they can get it the cheapest. That evaluation usually favors fossil fuels, such as coal. But in the past two years, New York, Massachusetts, Nevada, and now California have begun making utilities include one more factor in the calculation: an "adder," a hypothetical figure representing the cost of the pollution the fuel produces.

BLACK ART. In New York, for example, a coal plant might be assessed, on paper, 1.4~ per kilowatt hour for environmental damage on top of the 5~ or 6~ the coal will cost. The idea is to compare this higher cost of using coal with the price of less polluting fuels such as natural gas, wind, or solar power. If the calculation favors a cleaner fuel, the utility must use that fuel--and can raise its rates to cover the added cost.

It sounds simple. But determining what value to use for the adder is a black art. Currently, most are calculated based on standard measures of controlling pollution. In Massachusetts, the cost of carbon dioxide pollution caused by burning fossil fuels is calculated at $22 per ton of CO--or what it would cost to plant enough. Stavins argues that the cost of pollution should be based on myriad factors, including a region's existing air quality and its proximity to other pollution sources. He would also find a way to figure in health damage, such as headaches or asthma attacks brought on by pollution, plus the damage to buildings from acid rain. "The right adder will be different in each area of the country," Stavins says.

The uncertainty over the validity of current adders alarms some utilities and consumer groups--especially since pollution penalties will increase electricity rates as demand grows and new sources of power are lined up. Such consumer advocates as San Francisco-based TURN, or Toward Utility Rate Normalization, say it's unfair for electricity buyers to absorb environmental cleanup costs as long as more substantial pollution sources such as transportation are not addressed. TURN argues further that California's plan doesn't provide enough incentive for producers who sell alternative power to utilities to be truly efficient: If they know the adder penalty, TURN argues, they will undercut conventional fuel prices just enough to win a contract.

Such concerns have driven a small wedge between consumer groups and their usual allies, environmentalists, who see many pluses for consumers. At the least, a pollution penalty will speed development of renewable energy such as solar, wind, and geothermal power, says Ralph Cavanagh, director of energy programs for the Natural Resources Defense Council. And, environmentalists and some utilities say, there's a longer-term benefit: insulation from volatile oil markets. The U. S. "paid a tremendous penalty during the 1973 oil embargo and this year's gulf crisis," says Don Felsinger, vice-president for marketing resources at San Diego Gas & Electric Co.

BEING GREEN. The debate will get hotter. At least two dozen states are considering least-cost pricing, or elements of it. In California, key utilities such as Pacific Gas & Electric Co. and SDG&E have voiced cautious support; after all, the West is relatively rich in alternative energy sources. But David L. Holt, chief electrical engineer of the New England Electric System, contends that the Massachusetts plan is so full of holes that it's possible no environmental benefit would result from its implementation.

Now, Massachusetts is reviewing how it calculates the numbers. So is New York. "Regulators want to appear green," grouses one California utility executive. "But lots of questions haven't been resolved." Utility commissions hope to resolve them before electricity bills rise--and the public starts to react.

Before it's here, it's on the Bloomberg Terminal.