Fuel-switch decisions in the electric power industry under environmental regulations

ABSTRACT The changing landscape of environmental regulations, discovery of new domestic sources of natural gas, and the economics of energy markets has resulted in a major shift in the choice of fuel for electric power generation. This research focuses on the relevant factors that impact a power plant's decision to switch fuel from coal to natural gas and the timing of such decisions. The factors studied in this article include capital costs of plant replacement, public policy, associated monetary penalties, availability and access to gas supply networks, and the option of plant retirement. These factors are evaluated in a case study of power plants in the Southeastern United States, using mathematical programming and logistic regression models. The results show that environmental regulations can be effective if the monetary penalties imposed by such regulations are set at an appropriate level, with respect to plant replacement costs. Although it is economic for large-size (power generation capacity > 600 MW) coal-fired power plants to switch fuel to natural gas, plant retirement is more suitable for smaller-sized plants. This article also presents a multi-logit decision model that can help identify the best time for a power plant to switch fuel and whether such a decision is useful in the context of plant replacement costs, fuel costs, electric power decommission limits, and environmental penalties.