A summary of Tom Linquist's conversation with Tom Fanning, Southern Company CEO, on strategy and investment. Full podcast available.
Real Green Costs
Valuing risk reduction for renewables and DSM.
Resource planners are faced with complex choices for developing cost-effective and robust energy supply portfolios. These choices are complicated by uncertainties inherent in future fuel and emissions costs. In the summer of 2008, retail energy providers with supply primarily from wind generation had a substantial cost advantage over gas-fired generation. In the summer of 2009, though, gas prices plummeted in the wake of the recession. Reversing the previous trend, this shift causes wind generation to appear more costly relative to gas-fired generation.
Dramatic swings in market prices are inevitable in today’s competitive energy markets. Recognizing that consumers of energy are risk averse, there exists a real and measurable value to resource choices that reduce the uncertainty in energy supply costs. By applying advanced analytics that achieve higher levels of prudent portfolio management, the value of the risk avoided through integration of renewable energy sources and demand-side management (DSM) can be directly quantified.
DSM and renewable energy sources have unrealized and unmeasured value to reduce energy supply risk. The inherent absence of fuel requirements and emissions of these resources removes exposure to market prices and provides a latent, yet quantifiable, value of avoided market risks to ratepayers. This risk reduction value (RRV) can be measured using techniques similar to those used by insurance companies to develop actuarially derived premiums. Quantifying the RRV for DSM and renewable energy, while integrating this value into the resource planning process, appropriately credits the value derived from reduced market risk exposure. For DSM programs, RRV provides a directly measureable net benefit, along with more easily measured avoided fuel, capacity, emissions, transmission and distribution expenditures.
Numerous factors give rise to uncertainty in power supply costs. These risks primarily manifest themselves as volatility in market prices for power, fuel and emissions allowances. Further, market risks are magnified by volumetric uncertainty. Various unforeseeable, stochastic factors, such as weather and unit outages, as well as long-term factors such as economic growth and transmission congestion, contribute to volumetric uncertainty.
DSM measures and renewable energy technologies by their very nature tend to mitigate market risks and volumetric uncertainties. Once a DSM measure is in place, market exposure decreases proportional to the respective avoided energy. Renewable energy mitigates risk by producing power without consuming fuels that typically experience high degrees of market price volatility.
In order to remove the inconsistencies and potential biases from the resource selection process, it’s best to apply a portfolio planning methodology that explicitly measures and accounts for the RRV for DSM and renewable energy. Direct incorporation of the RRV into the resource valuation process levels the playing field with respect to traditional supply resources. Therefore, resource planners should:
• Make use of leading analytic practices to determine the latent RRV inherent in DSM and renewable energy alternatives; and
• Include RRV as a measureable program benefit for DSM and renewables.
In making these decisions, it’s important to