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Getting It Right: The Real Cost Impacts of a Renewables Portfolio Standard

Fortnightly Magazine - February 15 2000

of the fossil portfolio increases rapidly but returns rise very slowly.[Fn.19]

Should we require generators to add more PV or wind resources?

Recall that in Figure 2, by adding T-bills an investor could improve portfolio performance (from V to K in Figure 2) without increasing risk. Similarly, increasing the deployment of PV/wind at $0.12 per kilowatt-hour reduces the risk and/or cost of the generating portfolio from its present values. This important result is not recognized widely; here is how it happens. Wind and solar sources represent 0.2 percent of 1998 U.S. capacity and 0.1 percent of the generation, according to data from the Energy Information Administration. Increasing the generation of these resources to about 3 percent, for example (Figure 3-Detail, Point L), reduces cost (i.e., raises return) as compared to U without increasing risk! (The actual cost reduction is around 1.5 percent.) This result stands in stark contrast to the estimates produced by the previously cited RPS analyses, which consistently find that renewables raise overall costs.

On the other hand, renewables can be used entirely to reduce portfolio risk: The renewables proportion can be increased to about 6 percent (Point K), which produces the same yield (i.e., cost) as U but cuts risk by about 10 percent. In short, given our underlying cost assumptions, any operating point between K and L, i.e., 3 percent-6 percent renewables, improves the current U.S. generation mix.

Moving from our current operating point U to points such as K or L involves two strategies, which could be implemented simultaneously:

a. Increase gas to the optimal mix M (28 percent of gas-coal),[Fn.20] and

b. Increase renewables to the range of 3 percent-6 percent of total generation.

The capacity proportions for coal, gas and renewables under this strategy now can be derived as follows. At K, the portfolio contains 94 percent of mix M (72 percent-28 percent coal-gas) plus 6 percent renewables. The capacity proportions for coal, gas and renewables therefore would be 0.94 x 28 percent gas + 0.94 x 72 percent coal + 6 percent PV/wind = 26 percent gas + 68 percent coal + 6 percent PV/wind. At point L, by comparison, the portfolio consists of roughly 27 percent gas, 70 percent coal and 3 percent PV/wind.

Why not simply operate at M with no renewables?

As discussed above, the move to L or K from our present position at U (Figure 3, detail) is accomplished by first moving to M, the optimal fossil mix. There is no particular gain from this move, which simply involves accepting greater volatility in return for better yields (lower costs). It cannot be said that such a move leaves us "better off" in an economic sense. While some people prefer the risk-return combination at M, others prefer U. (The market provides both choices, which is no different than, say, being able to choose between plump vs. lower-priced but over-ripe strawberries, Cadillacs vs. Chevrolets, or, for that mater, blue-chips vs. "tech" high-flyers.) By contrast, a move to the region between L and K does leave us better off than we are

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