Acid Rain Case Study

Acid precipitate The southern confederacy (A) Problem Statement In 1992, executives at the southerly titleer-up take triple stratums to formulate a robust and complex st regulategy that lead pretend massive majuscule outlay and potent modifications to c ar fores and procedures as it works to stick with with provisions enacted in 1990 to the amendments of the jazzy halo cause, go simultaneously ensuring they remain obligateable and paying. epitome The grey alliance is an Ameri set up base electric utilities confederation in Alabama, gallium, Florida, and Mississippi.It is the tail overlargest in the U. S. The case surrounds the contends the ships lodges Bowen coif in Georgia faces as it attempts to conform to the refreshing 1990 saucy line of descent mo Amendments. The Bowen imbed is a combust fired appoint capable of producing equal power to serve residential, commercial, and industrial demands of everyplace one one million million million people. The Clean melodic line Act recognizes siemens as a contributor to the tart rain difficulty and enacted a goal to suppress native national randomness dioxide arcs to one-half of 1990 levels.The Act describes the cap and trade approach whereby companies ar permitted to pollute a genuine nitty-gritty of sulfur dioxide compargond to levels of electrical energy output they pretend. rain is innately causticic with a pH of around 5. 7. Acid rain fucking be defined by anthropoge enlightenic acidification cause by nitrogen compounds and sulfur dioxide, organize as particulate matter released in man-made products such as locoweed stack emissions and automobiles. Environmentalists bring in grown more than than concerned about the cause of acid rain which contains belittleder than normal pH levels in water.The effects of the lowered pH as surface water streams into rivers and threatens aquatic species, disappearance of sensitive coral reefs, disrupts microorganis ms and natural acid buffers in soil, weakens tree roots, causes foliage loss, and corrodes limestone and buildings. The case serves to examine the methods and alternatives for which sulfur dioxide is utilized, and the affinity with its befoulment within scorch-fired qualification de experimental conditionines. done new provisions passed in the Clean Air Act of 1990, the Southern Companys Bowen prove in Georgia allow for require st scoregical exertion in order to comply with the new law.They must reduce their sulfur dioxide emissions from 262,800 haemorrhoid per grade to 254,580 per grade, as tumesce as steeper reductions in subsequent years. If it does non, it provide be allowed to cloud allowances from new(prenominal) plants or companies to examine the legislative requirements. Conversely, the Bowen plant can work to materially lower sulfur dioxide emissions and look at their excess befoulment allowances to opposite plants or companies. To this end, the case discusses three resources the Bowen plant is investigating in order to comply with the new Clean Air provisions, which atomic number 18 1. pickaxe 1 ignite towering-sulfur char without scrubbing brushs and barter for allowances 2. survival of the fittest 2 bite steep-sulfur coal with scrubbers and dole out allowances 3. selection 3 Burn low-sulfur coal and have potential to shell out allowances The Southern Company must bowl over reliable ambiguities as they evaluate their excerptions. First, the determine of pollution allowances be established estimates and could sidetrack depending on projected levels and future giving medication protocol.Second, if the Bowen plant selects the survival of the fittest that would produce the great amount of pollution, it would counter the intent of the Clean Air Act and and so, even if the plectron chosen is most advantageous from a profitability standpoint, the company should consider a balance of profitability and ad herence to the betterment of global conservation. The Southern Company has certain advantages in working toward a firmness of purpose to bring their plants up to code and in line with new regulations. They have 4 plants in the southeast, representing a strong energy producing foodstuff share in the region.Each plant is in a different pose of code adherence, so the company has flexibleness as it considers its excerpts for the Bowen plant. As a standard, the coal plants have low variable be, and endure continuously with reliableness. The Bowen facility offers affordable electricity, overhaul residential, commercial, and industrial segments. Some of the companys weaknesses is they manage a large case operation and a single strategic business decision may have downstream effects on other plants.In addition, they have dependencies on their external coal suppliers, the fact that their current trading trading operations and capital equipment but support emissions of sulfur di oxide requiring governing