Potential Benefits of an RPS in Vermont

Potential Benefits ofan RPS in Vermont Mark Bolinger Lawrence Berkeley National Laboratory MABolinger@lbl.gov (603.795.4937) VT RPS Collaborative Meeting Montpelier, VT October 1, 2003 Environmental Energy Technologies Division • Energy Analysis Department

Potential Benefits of an RPS • Mitigates Fuel Price Risk • Reduces Natural Gas Prices (to all sectors) • Reduces Wholesale Power Prices (through “bid stack effect”) • Displaces Emissions & Mitigates Future Environmental Compliance Risk • Promotes Local Economic Development Environmental Energy Technologies Division • Energy Analysis Department

Gas Prices Have Increased Environmental Energy Technologies Division • Energy Analysis Department

Gas Price Volatility Has Increased Environmental Energy Technologies Division • Energy Analysis Department

Gas Contributes to Electricity Price Volatility • The cost of natural gas accounts for more than half the levelized cost of new gas-fired generation, and more than 90% of operating costs • Gas-fired “peakers” often set the market clearing price in New England • VT currently not all that exposed to wholesale market…still true in 10 years? Environmental Energy Technologies Division • Energy Analysis Department

to to LBNL’s Accounting for Fuel Price Risk… Question: How to compare fixed-price renewable to variable-price gas-fired generation? • Current Practice: • Cost of renewables is often compared to cost of gas-fired generation based on uncertain fuel price forecasts • Best Practice: • Cost of renewables should be compared to cost of gas-fired generation based on a guaranteed fuel price How do guaranteed forward gas prices compare to uncertain gas price forecasts?? Environmental Energy Technologies Division • Energy Analysis Department

Swap Prices Exceed Price Forecasts Environmental Energy Technologies Division • Energy Analysis Department

Futures Prices Exceed Price Forecasts Environmental Energy Technologies Division • Energy Analysis Department

Physical Prices Exceed Price Forecasts Environmental Energy Technologies Division • Energy Analysis Department

Premiums Range from $0.4-0.8/MMBtu Environmental Energy Technologies Division • Energy Analysis Department

Implications • Whether these premiums represent “hedge value” or something else (e.g., biased forecasts) is debatable, but does not change implications: Use forward prices, not forecasts, when comparing gas-fired to renewable generation • Synapse VT cost analysis captured some of this: • Used current NYMEX strip as the basis for the 2010 gas price input to the combined-cycle COE calculation • But did not account for fuel prices beyond 2010… • Ideally, would just use long-term wholesale electricity forwards (if they existed) Environmental Energy Technologies Division • Energy Analysis Department

Renewables Displace Natural Gas Theory: As renewables displace gas-fired generation, demand for natural gas declines, and the price of gas falls Inverse elasticities range from –0.1 to +4.0, averaging +1.7 (estimate from literature is +1.25) Environmental Energy Technologies Division • Energy Analysis Department

Quantifying the Impact LBNL’s “Simplified Method” (for NEMS): • Survey implicit inverse price elasticity of supply from model output and economics literature • Study relationship between wellhead and delivered price changes, both nationally and regionally • Inject renewables in each NEMS region to determine what they displace With this basic information, we can get a rough idea of the impact of a state RPS on regional gas prices (without having to run the model!) Environmental Energy Technologies Division • Energy Analysis Department

VT RPS May Reduce NE Gas Prices Environmental Energy Technologies Division • Energy Analysis Department

Bid Stack Effect Theory: Renewables with low operating costs will bump higher-cost marginal resources out of the “bid stack,” leading to lower clearing prices • 2 studies of NY RPS measure this: • Joint Utilities: -$1/MWh by 2013 • NYSERDA: -$1.3/MWh by 2013 • Synapse VT cost analysis does not account for potential changes in bid stack Environmental Energy Technologies Division • Energy Analysis Department

Environmental (Air Quality) “Cap and trade” programs for SO2 and NOX cloud the picture: • Emissions displaced by renewables may simply be “added” elsewhere (to get back to the cap) • While total emissions may therefore remain at the cap, the cost of compliance should be lower Also reduces risk of future envtl regs (e.g., carbon tax)! Environmental Energy Technologies Division • Energy Analysis Department

Economic Development • Synapse NY study (for RETEC) provides a good survey of the literature; REV has its own VT-specific analysis • Note: Most economic development studies to date pertain to wind development, but Synapse VT RPS analysis shows biomass and hydro may dominate…applicability? Environmental Energy Technologies Division • Energy Analysis Department

References • La Capra, Sustainable Energy Advantage (SEA). 2000. Massachusetts Renewable Portfolio Standard Cost Analysis Report. • ICF Consulting (for Joint Utilities). 2003. Report of Initial Analysis of Proposed New York RPS. • NYSDPS, NYSERDA, SEA, La Capra. 2003. New York Renewable Portfolio Standard Cost Study Report. • Synapse (for RETEC). 2003. Cleaner Air, Fuel Diversity, and High-Quality Jobs: Reviewing Selected Potential Benefits of an RPS in New York State. • ACEEE (with EEA). 2003. Impacts of Energy Efficiency and Renewable Energy on Natural Gas Markets. • LBNL. 2003. Accounting for Fuel Price Risk: Using Forward Natural Gas Prices Instead of Gas Price Forecasts to Compare Renewable to Natural Gas-Fired Generation • Tellus. 2002. Modeling Analysis: Renewable Portfolio Standards for the Rhode Island GHG Action Plan. • A number of national studies by EIA and UCS Environmental Energy Technologies Division • Energy Analysis Department

Potential Benefits of an RPS in Vermont