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NOTiCEThis report was prepared as an account of work sponsored by an agency of the United States government.Neither the United States govemmenr nor any agency thereof, nor any of their employees. makes any warranty, express or implied, or assumes any legal liabiri or responsibility for the accuncy, completeness. or usefulness of any information, apparatus, produd, or process disclosed, or represents that its use would not infringe privatety owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessariiy constitute or impiy its endorsement, recommendation, or This research evaluates how investments in renewable energy technologies can mitigate risks in the electric supply industry. It identifies risks that are known to be of concern to utilities and other power producers. These risks include uncertainty in fbel prices, demand, environmental regulations, capital cost, supply, and market structure. The research then determines how investments in renewables can mitigate these risks. Methods are developed to calculate the value of renewables in terms of their attributes of fbel costs, environmental costs, lead-time, modularity, availability, initial capital costs, and investment reversibility. Examples illustrate how to apply the methods.
RISK-MITIGATING ATTRIBUTESA frequently cited attribute of renewables is that they have no fbel costs. As a result, there is no uncertainty associated with fitture fitel prices. This research estimates the value of eliminating fbel price uncertainty by evaluating what it would have cost to enter into a long-term, fixed price fbel contract such as a natural gas contract. This transaction has a direct cost and an indirect cost. The direct cost is the present value cost of the fbel contract with the discount rate being the firm's debt rate. The indirect cost is the cost associated with changes in the firm's capital structure because such a contract is comparable to taking out a loan and has characteristics that are similar to debt financing.
Environmental costsRenewable energy technologies tend to have minimal costs associated with environmental legislation. This results in a benefit of renewables relative to fossil-based plants. Environmental costs incurred by a fossil-based plant owner fall into two categories. First, there is the added cost of building the fossil-based plant to satisfj, current environmental standards. Second, there are the potential costs that the fossil-based plant owner might incur in the future due to environmental standards that have not yet been established. While the added cost to satisfy current standards is typically included in the initial capital cost of the fossil-based plant, potential fbture costs are not. This research suggests how to calculate these potential costs, and thus the relative benefit associated with...