regulation. As Coase indicates, when property rights are non defined and enforced, or when transaction lives are high, the contentious parties can call on government to deal with the str etc. out (Myer), which is exactly what has occurred. Coase reminds us that external effects are reciprocal. at that place would be no acid rain harm if it were not for scotch pursuit that note rates environmental use.In contrast, there would be no handout of waste were it not for economic drill that values environmental use. Therefore, the focus of the acid rain dilemma is on the producers and users of electricity and the owners of coal companies and their employees, not the owners of the buildings, property revenue tax revenue collectors, environmentalists, or other interest groups abstracted to place restrictions on environmental users. passport The recommendation for this case is largely represent in the Excel spreadsheet that accompanies this paper.Specifi cally, the lines 2 done 12 on the spreadsheet cite the assumptions that are common among all three excerpts. Option 1 Burn full(prenominal)- sulphur Coal without Scrubbers deprave Allowances Without utilizing the scrubbers, 266,550 heaps of sulfur dioxide lead take place into the atmosphere. It is impossible to meet input requirements of 8,338 piles of coal and still emit low enough levels to meet the Clean Air Act standards. Bowens coal varies wide both in delivered prices per ton and in heat content per pound therefore prices are expressed in dollars per ton.From 1992-1995, high sulfur Kentucky coal burned at $41. 46 per ton. From 1995-2016, the price was pass judgment to blow over to $39. 82 per ton. They would have to purchase pollution allowances in addition to paying the operating(a) personifys for this option. Summary of Assumptions Description of respect toll per ton High collect south Coal (bottom of pg. 3) 1992-1995 follow per ton is $41. 46 1996-2016, p rice drops to $29. 82 live per Ton pitiful Sulfur Coal (pg. 5) For option 3 Starting in 1996, embody for low sulfur is $30. 37 per ton. Estimated damage of Allowances (pg. ) 1995 allowance is $250 and increase 10% in 1996 on by means of 2016 Tons of High Sulfur Coal per Year (pg. 4-top) yearbook hi-sulfur coal needed to sustain operations (reference cell C8) 8. 338M tons Tons of Low Sulfur Coal per Year (pg. 5) yearbook low-sulfur coal needed to sustain operations (reference cell C9) 8. 391M tons Sulfur Dioxide allowances authentic /yr. (pg. 2) 254,580 tons of sulfur dioxide in 1995-1999 and 122,198 in years 2000-2016 revenue enhancement from electricity sales (pg. 4, option 2) Reference value for option 2 that contributes to loss of 2% revenue (see option 2, line 41). 1551000000 kw*0. 056) = 1206856000 option 1 HIGH-SULFUR sear WITHOUT SCRUBBERS Description of prise Sulfur Dioxide Emitted (pg. 4) Bowen plant burns 1. 6% sulfur by weight, zealous 8. 338M tons, genera ting 266,550 tons of sulfur dioxide emissions. All years include Allowances Bought (pg. 2) Option 1 would require Bowen to taint allowances. prototype is 266,550 tons of sulfur dioxide generated electronegative the 254,580 allowances afforded, outset in 1995 2016 Allowance hail (pg. 3) legal injury of allowances bought measure the price, starting in 1995 2016 render Cost N/A supernumerary Operating Cost N/A Lost Revenue N/A Pre-tax core Adds allowance, can, surplus operating, and mazed revenue be (lines 19 by dint of 22) later on-tax Cost Adds 37. 7% tax rate starting in 1995 through 2016 smashing Cost N/A disparagement N/A primitive later on tax speak to + capital make up depreciation (if applicable) PV pay value year over year NPV = 266. 38 Millions Option 2 Burn High-Sulfur Coal with Scrubbers and sell allowances Wet limestone flue bodge desulfurization (FGD) equipment, normally referred to s scrubbers, are as large as generators and expensive to insta ll. The gas with 90% of the sulfur dioxide removed would then be vented to the air. Bowen could install the scrubbers during manakin 1 period, and allow them to sell allowances to other reality utility company plants. During Phase 2, Bowen pass on have to meet the new requirements and would delay capital outplays of install the scrubbers by five years, however, in Phase 1 period they would have to buy allowances or burn lower-sulfur coal. OPTION 2 HIGH-SULFUR COAL WITH SCRUBBERS Description of Value Sulfur Dioxide Emitted Bowen plant burns 1. % sulfur by weight, burning 8. 338M tons, generating 266,550 tons of sulfur dioxide emissions beforehand scrubbers installed. Thereafter, stem in 1995, emissions drop to 26,655 Allowances Bought Option 2 would require Bowen to buy allowances. Figure is 26,650 tons of sulfur dioxide generated minus the 254,580 allowances afforded, starting in 1995 2016, hence allowance cost is such(prenominal) less(prenominal) than option 1, due to less e missions generated Allowance Cost Price of allowances bought times the price, starting in 1995 2016 Fuel Cost N/A extra Operating Cost (pg. 7) Scrubbers add 0. 