Cogeneration of Electric Energy: the Case of Pulp and Paper Mills

This paper uses applied welfare economics to analyze the phenomenon of cogeneration of electric energy. It defines the optimum levels of energy use (and of cogeneration) by industrial firms, and shows the efficiency costs of various possible deviations from the optimum. The analysis is rooted in the case of pulp and paper mills and deals with alternatives that are realistic for that case. Data from 29 Canadian paper mills suggest that it would be both wise and prudent to mandate the purcahse by Canadian utilities of the "excess energy" (i.e., energy produced in excess of their own usage) of Canadian mills, at a price that reflects the utilities' long-run avoided cost.