Quantifying the Value that Renewable Energy and Energy Efficiency Provide as a Hedge Against Volatile Natural Gas Price

August 13, 2002 - 12:00pm
Bldg. 90

Advocates of renewable energy and energy efficiency have long argued that such technologies can mitigate fuel price risk within a utility’s generation portfolio. These arguments - made with renewed vigor in the wake of unprecedented natural gas and wholesale electricity price volatility during the winter of 2000/2001 - have mostly been qualitative in nature, however, with few attempts to actually quantify the price stability benefit that renewables and efficiency provide. In evaluating this benefit, it is important to recognize that alternative price hedging instruments are available, in particular, gas-based financial derivatives and fixed-price physical gas contracts. This seminar will describe an attempt to quantify this benefit by equating it with the cost of achieving equivalent price stability through alternative means, particularly gas-based financial derivatives (i.e., futures and swaps). Preliminary conclusions are that natural gas-fired generators have had to pay a premium of roughly 0.50¢/kWh over expected spot prices to lock in natural gas prices for the next 10 years. This incremental cost to hedge gas price risk is potentially large enough - particularly if incorporated by policymakers and regulators into decision-making practices - to tip the scales away from new investments in variable-price natural gas-fired generation and towards fixed-price investments in energy efficiency and renewable energy. For more information about this seminar, please contact: Kristina LaCommare(510) 486-4718

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