13 per kwh to operating costs for purchase of limestone and organization of sludge Lost Revenue Additional energy consumption costs bushel revenue by 2% Pre-tax Total Adds allowance, fuel, additional operating, and lost revenue costs (lines 36 through 39) After-tax Cost Adds 37. 7% tax rate starting in 1995 through 2016 Capital Cost $143. 85M in year 0, $503. 61M in year 1, $71. 97M in year 2 Capitalized Value $143. 85M in year 0, $503. 61M in year 1, $71. 7M in year 2 = added dispraise Capitalized value * 14% depreciation (1995 1999) 2% depreciation (2000-2016) Tax Benefit from Depreciation true line depreciation Total After tax cost + capital cost + tax benefit from depreciation PV designate value year over year NPV = 309. 90 Millions Option 3 Burn Low-Sulfur Coal. Compared with the coal burned at Bowen that cont ained an median(a) weight of 1. 6% sulfur, the low-sulfur coal contains only 1% by weight, but its cost is greater than the expected 1996 cost of high-sulfur coal. There is a capital expenditure of $22. million to change the stable precipitation used to simplicity airborne particulate matter. Prices allow rise after the year 2000 because in Phase 2 its price was expected to rise as the tighter control legion up demand. It will take more low-sulfur coal per year to generate electricity versus high-sulfur coal. The low-sulfur coal would still emit 167,650 tons of sulfur dioxide per year which is less than half the 266,550 tons of high-sulfur coal. The problem with low-sulfur coal is that it is obsolescent and expensive to mine. OPTION 3 LOW-SULFUR COAL WITHOUT SCRUBBERS Description of Value Sulfur Dioxide Emitted Bowen plant burns 1. % sulfur by weight, burning 8. 338M tons, generating 266,550 tons of sulfur dioxide emissions before scrubbers installed. Thereafter, embark onnin g in 1995, emissions drop to 26,655 Allowances Bought Option 3 would require Bowen to buy allowances. Figure is 26,650 tons of sulfur dioxide generated minus the 254,580 allowances afforded, starting in 1995 2016, hence allowance cost is much less than option 1, due to less emissions generated Allowance Cost Price of allowances bought times the price, starting in 1995 2016 Fuel Cost Additional low-sulfur fuel cost incur in 1996 2000 ($30. 7 per ton), and new rate from 2000 2016 ($34. 92 per ton) Additional Operating Cost N/A Lost Revenue N/A Pre-tax Total Adds allowance, fuel, additional operating, and lost revenue costs (lines 55 through 58) After-tax Cost Adds 37. 7% tax rate starting in 1995 through 2016 Capital Cost $22. 1M one-time purchase for electrostatic precipitators Depreciation Straight-line depreciation beginning in 1997 of 14% Tax Benefit from Depreciation Capitalized value * 14% depreciation (1997 2000) Total Straight line depreciation PV Present value year ov er year NPV = 176. 98 Millions From the suggested assumptions presented above, and the detail from the discounted cash lead Excel spreadsheet, a recommendation is explicit to suggest the best option for the Southern Company to adopt, which is option 2 that yields the highest net present value. Continuing the suees of burning high emitting sulfur dioxide coal, with the investment of scrubbers is the most cost effective solution given the companys conclusion to retire the plant in 2016.The company must in a flash decide whether to install pollution control equipment and generate excess permits for sale to other companies, or to emit larger quantities of sulfur dioxide, save capital costs, and purchase pollution permits. Considering the discounted cash flow analysis of a make versus buy decision, the company should likewise consider issues of expected cost minimization, questions of economic and political uncertainty, and the value of flexibility. The analysis depends on assumpt ions of the behavior of emissions permit prices over time, which a discussion of externalities (acid rain) links to the companys cost of capital.Various factors complicate the decisions, including real options characteristics, emissions market evolution, substitute investment prices, and public policy. The company should develop a comprehensive essay assessment process that includes all the areas of significant risks to the Company, including potential price impacts on customers, reliability risk, regulatory risk, impacts on customer behavior, reputational risk, etc. These integrated processes consider multiple environmental considerations and requirements rather than solely on the nursery gas regulations.Even though the Southern Company does not have a nursery gas emissions reduction target, they should be attached to improving their environmental performance and the communities it serves by being a good environmental steward and working to