Potential Benefits of
an 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
Source: NYMEX
Environmental Energy Technologies Division • Energy Analysis Department
Feb-09
Mar-08
Mar-07
Mar-06
Mar-05
Apr-04
Apr-03
Apr-02
Apr-01
Apr-00
Apr-99
Apr-98
Apr-97
Apr-96
Apr-95
Apr-94
Apr-93
Apr-92
Apr-91
Apr-90
Natural Gas Futures Price ($/MMBtu)
Gas Prices Have Increased
10
9
8
7
6
5
4
3
2
1
0
Gas Price Volatility Has Increased
90%
80%
Annualized 90-Day Volatility
252-Day Moving Average
70%
60%
50%
40%
30%
20%
10%
0%
Aug-90
Mar-91
Sep-91
Apr-92
Oct-92
May-93
Dec-93
Jul-94
Jan-95
Aug-95
Mar-96
Oct-96
Apr-97
Nov-97
Jun-98
Dec-98
Jul-99
Feb-00
Aug-00
Mar-01
Oct-01
May-02
Dec-02
Jun-03
Annualized Standard Deviation
100%
Environmental Energy Technologies Division • Energy Analysis Department
Gas Contributes to Electricity Price Volatility
• The cost of natural gas accounts for more than
half the levelized cost of new gas-fired
generation, and more than 90% of operating
costs
• Gas-fired “peakers” often set the market
clearing price in New England
• VT currently not all that exposed to wholesale
market…still true in 10 years?
Environmental Energy Technologies Division • Energy Analysis Department
LBNL’s Accounting for Fuel Price Risk…
Question: How to compare fixed-price renewable to
variable-price gas-fired generation?
to
Current Practice:
• Cost of renewables is often compared to cost of gas-fired
generation based on uncertain fuel price forecasts
Best Practice:
to
• Cost of renewables should be compared to cost of gasfired generation based on a guaranteed fuel price
How do guaranteed forward gas prices compare to
uncertain gas price forecasts??
Environmental Energy Technologies Division • Energy Analysis Department
Swap Prices Exceed Price Forecasts
November 2000
Natural Gas Price ($/MMBtu)
4.1
3.9
3.7
Implied Forward Swap Curve (Enron)
3.5
EIA Forecast (AEO 2001)
3.3
3.1
2.9
2.7
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Enron and EIA
Environmental Energy Technologies Division • Energy Analysis Department
2010
Swap Prices Exceed Price Forecasts
November 2001
Natural Gas Price ($/MMBtu)
4.7
4.2
3.7
3.2
Implied Forward Swap Curve (Enron)
2.7
EIA Forecast (AEO 2002)
2.2
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Enron and EIA
Environmental Energy Technologies Division • Energy Analysis Department
2011
Futures Prices Exceed Price Forecasts
November 2002
Natural Gas Price ($/MMBtu)
4.0
3.8
3.6
NYMEX Futures Price (Annual Average)
EIA Forecast (AEO 2003)
3.4
3.2
3.0
2003
2004
2005
2006
2007
Source: NYMEX and EIA
Environmental Energy Technologies Division • Energy Analysis Department
2008
Physical Prices Exceed Price Forecasts
November 2002
Natural Gas Price ($/MMBtu)
4.6
4.4
4.2
4.0
3.8
3.6
3.4
Williams/DWR Physical Supply Contract
3.2
3.0
2004
EIA Forecast (AEO 2003)
2005
2006
2007
2008
2009
Source: Williams and EIA
Environmental Energy Technologies Division • Energy Analysis Department
2010
Premiums Range from $0.4-0.8/MMBtu
0.7
0.9
0.6
0.8
0.7
0.5
0.6
0.4
0.5
0.4
0.3
0.2
0.1
0.3
Enron - AEO 2001
Enron - AEO 2002
NYMEX - AEO 2003
Williams - AEO 2003
Average (by contract term)
Average (all contract terms)
0.2
0.1
0.0
0.0
2-Year
5-Year
6-Year
Contract Term
7-Year
10-Year
Environmental Energy Technologies Division • Energy Analysis Department
Implicit Premium (¢/kWh)
Implicit Premium ($/MMBtu)
1.0
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
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
Renewables Displace Natural Gas
Theory: As renewables displace gas-fired generation,
demand for natural gas declines, and the price of gas falls
Author
EIA
EIA
EIA
EIA
EIA
EIA
UCS
Tellus
Tellus
Tellus
ACEEE
Reduction in US
Gas Wellhead
Implicit
Date of
Other
Gas Consumption Price Reduction Inverse Supply
Study Scope
RPS
Measures?
Quads (%)
$/Mcf (%)
Elasticity
1998 National 10%-2010
No
1.1 (3.4%)
0.32 (12.9%)
3.8
2001 National 10%-2020
Yes
1.5 (4.0%)
0.27 (8.4%)
2.1
2001 National 20%-2020
Yes
3.9 (10.8%)
0.56 (17.4%)
1.6
2002 National 10%-2020
No
0.7 (2.1%)
0.12 (3.7%)
1.8
2002 National 20%-2020
No
1.3 (3.8%)
0.56 (6.7%)
1.8
2003 National 10%-2020
No
0.5 (1.5%)
0.00 (+0.05%)
0.0
2001 National 20%-2020
Yes
10.5 (29.7%)
1.57 (50.8%)
1.7
2002
RI
10%-2020
No
0.1 (0.4%)
0.00 (+0.04%)
-0.1
2002
RI
15%-2020
No
0.2 (0.7%)
0.01 (0.4%)
0.6
2002
RI
20%-2020
No
0.3 (0.8%)
0.03 (0.8%)
1.0
2003 National 6.3%-2008
Yes
1.4 (5.5%)
0.77 (22.1%)
4.0
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
Impact of VT RPS (1%/yr to 10% in 2015) on Natural Gas Prices in New England
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
RPS-Induced Change in Avg Gas Price to All Sectors (2001 $/MMBtu)
0.00
VT Savings in 2015 (2001$):
-$0.2 million
(-$0.3/MWh)
-0.01
-$0.4 million
(-$0.6/MWh)
-0.02
-0.03
-0.04
-0.05
-0.06
-0.07
-0.08
Inverse Supply Elasticity = 0.5
Inverse Supply Elasticity = 1.0
-$0.8 million
(-$1.2/MWh)
Inverse Supply Elasticity = 2.0
Inverse Supply Elasticity = 3.0
Assumptions:
-$1.2 million
(1) AEO2003 is the reference case
(-$1.8/MWh)
(2) Renewables displace gas-fired generation 1-to-0.66
(3) Gas-fired heat rate = 7,500 Btu/kWh
(4) Range of 4 different inverse supply (wellhead) elasticities presented
(5) A change in the avg wellhead price flows through 1-to-1 to a change in the avg national delivered price
(6) NE delivered gas prices are impacted more than national delivered prices: by a multiple that drops from 2.5 to 1.25
(7) For VT Savings in 2015, assumes 15% of VT power needs met by gas (residential and C&I consumption data from EIA)
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
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)
State:
MA
RI
NY
NY
Study: La Capra/SEA
Tellus
ICF/Joint Utilities
NYSERDA
RPS: +4% by 2009 +13.4% by 2020
+8% by 2013
+7.5% by 2013
CO2 (million tons/year)
-2.6
-0.6
-1.5 to -1.8
-5.9
SO2 (thousand tons/year)
-7.9
not measured
+0.5
-14.0
NOX (thousand tons/year)
-1.2
not measured
+0.4 to -2.3
-8.0
Mercury (tons/year) not measured
not measured
0
not measured
“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