Optimizing Organic Waste to Energy Operations

Abstract

A waste-to-energy firm that recycles organic waste with energy recovery performs two environmentally beneficial functions: it diverts waste from landfills and it produces renewable energy. At the same time, the waste-to-energy firm serves and collects revenue from two types of customers: waste generators who pay for waste disposal service and electricity consumers who buy energy. Given the process characteristics of the waste-to-energy operation, the market characteristics for waste disposal and energy, and the mechanisms regulators use to encourage production of renewable energy, we determine the profit-maximizing operating strategy of the firm. We also show how regulatory mechanisms affect the operating decisions of the waste-to-energy firm. Our analyses suggest that if the social planner's objective is to maximize landfill diversion, offering a subsidy as a per kilowatt-hour for electricity is more cost effective, whereas if the objective is to maximize renewable energy generation, giving a subsidy as a lump sum to offset capital costs is more effective. This has different regulatory implications for urban and rural settings where the environmental objectives may differ.