Our Impact: Custom Models Help Assess Impacts of Energy, Environment Choices

This is the seventh installment in a 12-part series highlighting the environmental policy impacts of the Nicholas Institute for Environmental Policy Solutions over its first decade.

Imagine having to make billion dollar investments affecting millions of electricity consumers for at least 30 years in the midst of energy technology changes and impending emissions regulations to address climate change. That’s the situation facing state regulators who’ve participated in decision-making workshops presented by the National Association of Regulatory Utility Commissioners (NARUC) and Duke University’s Nicholas Institute for Environmental Policy Solutions.

“If we go back 10 years, no one was thinking that natural gas prices would be as low as they are today or that we’d be looking to regulate carbon emissions from electrical generating units under the Clean Air Act,” said Miles Keogh, NARUC’s research director. “Committing billions to go down one pathway or even multiple pathways—that can be a scary proposition. When there’s so much uncertainty about the future energy landscape, traditional scenario analysis may not always be the best tool for making decisions that minimize risk.”

Through a NARUC training series, the Nicholas Institute’s David Hoppock and the Nicholas School’s Dalia Patino-Echeverri are helping regulators move beyond such analysis by demonstrating how to determine the optimal investment decision(s) with a model they co-created: PowerOptInvest. This model—publicly available to regulators and utility operators—can pinpoint hedging strategies, optimize expected value under real-world uncertainty, and identify the options value of deferring major capital investments, Hoppock said.

As a developer of PowerOptInvest and other economic and energy models, the Nicholas Institute has helped policy makers assess a variety of complex energy and environment choices with sophisticated analyses of tradeoffs. For the last decade, it has used these models, some created by Nicholas Institute staff in collaboration with Duke University faculty and some available through strategic alliances with other research institutions, to investigate issues as diverse as the greenhouse gas implications of bioenergy use, network optimization of the carbon dioxide pipeline, and carbon pricing—or how emissions trading and carbon taxes can induce changes in energy production, use, and emissions.

“Since our 2005 inception, we recognized that decision makers need ways to systematically examine the environmental and economic consequences of contemplated large-scale policy changes,” said the Nicholas Institute’s Environmental Economics Program director Brian Murray. “Figuring out the benefits and costs and warding off unintended consequences requires robust climate and energy models.”

Initially, the Nicholas Institute collaborated with organizations outside Duke or used off-the-shelf public domain models to bring modeling to the discussion. More recently, said Murray, “we’ve seized opportunities for our own staff, sometimes working with Duke faculty, to develop models. That capability has allowed us to integrate our economic, legal, environmental science, and engineering expertise to be proactive and nimble in evaluating and contributing to policy solutions.”

As part of a multi-institutional team, Murray helped develop and use the Forest and Agriculture Sector Optimization Model with Greenhouse Gases (FASOMGHG) to examine the net greenhouse gas (GHG) effects of U.S. biofuel policies such as renewable fuels standards, estimating the influence of indirect land use change on GHG emissions. In collaboration with researchers at the International Institute of Applied Systems Analysis, the team extended this research globally in work that analyzed the environmental and economic sensibility of U.S. ethanol policy.

The Nicholas Institute has since used FASOMGHG and another model to explore the environmental and economic implications of renewable portfolio standards (RPSs), which obligate electricity suppliers to produce a specified fraction of their electricity through purchases from certified renewable energy generators. For this study, FASOMGHG and the Sub-Regional Timber Supply (SRTS) model, developed at North Carolina State University, were used to assess the multi-sector and interregional and intraregional allocation of increased harvests to meet a hypothetical region-wide RPS with biomass carve-outs in the southeastern United States. The result was a detailed picture of the dominant types of biomass contributing to the RPS, the regional distribution of land use and harvest changes, and the spatial and temporal carbon response to those changes—in this case, substantial net GHG reductions.

Since 2014, much of the Nicholas Institute’s modeling work has focused on cost-effective ways to meet emissions reduction targets for existing power plants under the Clean Power Plan (CPP)—work relying on the Nicholas Institute-created Dynamic Integrated Economy/Energy/Emissions Model (DIEM). Nicholas Institute researchers have used DIEM to evaluate CPP compliance options both nationwide and in the Southeast—presenting findings at an ongoing series of workshops for regulatory officials in southeastern states. Participant Keith Bentley, air protection branch chief at the Environmental Protection Division of the Georgia Department of Natural Resources, noted that DIEM analysis is helping his organization understand the economic impacts of calculating emissions targets using rate- or mass-based approaches.

“We don’t have economic modeling capability in house so this is critical info we didn’t have and can now bring into our decision making,” he said.  

DIEM modeling has also helped regulators understand the implications of pursuing multistate versus unilateral CPP compliance. In part because of the DIEM analysis, Myra Reece, bureau of air quality chief for the South Carolina Department of Health and Environmental Control (SCDHEC), said that she and the Energy Coalition, a stakeholder group formed by SCDHEC to study compliance choices, are “investigating the multistate option and how this approach could help address cost and reliability concerns.”

When CPP rules are finalized, regulators and utility operators can use PowerOptInvest to create investment portfolios reflecting the rules and positioned to address foreseeable risks, such as market upsets.

In an example analysis, Hoppock and Echeverri used the model to examine the economics of constructing a new natural gas combined cycle plant with and without energy efficiency investments given uncertainty about the direction of natural gas prices. The researchers say that similar modeling exercises can be used—by utility regulators and ratepayer advocacy groups as well as profit-maximizing utility operators—to discover the potential cost of fuel price volatility and other uncertainties and to capture the value of risk-hedging investments.

Although conceived as a tool for the electricity sector, PowerOptInvest is in fact applicable to analysis of any major capital investment beyond the power sector.

“We see PowerOptInvest being used to analyze, for example, infrastructure decisions in the water sector,” said Hoppock. 

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--Story by Melissa Edeburn