Why Are Electricity Prices Increasing?
The Brattle Group for the Edison Foundation|June 1, 2006
This report examines the factors underlying the recent increases in electricity prices and the potential impact of these factors on the industry's financial condition. It focuses primarily on cost changes experienced over the past five years and the projected trends in these costs over the next ten years.
This report examines the factors underlying the recent increases in electricity prices and the potential impact of these factors on the industry's financial condition. It focuses primarily on cost changes experienced over the past five years and the projected trends in these costs over the next ten years.
Extract (pages 46-48)
Renewables
New renewable electricity includes, among others, wind, solar, geothermal, biomass (wood, wood waste, energy crops, and landfill methane), and small hydro. The primary advantages of renewables are low, stable operating costs and the environmental benefits of little or no air and water emissions. However, renewable technologies generally are more costly to build (on an installed $/kW basis), although construction times for wind and solar are typically shorter than for fossil-based generation capacity. While some biomass and geothermal operate as baseload capacity, wind and solar have lower capacity factors and their output is intermittent because they are based on variable resources. Renewable resources also vary quite substantially in their geographic distribution.
At this time, wind power is the most competitive renewable generating technology as its levelized cost compares favorably to the levelized cost of gas-fired generation in some areas. However, wind power cannot reliably meet peak demands because of resource intermittency. Therefore, wind capacity is less valuable to meeting system reliability and generation adequacy objectives than equivalent amounts of conventional fossil fuel generation capacity. In addition, variable output that is not readily forecasted makes wind power more challenging and costly to integrate into the power grid. This additional cost is generally considered modest at current levels of wind power generation, but may rise as greater amounts of intermittent resources are incorporated into regional electricity markets. Recognizing the need to promote greater amounts of intermittent wind resources, FERC and industry stakeholders have developed new market and operational rules to assist developers in gaining access to transmission and other market services on terms comparable to those available to conventional energy developers.
Other than traditional hydroelectric power stations, renewable energy is still a small percentage of the overall electric supply. However, recent growth rates in installed capacity have been impressive--wind capacity has been growing at about 20% per year recently--which has largely been a result of renewable requirements established at the state level and the periodic renewal of the production tax credit allowed for renewables, although there also has been increased demand from customers of utilities offering 'green' electricity for a premium rate.
Renewable Energy Standards
....It is too early to tell just how RPS poliices will contribute to electricity price increases, since many of the ambitious targets lie in the future. Similarly, experience in renewable energy credit (REC) markets and resultant price dynamics is limited to those few states with active REC markets. However, in the majority of cases, renewables (or equivalently, RECs) will be purchased at prices above the wholesale cost of conventional generation and thus will increase the overall cost of serving load in states where such policies have been enacted. The additional expenditures from mandatory renewable obligations represent additional costs that should be recovered in rates........
