Externalities and electric power: an integrated assessment approach

This paper describes an integrated assessment approach for considering the options that electric utilities have to meet the anticipated demand for their power. The objective that this paper considers is one of meeting the demand for power, with an acceptable degree of reliability, at minimum cost. The total cost is the sum of the private cost of producing the electric power plus the external costs that result from its production. These external costs, or externalities, are effects on the well-being of third parties that producers and consumers of electric power do not take into account in their decisions. The external costs include many different types of effects such as illness, ecosystem damage, and road damage. The solution to the problem of minimizing total cost is addressed in two steps. The first step uses damage function methods to establish a common metric for the weights of the different objectives (i.e., external costs). The damage function analysis also reduces the dimensionality of the analysis in the second step, and identifies criteria to include in that analysis. The second step uses multi-criteria decision methods. This analysis includes the most important externalities that the damage function analysis identifies and, in addition, potentially important factors that can not be quantified reliably using damage function methods. An example of the latter are the damages from global climate change. The two-step method that this paper describes addresses many of the limitations of the damage function method and multi-criteria methods, that arise when they are used separately. This linked method can be used by electric utilities for their integrated resource planning. It can also be adapted to other applications.