The True Cost of Electric Power - India Environment Portal

vii. Private Costs
an additional unit of something, in this case electricity, which would include all costs of inputs
into producing electricity. A term that often comes up is levelized costs, which spread the fixed
costs of the capital used to produce something over the lifetime of that capital and add to it the
variable costs (labor, fuel, and management) used to produce that thing to arrive at an average
private lifetime estimate of the cost of production.
viii. Benefit Transfer: This is a term that describes the process of taking an estimate of benefits or
damages from (usually) a primary study performed at a donor site and applying it (with or
without various types of adjustments) to the transfer site. The donor site is where an original
study takes place, say at the site of an existing power plant, whereas the transfer site is where
the study sit
benefit transfer involves taking an estimate of the external costs of electricity associated with a
specific fuel and technology from one location (in the European Union, for instance) and
applying that estimate (again, with or without various adjustments) to coal-generated
electricity in another location (for example, South Africa).
D. Use of External Cost Estimates
With the above terminology in place, the objective of estimating the external costs of various forms
of energy is then to develop policies that alter the price of energy to take such costs into account and
energy ge
lower prices for fossil fuelderived energy than for renewables-supplied energy. Hence, if one can,
through policies, appropriately raise the price of electricity produced by fossil fuel energy relative to
renewables, the playing field levels out and renewables can compete with fossil fuel on a fair and
economically justified basis.
In practice, however, it is very difficult and controversial to distinguish between damages or
benefits on the one hand and external costs on the other. The relatively easy and clear case is where a
pollutant is not currently regulated or regulations are not enforcedsay for carbon dioxide (CO 2) in
the United States or for many conventional pollutants in developing countries. In that case, all the
damages are external costs. But if the pollutant is already regulated and the regulations enforced (such
as sulfur dioxide [SO 2ns is reflected in
the costs of generating electricity, then one could argue that in some cases at least a portion of the
damages are internalized, depending on the type of regulatory framework. For example, if SO 2
emissions fall under a cap, such that a unit of additional emissions by one source is offset by
reductions elsewhere, one could argue to a first approximation that external costs of new SO 2
emissions (say from a new coal plant) are zero. In contrast, regulation of the pollutant with an
emissions fee internalizes the costs of emissions if the fee is equal to the damages. If the fee is less than
the damages, then the remainder could be viewed as an external cost. On the other hand, the fee could
be greater than the damage, suggesting a negative external cost of production. If regulation of the
pollutant is based on a standard requiring the use of a specific control technology, then emissions will
be reduced, but the remaining emissions will have an external cost. Because of these complications
that hinge on the policy environment, studies of the social costs or external costs of energy or
electricity invariably stop after they have estimated damages or benefits and argue for adjustments to
energy prices on that basis, but this is not always a correct measure of the external costs.
BURTRAW, KRUPNICK, AND SAMPSON
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