Renewable Portfolio Standards – Require a Portfolio
Many utilities fulfill their renewable portfolio standards with very few options. The easy way for the utility is to do a Power Purchase Agreement (PPA). Most PPA’s are for wind as it has been the economic leader of the renewable choices. Essentially, the utility typically requires the commission to approve the agreement. Once the commission agrees the PPA becomes a cost pass thru. Given the numerous market structures throughout the country, the cost recovery is done through various mechanisms. In the end, the rate payer will pay whether they like it or can afford it. The worst form of cost pass thru is where the utility puts the cost in the distribution rates. This obscures the tracking of actual generation cost.
Regardless of the mechanism, utilities incentives to do renewable is to avoid costly penalties which are typically paid by shareholders not rate payers. The PPA usually will not mandate the developer to a fixed amount of volume. There is a performance criteria and several demonstrated calculations proving a certain yield is very likely. However, as we all know Mother Nature offers no guarantees. I can envision a year where the sun does not shine or the wind does not blow as much as predicted/expected. This could lead to a massive short of renewable credits. In developing an Integrated Resource Plan (IRP), much focus is given to reliability. Therefore a diversity of various generation options (baseload, intermediate, peaking, and market purchases) is a typical outcome. An IRP should strive for robustness not optimal planning, since the future is quite unpredictable and electricity is a unique commodity with limited storage and particular characteristics to maintain (e.g. frequency). I can tell you from multiple experiences, when the lights are out many would gladly pay more for better reliability.
If utilities would approach their renewable portfolio standard similar to their IRP, it would suggest a balanced portfolio approach. The portfolio would give some added value to the higher upfront capital risk projects such as geothermal and biomass. These types of generation would represent the baseload of the renewable portfolio. This will allow for a consistent level of renewable regardless of weather conditions. Adding to the diversity of the portfolio in many instances, I would suggest the utility to actually invest a portion to develop and operate renewable assets versus PPA. Given the similar operating features of geothermal and biomass to fossil fuel units, they would make an ideal candidate to be owned and operated within the renewable portfolio. In the long run, the capital spend will also likely payoff for the utility shareholders. As discussed above current wind PPA’s are just passed through with all the value going to the developer. An investment in actual renewable baseload generation allows the utility to capture some return on investment.
I have much experience in the renewable world. I have served on the technical review panel of the National Renewable Energy Laboratory (NREL). In addition with my utility planning background, I can bridge the two areas to help you create a robust renewable portfolio.
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