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Gas-fired Generation: Can Renewable Energy Reduce Fuel Risk?

Fortnightly Magazine - May 1 1997

between them. (See the first block of data in Table 2. High-risk environmental and fuel cost distributions are assumed.) The mean present value of revenues in the regulated scenario is $21 million greater with wind than without wind, suggesting that this case is still likely to be slightly more expensive for ratepayers, despite the possibility of CO2 regulation. However, the standard deviation in revenues is $464 million less, indicating that the wind investment is much less risky. By contrast, the mean return on equity is virtually the same in both cases.

Different views of the data provide additional insights into the effects of replacing the gas-fired plant with the wind plant. (Figure 1 shows a scatter plot of the difference in present-value revenues for the wind and gas cases in the regulated market scenario.) It is important to note that when the present value of revenue requirement in the gas case is high, the wind case tends to be less expensive than the gas case (points fall in the lower half the chart). In turn, when the present value of revenue requirement is low, the converse is true. (Note: This graphically illustrates the point that wind plants can act as an insurance policy or hedging strategy against fossil-fuel risks.)

Yet another view of the data (see Figure 2) shows the differences between the mean revenues and standard deviations of the gas and wind cases for each year of the study period. As expected, the wind case starts out more expensive than the gas case on average, but then becomes less expensive as fuel prices rise and the higher wind plant capital investment is paid off. In every year but the first, the standard deviation for the wind case is lower than that of the gas case by amounts ranging up to $150 million.

Poolco; Bilateral Contracts. The unregulated market is more complicated to model than the regulated market. The risks seen by the utility and its customers depend on many factors, such as the nature and degree of competition, corporate structures, the role of regulation, the design and functioning of the power pool, and the contractual relationships between the utility company and its

customers and fuel suppliers. We cannot incorporate all such factors into the model. Instead, we consider two scenarios that illustrate a plausible range of sensitivity to risk: a power pool (Poolco) scenario and a fixed-price contract (bilateral) scenario.

The critical difference between the two scenarios is that, in the power pool, TU Electric's plants compete against comparable fossil, nuclear, and renewable plants based on short-term variable

operating costs. Capacity payments are proportional to loss-of-load probability, as in the U.K. Pool. In the fixed-price contract scenario, the price of power is fixed for periods ranging from one to five years. In both cases, the capacity build decisions are assumed the same as in the regulated market scenario. The results can be summarized in a table. (See the bottom two blocks of data in Table 2.) It is important to note, first, that the power pool scenario poses greater risks for