Growth in variable resources creates an increasing need for demand response and fast-ramping generation. The right market design can bring both.
Before You Build It: Think Green
The complex financial analysis that has driven renewable energy investment has become the standard for assessing all potential electric generation investments.
expanding and modifying the nation’s existing infrastructure, present additional challenges for accurate valuations and economic analysis. Specifically, there is tremendous uncertainty regarding how the emerging costs and benefits associated with meeting portfolio requirements and carbon limitations will be treated by public utility commissions for rate-making purposes.
Additionally, a new generation of alternative-energy facilities, such as advanced coal and gasification technologies, each with its own set of tax incentives, is evolving. As was the case with renewable-energy investment, these are new and expensive technologies, but when supported by tax incentives, and the potential avoided costs in a carbon-restricted market, these facilities will be economically viable in certain circumstances. Other new technologies being developed to mitigate the potential carbon liabilities associated with conventional fuels, such as carbon capture and sequestration facilities that currently are prohibitively expensive, and the possibility of incentives for these technologies also is on the horizon.
So the Right Choice Is …
While this confluence of new financial drivers dramatically has shifted the economic landscape of generation investment, it is still important to keep the impact of these factors in context. The projected demand for additional electricity has been well documented, and given the limited resources available for putting renewable generation projects on line, a significant amount of traditional generation will be built in the near future. The proposition here is not that renewable generation or a mix of renewable and alternative conventional-fueled facilities would be a better generation source, would necessarily be more cost effective, or would even be available in every setting in the future. Rather, because of the tremendous shift in the incentive and regulatory framework for building electric generation that is occurring, an investor in this industry now is faced with a more difficult and complex analysis in assessing the economics of developing and building new electric-generation capacity. Going forward, investment analysis must begin to fully integrate all of these potential financing mechanisms and weigh the relative costs and values of those against all open investment options, including, specifically, source technology, if an investor hopes to achieve optimal economic efficiency.
1. A renewable portfolio standard, or RPS, is a regulatory framework that requires that a set percentage of electricity sold to end users be derived from renewable generation sources. Renewable energy credits (also called RECs, green tags, tradable renewable certificate, or renewable energy attributes) are the mechanism by which a jurisdiction measures compliance with a renewable portfolio standard. In some states, RECs are bundled with the renewable energy and a retailer must buy an adequate supply of actual renewable sourced power to meet the requirements. Other RECs are market-based trading instruments that can be bought and sold independently of the actual renewable sourced electricity. An example would be a state that set the portfolio requirement at the retail electric sale—an REC in that state would be created every time 1 MW of renewable sourced electricity was produced. The retail seller of electricity then would buy the megawatts of electricity to resell, as well as the REC that would be used to meet the portfolio requirement,