Social Costing of Electricity in Maryland: Effects on Pollution, Investment, and Prices

Many state public utility commissions (PUCs) have started to require electric utilities to consider environmental and other externalities in their planning processes. To date social costing has been applied exclusively to the evaluation of new sources of electricity. More comprehensive approaches to social costing would include requiring the utility to dispatch both new and existing generating units according to social cost, or requiring electricity consumers to pay a price for electricity that reflects its full social cost. Using estimates of external costs taken from the literature, this study contrasts the implications of these three different approaches for utility decision making, electricity prices, demand for electricity and other fuels and the net emissions of selected pollutants for a Maryland utility. We find that applying social costing at the investment stage only may lead to reduced investment in new resources, increased use of existing generation resources and higher emissions of key pollutants. Applying social costing to dispatch generally leads to increased levels of investment in clean technologies, lower levels of emissions and only moderate price increases. Also, social costing of electricity generally has a small impact on consumer demand for natural gas.