Power generation choice in the presence of environmental externalities

Abstract: This dissertation consists of an introductory part and six self-contained papers, all related to the issue of power generation choice in the presence of environmental externalities. Paper 1 provides a critical survey of a large number of electricity externality studies carried out during the last decades, and discusses a number of conceptual, policy-related and, in some cases, unresolved questions in the economic valuation of electricity externalities. These include: (a) the definition of externalities; (b) the choices of scope, relevant parameter input assumptions, and methodology; (c) the role of “green” consumer demand in replacing external cost assessments; and (d) the behavioral assumptions and ethical principles underlying external cost valuation. Paper 2 focuses on explaining the variability of results among the external cost studies carried out so far by providing an econometric analysis of a large sample of externality studies. Most importantly, the paper concludes that an important explanation for the reported disparities can be attributed to the overall methodological choice employed. Paper 3 explores some of the ethical limits of environmental valuation, and analyzes what the implications are of these limits for the social choice between different power sources. The main thesis of the paper is that the scope of electricity externalities where non-market valuation can be applied from an ethical point of view is likely to be narrower than commonly assumed. Papers 4 and 5 use the choice experiment method to estimate how the environmental impacts arising from hydroelectric production are perceived and valued by Swedish house-owning households and non-residential consumers. The basis of the choice exercise is taken in the criteria set up by the Swedish Society for Nature Conservation under which existing hydropower in Sweden can be labeled as “green” electricity. Data are gathered using mail- out surveys to 1000 households and 845 private and public enterprises, respectively. In general the results indicate that environmental investments in the hydro sector should, according to the respondents, primarily be directed towards lowering the negative impacts on fish life in the river affected by the hydroelectric development. Finally, paper 6 examines cost- reducing innovations for wind turbine farms in Denmark, Germany, and the United Kingdom. An econometric analysis using an expanded version of the two- factor learning curve concept, in which investment cost reductions are explained by cumulative capacity and the R&D based knowledge stock, is performed. The results show that both these factors have had a significant impact on cost reductions in the wind power sector.