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

Fortnightly Magazine - May 1 1997

for utility investment in wind energy based on risk considerations. Although this incentive is theoretically largest in a power pool, the extreme volatility of prices in such a market may serve to mask the incentive to a considerable degree. A market dominated by fixed-price contracts may be most favorable to wind, as the risk benefits will then be distributed more or less evenly between customers and utility company shareholders, giving both a modest incentive to go with wind. t

Michael C. Brower is president of Brower & Co., Andover. Mass. Brian Parsons is project manager for wind applications at the National Wind Technology Center, National Renewable Energy Laboratory, Golden, Colorado. The authors were assisted in this research by Kevin Bell, Convergence Research, Seattle; Peter Spinney, Charles River Associates, Boston; and Stephen Bernow and Max Duckworth, Tellus Institute, Boston. The authors gratefully acknowledge the support of the U.S. DOE for this research (NREL Subcontract No. TNA-5-15100-01).

1Support for these assumptions is provided in Jonathan M. Jacobs and Thomas E. Huntley, Pacific Gas and Electric Company, "Valuation of Fuel Diversity," Submitted for Hearings before the California Energy Commission (February/March 1992). Table 1. Gas vs. Wind

(Expected Risks (em Fuel Price, Load Growth, Availability, Environmental Compliance) %n2%n

Parameter Discounted at WACC %n3%n Discounted at Risk-Free Rate

Base Plan %n4%n 2 Alternate Plan %n5%n Change Base Plan Alternate Plan Change

PV of Revenues ($) 69,737 70,059 322 83,598 83,906 308

PV of Costs ($) 63,817 63,685 -132 76,674 76,469 -205

PV of Net Income ($) 5,920 6,374 454 6,924 7,437 513

Average ROE (%) 10.76 10.76 0.00 10.76 10.76 0.00

2Under expected conditions, i.e., no uncertainty in any variables.

3WACC - Weighted average cost of capital

4Base plan - 400-MW, gas-fired, combined-cycle plant

5Alternate plan - 1600-MW wind power plant

Table 2. Gas vs. Wind

High-Risk Assumptions (em by Regulatory Scenario)

Scenario Revenues ($) Costs ($) Net Income ($) ROE (%)

Mean Std. Dev. Mean Std. Dev. Mean Std. Rev. Mean Std. Dev.

Regulated Market Gas 91,159 17,503 83,629 16,337 7,530 1,843 10.70 1.14

Wind 91,180 17,039 83,154 15,846 8,026 1,857 10.71 1.11

Change 21 -464 -474 -492 496 14 0.00 -0.03

Unregulated Market Gas 100,270 23,705 88,111 17,973 12,159 7,379 21.80 11.32

Power Pool Wind 100,053 23,759 87,595 17,667 12,459 7,523 21.50 11.01

Change -216 55 -516 -306 300 144 -0.31 -0.31

Unregulated Market Gas 91,902 16,143 84,079 15,954 7,823 2,098 11.01 2.68

Fixed-Price Contracts Wind 91,984 15,755 83,609 15,474 8,375 2,085 11.14 2.47

Change 82 -388 -470 -480 552 -13 0.13 -0.21

*All figures are present values over 20 years (2003-2022) discounted at 7.5 percent, converted to 1996 dollars. Revenue and net income are in millions of dollars. Standard deviations reflect variations between iterations, not between years.

Technical Appendix Overview of the Model The model we used, Strategic Resources Planning (SRP) model, generates resource expansion plans and estimates capital and operating expenses for TU over a 20-year period. The resource plans and their estimated costs differ with each draw of uncertain inputs. For example, if gas prices increase sharply compared with coal prices in