PERFORMANCE assessment OF Power plants under environmental regulation
Mika Goto, Central Research Institute of Electric Power Industry,
Toshiyuki Sueyoshi, New Mexico Institute of Mining and Technology,
Overview
Recently, consistency in government policies between economic efficiency and environmental protection become increasingly important for electric power companies. In particular, the problem ofconsistency influencesa decision-making process in management for a utilization of power plants and a fuel mix. This study is interested in the performance assessment of power plants under U.S.environmental regulation. For the purpose, this study proposes a use of Data Envelopment Analysis (DEA) that is a methodology of performance assessment. In responding to various environmental issues, many researchers have applied DEA as a research tool. For example, Zhouet al. (2008) summarized more than 100 DEA applications in environment and energy studies. Cooper et al. (1996) provided a summary of more than 100 previous studies on how OR/MSmethods were useful in preventing air pollution problems.Using the proposed DEA models, this study conducts the performance evaluation of fossil fuel power plants in PJM. We discuss how environmental factors,such as an amount of greenhouse gas emissions,are incorporated intothe DEA approach for measuring unified (operational and environment) efficiency. Based upon the discussion by Sueyoshi and Goto (2012), this study describes two types of disposabilitywhich originatesfrom corporate strategy for environmental protection.
Methods
The DEA approach,proposed for environmental assessment in this study, has been long serving as an important methodology to evaluate the performance of various organizations in public and private sectors. In DEA, the unified performance of each power plant is characterized by their production activities that use inputs to produce not only desirable (good) but also undesirable (bad) outputs. An important feature of DEA performance assessment is that the achievement of each DMU is relatively compared with those of the remaining others. The performance level is referred to as “an efficiency score” or “an efficiency measure”.
The unified efficiency utilized in this study isseparated by two strategic conceptson disposability. One of the two concepts is formulated under natural disposability and the other concept is formulated under managerial disposability. The two disposability concepts arecharacterized by differentstrategies forelectricity generation in powerplants that need to adjust themselves for a change of environmental regulation. An important feature of this study is that we propose DEA models that combine desirable and undesirable outputs of the power plant under natural and managerial disposability.
A data set used in this study contains100 fossil fuel power plants in PJM. The data set consists of two inputs, a desirable output and four undesirable outputs. The first input is an amount of heat used to generate electricity at each power plant. The heat input is measured by a unit of million British thermal units (MMBtu). The second input measure is a generation capacity of each power plant which is measured by megawatts (MW).
The desirable output is an annual amount of electricity generated by each power plant and it is measured by megawatt hours (MWh). The undesirable outputs are an amount of greenhouse gas emissions. The first undesirable output is an amount of sulfur dioxide (SO2) that is a byproduct of electric power generation and is the main component of acid rain. The sulfur dioxide is measured by an annual amount in tons. The second undesirable output is an amount of carbon dioxide (CO2) that is a byproduct produced from the combustion of coal or hydrocarbons, measured in tons. The third undesirable output is an amount of methane (CH4) that is the main component of natural gas, and probably the most abundant organic compound on earth, measured by pounds (lbs: pound-mass). The methane is important for electrical generation by burning it as a fuel in a gas turbine or steam boiler. The fourth undesirable output is an amount of nitrous oxide (N2O), measured by pounds (lbs: pound-mass), that is a greenhouse gas with tremendous global warming potential. The nitrous oxide also causes ozone depletion and is single most important ozone-depleting substance emission.
Results
Table 1 summarizes the unified efficiency of power plants, whose measures are obtained by the proposed DEA model for environmental assessment. Table 1 has two interesting findings. One of the two findings is that the average unified efficiencyunder natural disposability is 0.9422, while that of under managerial disposability is 0.9290. The differenceindicatesthatthe operational efficiency of power plants is larger than their environmental efficiency in PJM.The other important finding is that coal, gas and oil-fired power plants havedifferent averages undertwo disposability concepts. In other words, different power plants have different unified efficiency scores. In particular, coal-fired power plants show lower efficiency scores,compared to the others due to their environmental burden for generation.
Table 1 Unified Efficiency Measures by Natural and Managerial Disposability
Conclusions
This studyproposed a new use of DEA for environmental assessment. In the proposed DEA environmental assessment, it was necessary for us to consider a production process where all organizations in private and public sectors produced not only desirable (good) but also undesirable (bad) outputs as a result of their business operations. To deal with the two types of outputs, this study discussed the concept of disposability that was separated into natural and managerial disposability. The natural disposability implies corporate strategy by which a firm attempts to decrease an input vector to decrease a vector of undesirable outputs. Given the decreased input vector, a firm attempts to increase a vector of desirable outputs as much as possible. In contrast, the managerial disposability indicates opposite strategy by increasing the input vector. This disposability expresses corporate strategy by which a firm considers the regulation change as a new business opportunity. A firm attempts to improve the performance by utilizing new technology and/or new management. This type of strategy orpositive adaptation to the regulation change on undesirable outputsis associated with Porter Hypothesis that is proposed by Porter and van der Linde (1995). Applying the DEA method to fossil fuel power plants in PJM, this study indicated that the proposed method were useful to assess power plants with different environmental strategies.
Selected References
Cooper, W.W., Huang, Z., Li, S., Lelas, V., Sullivan, D.W., 1996. Survey of mathematical programming models in air pollution management. European Journal of Operational Research96, 1-35.
Sueyoshi, T., Goto, M., 2012.Weak and strong disposability vs. natural and managerial disposability in DEA environmental assessment: Comparison between Japanese electric power industry and manufacturing industries.Energy Economics34, 686-699.