Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement

this software to generate variable costs and fixed cost estimates for each unit, for
each viable compliance option. Cost estimation requires detailed data on over 60
operating characteristics, fuel inputs, boiler specifications, plant operating costs, etc.
Post-retrofit emissions rates are estimated using the EPRI software, together with
EPA’s Integrated Planning Model (EPA 2003). A more detailed data appendix is
available upon request from the author.

It is impossible to directly observe plant managers’ expectations regarding ozone
season production levels Q_n under different compliance strategy scenarios. Because
coal generation tends to serve load on an around-the-clock basis, the production levels
of the plants in this sample are less likely to be significantly affected by changes in vari-
able operating costs (as compared to intermediate and peak load units). Anecdotal
evidence suggests that managers used past summer capacity factors to estimate fu-
ture production levels, independent of the compliance choice being evaluated (EPRI,
1999). I observe unit-level hourly production over the period 1997-2005. I assume
that managers used past summer production levels to proxy for expected ozone season
production. This assumption is discussed in more detail in the Appendix.

Summary Statistics

Figures 3 and 4 summarize the observed choices for units in restructured and un-
restructured markets in terms of MW of installed capacity (87, 828 MW in regulated
markets and 88,370 MW in restructured markets).²² A significantly larger propor-
tion of the coal capacity in unrestructured markets has been retrofit with SCR ( the
control option that delivers the most significant emissions reductions). Conversely,
in restructured markets, a greater proportion of capacity has either not been retro-
fitted, or has been retrofitted with controls that can achieve only moderate emissions
reductions (such as combustion modifications or SNCR). These preliminary results
are consistent with the predictions of the model.

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