Incorporating Environmental Externalities Into the Capacity Expansion Planning: the Case

Modeling national emissions reduction targets for electricity generation in Israel

Nir Becker (a), David Soloveitchik (b), Moshe Olshansky(c)

Abstract and overview

There is no one solution to the emissions reduction problem in the electricity sector – - “cap and trade” carbon market, strict emissions limits, voluntary targets, emissions taxes, national energy efficiency increasing and conservation regulation, greater diversity of energy sources, etc..

In this paper we present a cost effective solution for a policy to reduce emissions in the electricity sector in Israel. Two most important options for emissions reduction are considered - national energy efficiency increase and taxes imposed on CO2, NOx and PM pollutants from electricity sector.

One purpose of this paper is to estimate the impact of reshaping electricity demand level on the amount of air pollution emissions, externalities, fuels consumption and cost of capacity expansion program for the long-run period (2011 – 2025) in the Israeli electricity sector.

We examine two scenarios of increasing the national energy efficiency (demand reshaping):

- Demandlevel for all 24 hours of each day was reduced by 5% during all considered years;

- Different reduction levelswere taken into consideration for peak hours only.

This research examines also the impact of different kind of externalities associated with power generation options using the WASP-IV model. The model is augmented by an additional software and developed methodology in order to help DM to determine the national goals of emissions reduction relevant to the planning process.

Finally, we take into account the "double dividend" issue of which ancillary benefits should be incorporated as well.

Keywords: Externalities, capacity expansion planning, multiple criteria decision making, WASP, Israel

JEL classification: O13, Q48, Q53

aDepartment of Economics and Management, Tel-Hai College, Israel ()

b Energy and Economic Models, Jerusalem, Israel ()

c Residex Pty Ltd ,Sydney,

Methods

Our method of analysis is based on multi-objective optimization approach introduced into the standard WASP computer package. WASP-IV and our additional software were used to generate the set of scenarios (according to the Simplex Lattice Design approach).

Variable cost of each emitting generator increases with a correlation between the level of the variable cost of each generator and its emissions intensity. Fuel emissions intensities and thermal efficiencies are taken into consideration.

The output of the modeling included: the impact on electricity prices; social cost of electricity; fuels usage and capacity planning.

In our case study 216 different scenarios were calculated with the help of our software. This gives us the possibility to simultaneously consider both pollution emissions and their health and climate change impacts.Specifically, the objective is to model the function that determines the minimum of direct and environmental costs subject to yearly demand and other constraints as in a regular capacity expansion model.

Results

We consider 216different scenariosof pollution reduction. One was the business as usual (BAU) while the others were generated by our software using energy efficiency increase options andemissions taxes forthreemajor pollutants, CO2, NOx and PMas well.

The results show that it is possible to reduce CO2 pollutants by 4.0%, NOx and PM pollutants by 3.2% and 2.2% respectively in the case of demand reduction by 5% for each hour for the period 2008-2025. In this case the amount of coal and gas for the electricity production will be also reduced by 1.3% and 8.1% respectively. For the fuel oil the reduction is more than 57% (!).

The case of peak hours demand reduction by 9% yields a reduction of generation cost by 0.24%. In this case fuel oil will be reduced by 88.3%(!!).Most of the impact results from using natural gas rather than coal.

Finally, it is shown that the capacity factor is reduced in a significant way if we take environmental considerations into account.

Conclusions

In this paper we describe the possible impact of emissions reduction on the electricity sector and economy in Israel.The paper contributes an empirical case study for the state of Israel applying an optimization program (WASP – IV).

We undertake an assessment of the cost and benefits to the electricity sector as well as the national economy for future emissions reduction programs. The analysis show the importance of an integrated management vs. concentrating on either demand or supply management alone.