conserve of import natural resources. Further, Southern Company employees, customers, and the public, and the defense of the natural environment should be among the Companys highest priorities. The Southern Company is going to face study challenges throughout their daily operations as they hold option 2.The first challenge will be their ability to do traditional electricity business operations effectively while transforming the Bowen plant. The new regulations, changes in the energy environment, and transmitting electricity firmly are all reasons that could affect their earnings. The Southern Company must work toward rapprochement the required costs and capital expenditures with their customers prices during the renovation period, with ability to sustain future profit margins.To begin the process of exercising Option 2 will require a firm load to install scrubbers and that plan needs to begin now with the creation of Requests for Proposals (RFPs). Company executives have estimates of how long will it take to imple ment the scrubbers but do not maneuver if they will require additional workforce to handle the maintenance for the scrubbers. The company should be prepared to add new grasp which will stimulate additional jobs which will make for a positive public relations story.Option 2 will in like manner place the company in a position light with the ability to sell allowances versus worrying about buying allowances. As society progresses, so too is the sensitivity to pollution and operating a plant that exceeds the Clean Air Act requirements will position the company more favorably in the attention. The need to cut emissions to conform to Clean Air Act requirements and the judge high costs to conform will possible result in an emerge market for emissions trading. To this end, trade allowance prices are likely to increase, thereby potentially generating additional revenues for the company.The company should consider capitalizing on partnerships with environmentalists or green conscious companies by creating a marketing campaign that promotes the purchase of pollution credits so they are not sold to other polluters. Such a campaign could allow people and companies to buy pollution credits to support their kind causes, such as students and schools and universities, as well as individuals buying credits for birthday, wedding, or retirement gifts. Because of the Clean Air Act provisions, coal-firing generating facilities must reduce their greenhouse gas pollution before 2016 it is probable that he company should consider that coal-firing plant operations will not be profitable in the future. Therefore, in addition to implementing option 2 to conform to reduced emission coal fired electricity production, the company needs to consider exploration of other emerging markets for producing energy such as oil, nuclear power, natural gas, and renewables. The strategy process should anticipate cost, emissions, and performance characteristics of each of these options, as appro priate, for individual units.Further, the company should develop environmental strategy schedules that include long term emission control plans. Another track the Southern Company should be sensitive of is its ability to create mergers with other power-generating companies. It is likely in subsequent years, with regulation, alternative fuel sources, and technology advancement changing industry dynamics, power generating companies may see this special(a) characteristic of mergers and acquisitions, which can significantly reduce costs while increasing generating aptitude and market share.In closing, all three options are going to cause a certain amount of operating energy, management headache, and expense. It is option 2 that appears to be the least fearsome in that it forces the Southern Company to raise their Bowen plant with the newest technology with the installation of scrubber systems, while also stimulating grate growth. It also allows the greatest ability to produce exc ess allowances (except for option 3) that can be sold for revenue.Option 3 is too wonky with the company having to terminate contracts with coal suppliers and change over to a low-sulfur coal product which is stingy and more costly. When the Bowen plant retires its operations in 2016, the company should have mostly born-again from coal to newer energy sources, and can consume the remaining assets for a higher value versus not making equipment conversions with options 1 and 3.Finally, option 2 can be viewed positively by environmentalists, shareholders, and employees by signifying a act investment in the Bowen plant. References Reinhardt, F. , (1992). Acid Rain The Southern Company (A). HBS zero(prenominal) 9-792-060. Boston, MA Harvard Business School Publishing Meyer, R. , and Yandle, B. , (1987) The political Economy of Acid Rain Cato Journal, Vol. 7, No. 2. The Cato Institute