Integrating Renewable Energy Technologies in the Electric Supply Industry: A Risk Management Approach

We investigated the potential of controlling risk in the electric supply industry by owning renewable energy technologies. We identified uncertainties that are of concern to utilities and other power producers, including fuel prices, demand, environmental regulations, capital cost, supply, and market structure. We discuss qualitatively how the attributes of renewable energy technologies are ofvalue to various types of plant owners in light of these uncertainties. We developed methods to quantify the risk-mitigation value of each of the attributes. Explicit consideration was given to the attributes of fuel costs, environmental costs, lead-time, modularity, location flexibility, availability, initial capital costs, and investment reversibility. We demonstrated how to apply the methods.The more-detailed examples included the following four cases: The first example is a municipal utility's investment in wind; this resulted in a reduction in fuel price uncertainty, a reduction in environmental cost uncertainty, and enabled the utility to respond to demand uncertainty using the wind plant's modularity and short lead-time. The second example covers a utility's expansion of thegrid- to nongrid-connected areas using customer-owned photovoltaic (PV) when there is demand uncertainty. The third example is a utility's use of distributed PV generation to respond to demand uncertainty on the transmission and distribution (T&D) system. The last example is a renewable aggregator's use of wind technologies and the project off-ramps that they provide. In general, our researchconcludes that renewable energy technologies, especially modular technologies such as wind and PV, can provide decision-makers with physical risk-management investments. In particular, we provide an overview of project evaluation methods as background information, describe how renewables can be used to manage known risks faced by various types of plant owners in the electric supply industry,develop methods to calculate the risk- mitigating value of the various attributes, and apply the methods using simple examples.