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CEIC-03-03

"The Cost of Regulatory Uncertainty in Air Emissions for a Coal-fired Power Plant"

Dalia Patiño Echeverri

Abstract:
Uncertainty about the extent and timing of changes in environmental regulations for coal fired power plants makes the difficult problem of selecting a compliance strategy even harder. Capital investments made today under uncertainty can limit future compliance options or make them very expensive. In this paper, we present a method for computing the cost of operating a moderate-sized, coal-fired power plant under different conditions of future regulatory uncertainty. Using a Multi-Period Decision Model (MPDM) that captures the decisions (both capital investment and operating) that a power plant owner must make each year, the framework employs a Stochastic Optimization Model (SOM), nested in the MPDM to find the strategy that minimizes the expected net present value (ENPV) of plant operations over a fixed planning horizon. By comparing model runs under different uncertainty conditions, the cost of regulatory uncertainty can be calculated.

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