Many public voices today want the government to simply mandate lower energy prices. It is this kind of temper-tantrum-as-policy that makes the Middle Ages seem so, well, medieval, and reminds us...
Real Green Costs
Valuing risk reduction for renewables and DSM.
note that for DSM, RRV becomes part of the avoided-cost calculation alongside fuel, emissions, generation, and transmission. Utilities have an additional incentive to consider RRV as part of their net-benefit calculation because they share directly in the net benefits accrued. Also, for renewable energy, RRV factors directly into the portfolio analysis to assess these resources versus traditional fossil generation options.
RRV is measured from the expected distribution of energy supply costs. RRV is determined by quantifying the value of the risk premium (RP) for each supply portfolio in terms of the areas from the mean to the upper tail of the cost distribution. In Figure 1 , RP is shown as the orange dotted area corresponding to the upper half of the cost distribution. Integrating the upper half of the cost distribution determines the value of risk similar to the functions employed to value options based on the uncertainty in commodity prices or the calculation of the value of insurance premiums.
The RRV corresponds to the difference in RP of the portfolio with DSM measures and renewable energy ( i.e., the green portfolio) from the base portfolio ( see Figure 2 ). That illustrates energy supply cost distributions for two respective energy supply portfolios: 1) a base case without DSM and renewable energy (shown in orange in Figure 2 ); and 2) a second case including DSM and renewable energy (shown in blue). These two distributions of costs correspond to an integrated electric utility with a peak demand of approximately 2,000 MW. The expected (mean) annual cost of supply for the base portfolio is $605 million, whereas the green portfolio costs increase by $15 million in place of new traditional generation of the base portfolio. Although the expected cost of supply for the green portfolio exceeds that of the base portfolio, the potential for cost increases are substantially mitigated by the green portfolio’s reduced exposure to market price volatility. The 95th percentile of cost for the green portfolio is $830 million versus the base portfolio cost of $900 million.
The RP for the two energy portfolios are $100 million and $75 million for the base case and green portfolios, respectively. The RRV of the green portfolio corresponds to the difference in the risk premium of $25 million, which approximately corresponds to the difference between the orange hatched area and the blue hatched area to the right of the mean in Figure 2 . By directly including the RRV as a credit to the green portfolio, the initial preference for the lower expected cost-based portfolio is reversed, with the green portfolio providing a net $10 million benefit of value ( i.e., derived by subtracting the $15 million difference in expected costs from the $25 million benefit from the reduced RP).
Calculation of a portfolio’s RP and RRV moves beyond traditional risk metrics to provide a discrete risk value that can be used to directly modify calculated portfolio costs. The incremental savings represented by the RRV can be credited against portfolio costs. The analytic value of the RRV over traditional risk metrics