Power plant heat-rate efficiency as a regulatory mechanism: Implications for emission rates and levels

In August 2018, the U.S. Environmental Protection Agency (EPA) proposed a new policy – the Affordable Clean Energy rule – to reduce greenhouse gas (GHG) emissions from existing coal-fired electric generating units and power plants. The new rule establishes emissions guidelines, including heat-rate efficiency improvements, for states when developing plans to limit GHG emissions. Past studies have indicated that heat-rate efficiency improvements can increase electricity output, leading to a reduction in emissions rates and an increase in emissions levels – a rebound effect that can temper the emissions-reduction benefits of plant-level heat-rate efficiency. This study adds to the literature by examining data on the relationship of plant-level heat-rate efficiency on the rate and level of GHG emissions. We explored three different types of GHGs – carbon dioxide, methane, and nitrous oxide. Controlling for variation across operators, our results suggest that gains in heat-rate efficiency are associated with higher levels of all three pollutants. Specifically, we found that a ten percent increase in heat-rate efficiency led to an average seven-to-nine percent increase in the level of GHG emissions. Our analysis highlights the need to further study the full effects of heat-rate efficiency policies before such rules are enacted.