[BETA] Fortnightly

Some in Congress would link customer choice with a portfolio standard. How would that play in a wholesale power market where gas turbines rule the roost?

By Michael C. Brower and Brian Parsons

WHAT KINDS OF POWER PLANTS WILL

get built in a deregulated electric industry? If recent history offers any guide, utilities and independent power companies will succumb to the traditional wisdom and invest in gas-fired combustion turbines and combined-cycle plants. Sound reasons may exist for doing so. The plants are less expensive than conventional steam plants. They put less capital at risk. Combined-cycle units have become very efficient, further reducing the cost. Moreover, natural gas prices are low and seem destined to stay that way for years.

But these attractive characteristics of gas technology should not blind power companies to the value of a diverse base of generating resources. For instance, what happens if gas prices rise unexpectedly? Also, the United States has been inching closer to making binding commitments to reduce greenhouse gas emissions, which could increase costs for owners of all fossil-fuel-burning plants. Lastly, electricity demand may become much more difficult to predict in a competitive market. That could make all large power plants (em even gas plants (em risky investments.

Diversifying the resource base by investing in renewable energy sources (em and in particular, wind plants (em offers an appealing strategy for managing such risks. Wind plants consume no fuel, can be built in relatively small increments with short construction lead time and generate no air pollution or greenhouse gases. These benefits, in fact, are among the main motivations for a provision of Rep. Schaefer's electricity restructuring bill (H.R. 655). The provision, the Renewable Portfolio Standard (RPS), requires the electric industry to meet rising targets for renewable energy use: 2 percent in 2000 rising to 4 percent in 2010.

We performed a study comparing the effects of investing in a gas-fired versus a wind power plant and learned that wind energy investments can cut risk in a variety of situations.

Study Findings:

A Role for Renewables

The logical question to ask is how much risk-reduction value can wind energy provide. Will it be enough to tip the balance against less-expensive, gas-fired power plants? Or will it prove to be a minor factor?

We addressed these questions by comparing the effects of investing in one of two resource options, a 400-MW, gas-fired, combined-cycle plant and a 1600-MW wind power plant. (We assumed that the two plants had equal firm capacity.) The case study utility was Texas Utilities Electric, a large investor-owned company serving an area with abundant windy land. The uncertain inputs included fuel prices, environmental regulations (specifically, CO2 controls), wind plant output, conventional plant availability and load growth. We considered both the change in expected cash flow, and the value of changes in the risk to cash flow (measured by variance), resulting from these uncertainties.

Three different market scenarios were examined: 1) traditional regulation; 2) an unregulated spot market or power pool (modeled after the U.K. Pool); and 3) an unregulated market in which power is traded