Becoming proactive about environmental risks: Regulatory reform and risk management in the US electricity sector

Abstract

Future environmental requirements are an important component of investment risk for long-lived facilities such as electric power plants. Yet the industry's current regulatory compact discourages proactive environmental investments, and thus encourages suboptimal long-term compliance strategies. This paper develops an indicative estimate of the resulting inefficiency by analysing a typical US power system. It argues that market-oriented regulatory reform can encourage environmental risk management by utilities.