How to justify green power without apologizing for the price.
Policymakers have shown considerable interest in the concept of a renewable portfolio standard (RPS), and how it might affect the cost of energy.
The RPS would require electricity providers to include a small amount of renewables-based power - typically less than 3 percent or 4 percent - in their resource mix. Several recent analyses estimate the costs associated with RPS requirements[Fn.1] and draw similar conclusions: They find that any additional costs incurred in attaining the desired levels of renewable energy are "minimal"[Fn.2] as compared to an all-fossil portfolio. This finding is then used to justify portfolio standards as a reasonable means of accelerating the diffusion of renewables, which is seen as a socially desirable, national objective. The message reads like an apology. With "hat in hand," these advocates tell the policy-makers, in effect, "Promoting renewables is a good idea, which will not cost too much."
In reality, however, that message gets it wrong - it sells renewables short. The prediction that renewables will raise overall generating costs flies squarely in the face of portfolio theory, a well-established part of modern finance.
Indeed, the standard RPS cost analysis arrives at this result by focusing on the direct cost of investing in renewables while ignoring the other important aspect - the favorable effect on portfolio risk that results because the costs incurred for renewable generation are generally fixed over time. In effect, we can think of renewable energy as essentially riskless,[Fn.3] which allows us to consider more properly the RPS concept using a finance-oriented analysis that weighs fuel price risk as well as the overall weighted-average generating cost.