Report Finds Greater Reliance on Efficiency, Wind and Long-Term Contracts Reduces Risks and Ratepayer Costs
June 7, 2011
SOUTH ROYALTON, VT -- A Vermont Law School report released today offers a comprehensive approach to resource acquisition in the electricity sector and highlights the increasing importance of efficiency, renewables such as wind power, and long-term contracts to lower risk and costs in meeting future electricity needs.
Mark Cooper, senior fellow for economic analysis at VLS's Institute for Energy and the Environment, presented his findings at the annual meeting of the Mid-America Regulatory Conference in Rapid City, South Dakota, where he was on a panel to discuss the potential marriage between natural gas and renewables.
Cooper is available to comment at 301-807-1623 (cell) and email@example.com
"Regulators and utilities must adapt to the increasing complexity and ambiguity that resource acquisition faces in the electricity sector," Cooper said. "The core principles of prudence and least cost planning should be reaffirmed, but a resource plan for America's electricity supply in the rest of the 21st century must also:
• be hedged against risk.
• maximize options to reduce uncertainty.
• be flexible with respect to outcomes that are, at best, vague.
• be insulated against ignorance of the unknown.
The report uses four fields (financial portfolio and real option analysis, technology risk assessment, reliability and risk mitigation management, and Black Swan Theory) to build a practical framework for regulators and utilities to evaluate electricity resources. The framework offers specific advice to utilities and regulators:
• Identify the trade-offs between cost and risk and lower risk through hedging.
• Reduce exposure to uncertainty by buying time.
• Keep options open by acquiring small assets that can be added quickly.
• Minimize surprises by avoiding assets that have unknown or uncontrollable effects.
• Create systems that monitor conditions and can adapt to change in order to maintain system performance.
• Buy insurance where possible.
• Recognize that diversity is the best insurance.
• Build resilience with diversified assets by increasing the variety, balance and disparity of the resource mix.
The report applies the framework to rank seventeen resources based on the cost estimates from two well-known sources-Lazard, Wall Street and the California Energy Commission.
"The empirical analysis shows that the current utility bias in favor of large, central station facilities makes long-term commitments in exactly the wrong way for the current decision making environment," Cooper said. "It commits to assets that have high risk (e.g., fossil fuel and nuclear facilities) or create large exposure to uncertainty (large size, high capital costs, or long lead times) with technologies that have vague long-term prospects (unstable resource availability and poorly understood environmental impacts)."
"Gas has an important role to play, but the dash to gas that is developing is being significantly overdone because it unnecessarily exposes ratepayers to risk, uncertainty and vagueness," Cooper said. "A more balanced approach that begins with a great deal more efficiency and locally abundant renewables such as wind-that can be acquired more quickly and in much smaller increments with long term fixed-price contracts-yields lower expected costs when combined with natural gas."
Cooper has 30 years of public policy analysis experience and has given 350 pieces of expert testimony before federal and state legislatures and regulatory bodies on behalf of consumer, low-income and public-interest groups, people's counsels and attorneys general.
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