The Effects of Environmental Quality Standards on Pricing Electrical Energy

In this paper the effects of implementing environmental quality standards on the pricing of electrical energy is discussed. In a situation where the maximization of social welfare is the objective, the price, in any period, is set equal to the operating cost plus explicit and implicit environmental-quality costs plus amortization on any new generating capacity. Further, a sufficiently high combination of costs to meet environmental quality standards will result in an earlier retirement of existing capacity than would otherwise have been the case.

In a profit-maximizing situation in which profit is subject to a return-on-investment constraint, the imposition of these standards leads, via the Averch—Johnson effect, to a larger investment in new generating capacity.