Valuation of Water and Emissions in Energy Systems

Pricing, incentives, and economic penalties (monetization) are common approaches to control and improve water usage and total direct greenhouse gas emissions (externalities) of energy and other industrial systems. We discuss that homogenous pricing for externalities provides limited flexibility for controlling and improving environmental impacts as different systems are affected differently by externalities. We use trade-off analysis and scalarization techniques to determine marginal prices for water and carbon by taking into account the actual physical and technical limits, stakeholders, and real-time conditions of the system at hand. We demonstrate that high water and emission prices might be needed to control and improve the current system of fixed price for externalities. In addition, a combined heat and power (CHP) system providing hot water and electricity to a real residential building complex is undertaken as case study to demonstrate and describe these concepts. For this CHP system, we found that carbon prices should be increased by a factor of 14 and water prices by a factor of 217 to achieve an optimal compromise between cost, water use, and emissions. Our results point towards the need to consider alternative pricing schemes such as resource bidding (as is done with electricity) that better capture technology trade-offs and push systems towards their efficiency limits.