Government policy and industrial investment in cogeneration in the USA

This paper presents an economic analysis of investment in cogeneration in selected industries and assesses the impact of investment tax credits policy directed at cogeneration. We use a dynamic partial equilibrium model that is derived under the assumption that investment in cogeneration occurs if and when the annualized cost of the incremental investment is less than the annualized benefits of avoiding electricity purchase from the utilities. Policy simulations show that investment in cogeneration is economically feasible even without the tax credits; the tax credit policy marginally increases investment in cogeneration. The welfare distortions and revenue loss to the US Treasury are also estimated. External benefits required per barrel of oil to offset distortion costs would come to $2.83.