Regulations imposed under the latest amendments to the 1963 Clean Air Act now require more than 600 coal-fired electric power plants in the U.S. -- and 11 in Alabama -- to limit the release of hazardous air pollutants. But by doing so, the plants must add expensive equipment upgrades, switch from coal-fired power to natural gas or face monetary penalties. What are the long-term business options for this makeover?
In the paper “Fuel-Switch Decisions in the Electric Power Industry Under Environmental Regulations,” Harbert College of BusinessSupply Chain Management professors Rafay Ishfaq and Mark Clark, and University of Alabama Management Information Systems professor Uzma Raja, point out the financial and logistics issues that must be resolved.
The paper weighs three key questions: 1) Should the plant continue to use coal and accept federal regulatory penalties? 2) Should the existing power plants be retired? 3) Should they be overhauled with new gas-based technology? The researchers offer strategic planning models designed to answer these scenarios.
“Compliance with federal environmental regulations also affects the natural gas supply chain. Gas is the primary, large-scale, alternative to the existing fuel, i.e., coal,” Ishfaq said. “In this context, we have not only looked at the financial and operational issues at the plant level, but also included logistics and distribution considerations with respect to the supply of natural gas to new/retrofitted power plants.”
The team gathered data from many Southeastern U.S. coal-fired plants, including those owned by Alabama Power, and considered multiple gas pipeline networks, including those operated by Southern Gas.
“Our models are useful for electric power companies in determining whether a specific power plant should switch fuel, and if it does, identify the right timeline to do so,” said Ishfaq. “For the gas transportation (pipeline) firms, our research also identifies network expansion options to serve a new group of customers (electric power companies) and gain access to a significant revenue stream.”
The models identify respective weights of replacement costs, fuel costs, power decommission limits, supply chain related costs, and environmental penalties in identifying the likelihood of fuel-switch at a plant in a specific planning period.
“There is significant politics around environment-related public policy at the federal and state levels,” Ishfaq added. “In our research, we did not take any sides, but rather evaluated the issue from a pure business point of view, given the current regulatory landscape.
“We feel that our research and the analytical work in our paper will be useful in evaluating the business impact of future changes in public policy.”
The paper was accepted for publication by IIE Transactions, an elite journal in the area of operations research and operations management.