Examination of incentive mechanisms for innovative technologies applicable to utility and nonutility power generators

Abstract

Innovative technologies, built by either utility or nonutility power generators, have the potential to lower costs with less environmental emissions than conventional technologies. However, the public-good nature of information, along with uncertain costs, performance, and reliability, discourages rapid adoption of these technologies. The effect of regulation of electricity production may also have an adverse impact on motivation to innovate. Slower penetration of cleaner, more efficient technologies could result in greater levels of pollution, higher electricity prices, and a reduction in international competitiveness. Regulatory incentives could encourage adoption and deployment of innovative technologies of all kinds, inducting clean coal technologies. Such incentives must be designed to offset risks inherent in innovative technology and encourage cost-effective behavior. To evaluate innovative and conventional technologies equally, the incremental cost of risk (ICR) of adopting the innovative technology must be determined. Through the ICR, the magnitude of incentive required to make a utility (or nonutility) power generator equally motivated to use either conventional or innovative technologies can be derived. Two technology risks are examined: A construction risk, represented by a 15% cost overrun, and an operating risk, represented by a increased forced outage rate (decreased capacity factor). Different incentive mechanisms and measurement criteria are used to assess the effects of these risks on ratepayers and shareholders. In most cases, a regulatory incentive could offset the perceived risks while encouraging cost-effective behavior by both utility and nonutility power generators. Not only would the required incentive be recouped, but the revenue requirements would be less for the innovative technology; also, less environmental pollution would be generated. In the long term, ratepayers and society would benefit from innovative technologies.