U.S Study Examines ‘Buy versus Build’ Decision for Renewables

A new analysis from the U.S. government has potentially far-reaching and timely implications for the adoption of renewable energy resources in that country.

BERKELEY, California, US, 2001-12-05 [SolarAccess.com] “Public power entities in California and across the nation are increasingly realizing that renewable energy should play a larger role in their portfolio,” says William Golove, co-author of ‘Revisiting the ‘Buy versus Build’ Decision for Publicly Owned Utilities Considering Wind and Geothermal Resources.’ The report was prepared for public utilities in California, and evaluates the relative advantages and disadvantages of renewable project ownership versus contracting for power from a non-utility generator. “Our analysis helps to inform publicly owned utilities on one of the first questions they will need to answer – whether to buy or build the new renewable capacity they desire,” explains Golove. The report takes into account tax incentives and incentives available to non-utility generators from the California Energy Commission, as well as low cost debt and REPI payment available to a publicly-owned utility. “Publicly owned utilities interested in adding wind and geothermal energy to their portfolios would be well served to carefully consider their project development and ownership options,” adds co-author Mark Bolinger. “There are very real and quantifiable differences between buy and build that relate mostly to the tax-free status of public utilities and their inability to take advantage of tax-based and California state incentives for renewable energy.” The report was funded by Golove, Bolinger and Ryan Wiser of the Department of Energy’s Lawrence Berkeley National Laboratory, to assist municipal utilities that are interested in adding renewable electricity to their portfolios. The focus of the report is on wind and geothermal resources, and provides an economic evaluation of the ownership options. As non-utility generators continue to increase capacity in an electricity market that formerly was dominated by utilities, the ‘buy versus build’ decision has become more important. A cash-flow model is used to calculate the levelized cost of energy for wind and geothermal under both options, to clarify the debate over whether a utility should sign a power purchase agreement with a NUG, or develop and own the generation capacity itself. The analysis suggests that, under the most likely case for the availability of incentives, a public utility in California would be better off economically by purchasing wind power rather than building and owning new capacity itself. In this scenario, public utility ownership of geothermal capacity enjoys a small advantage over a PPA arrangement. The margins are not always large, and the authors note that opposite conclusions could be reached by altering a few assumptions of the model. “The ultimate decision to buy or build cannot and should not rest solely on a comparison of the levelized cost of electricity,” concludes Wiser, noting that several considerations not reflected in the economic analysis are equally important. The report supports the purchase of power over utility-owned generation, due to the high risk of cost overruns in construction and operation of renewable facilities, which could “easily erode any financing advantages such utilities enjoy,” it notes. However, the U.S. geothermal industry is lobbying to become eligible for the same federal production tax credit given to the country’s wind power industry, which the authors agree would make the ‘buy’ option for geothermal relatively more attractive.

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