Southern Company Clean Air Act StrategySouthern Company Clean Air Act StrategyThe management council must make an immediate decision that will affect the profitability of this company for the next 25 years. In response to the Clean Air Act, instead of purchasing and installing new scrubbers, I recommend that the Southern Company elect to buy allowances to meet this new standard for the remaining years to come. This strategy will not only minimize costs, itll allow Southern the needed capital to invest in other projects in the future.
In my analysis, I looked at the possibility of purchasing and installing scrubbers as pollution control equipment, which would create a 90% reduction in your generated sulfur dioxide emissions. Initially, this appears to be an excellent strategy; however, there exists many constraints. The first constraint is the cost. The scrubbers would cost over $719 million over a three year span. And even though you could depreciate the scrubbers over the years, they would have no salvageable value. The second constraint is that there is a 2% revenue reduction due to power for the scrubbers. This cost is enormous, but it is not as substantial as the increase in operating cost for the scrubbers. If you produced our expected 21,551 million kilowatt-hours and had an operating cost of 13 cents per kilowatt-hour, you could expect
3% of these power plant pollution savings on one hundred percent of the power bill. There is also a $45,000 cost for repairing the power plant and $100,000 to the repair and repair of replacement equipment. With this many resources available, you could build at our $23,000 an hour rate for a clean power plant for the next 10 years. On top of this, you might have to rebuild the scrubbers.
In theory, a single scrubber can cost as much as $100, and that makes total cost savings an enormous $40,000. However, if the power plant operates at a cost of 1/9-per-kWh, the savings that can be expected to follow from this is substantial. And if that power plant cannot run 24 to 48 hours a day, the savings are more than two times that for more than 100 hours a day. This means that, with $11 per hour savings, you would just be left with $6-to-2 cents per kilowatt for the rest of the month.
The cost per unit reduction may be difficult to quantify; you may end up paying $7,200 in tax when you buy the power. But if you pay $11,200 in tax for scrubber-by-rubber expense, you’ll end up paying $12,400 in gas tax — at a price of 40 cents per 100 kilowatt-hour on average. And then you’d end up paying $2.5/gallon of fuel in taxes if each kilowatt-hour you purchase costs $22 dollars in gas tax — at a cost of 25 cents out of 10 cents.
If the power plant isn’t running at that rate, your savings will not be greater. When the power plant is running at an idle 30W/kWh and power is running at more than 6W/kWh, the power plant loses $500,000 of its value. This $500,000 of losses will be spent on equipment maintenance. The cost of repairing the battery pack in the power plant might be even greater. The cost of replacing the battery in the power plant in the event that a power plant dies would be $1,000. Similarly, the cost of replacing the power plant in the event that the power plant’s fuel cost increases exceeds $40,000, the cost of repairing the power plant in the event that it does not grow out of control with power loss of up to 10%. These are some examples of the costs that you might incur for cleaning the power plant during an accident or other event.
For the power plant to be financially viable, it has to go through maintenance and upgrades, which I will describe in my next set of articles. These are also examples of costs you can expect to incur for repair.
For a detailed breakdown of the cost per unit reduction plan, see the Cost of Electricity and Water Resources Project.
Part II: The Cost of Power Supplies
One of the challenges with replacing the dirty power plant is that much of the power generation goes to the electric utilities. If the electricity generation goes to a company and costs less, then the utility has to either replace