Price is not the only economic variable to consider in deciding what kind of generation a utility should build. Different kinds of power have different risks associated with them. This is important even if we set aside for the moment the climate risk associated with fossil fuels (e.g. the risk that Miami is going to sink beneath the waves forever within the lifetime of some people now reading this). It’s true even if we ignore the public health consequences of extracting and burning coal and natural gas. As former Colorado PUC chair Ron Binz has pointed out, risk should be an important variable in our planning decisions even within a purely financial, capitalistic framing of the utility resource planning process.
Utility financial risk comes largely from future fuel price uncertainty. Most utility resource planning decisions are made on the basis of expected future prices, without too much thought given to how well constrained those prices are. This is problematic, because building a new power plant is a long-term commitment to buying fuel, and while the guaranteed profits from building the plant go to the utility, the fuel bill goes to the customers. There’s a split incentive between a utility making a long-term commitment to buying fuel, and the customers that end up actually paying for it. Most PUCs also seem to assume that utility customers are pretty risk-tolerant — that we don’t have much desire to insulate ourselves from future fuel price fluctuations. It’s not clear to me how they justify this assumption.
What would happen if we forced the utilities to internalize fuel price risks? The textbook approach to managing financial risk from variable commodity prices is hedging, often with futures contracts (for an intro to futures check out this series on Khan Academy), but they only work as long as there are parties willing to take both sides of the bet. In theory producers want to protect themselves from falling prices, and consumers want to protect themselves from rising prices. Mark Bolinger at Lawrence Berkeley National Labs took a look at all this in a paper I just came across, entitled Wind Power as a Cost-effective Long-term Hedge Against Natural Gas Prices. He found that more than a couple of years into the future and the liquidity of the natural gas futures market dries up. In theory you could hedge 10 years out on the NYMEX exchange, but basically nobody does. Even at 2 years it’s slim!
PEAK COAL REPORT: U.S. COAL “RESERVES” ARE INCORRECTLY CALCULATED, SUPPOSED 200-YEAR SUPPLY COULD RUN OUT IN 20 YEARS OR LESS
Federal Estimates Overstate Reserves by Including Coal That Cannot Be Mined Profitably; Production Already Down in All Major Coal Mining States… And Utility Consumers Are Facing Rising Energy Bill Prices.
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WASHINGTON, D.C. – October 30, 2013 – America does not have 200 years in coal “reserves” since much of the coal that is now left in the ground cannot be mined profitably, according to a major new report from the Boulder, CO-based nonprofit Clean Energy Action (CEA). The CEA analysis shows that the U.S. appears to have reached its “peak coal” point in 2008 and now faces a rocky future over the next 10-20 years of rising coal production costs, potentially more bankruptcies among coal mining companies, and higher fuel bills for utility consumers.
The PEW Charitable Trusts Environmental Initiatives Clean Energy Program released this infographic earlier this month that shows how the future of Clean Energy policy matters to the tune of $1.9 Trillion. The evidence for the continued need for a Clean Energy Action Plan builds. We thank PEW for this valuable insight and validation of some of the work we accomplish at CEA.
International Energy Agency’s 2012 WORLD ENERGY OUTLOOK reports on key elements of the world-wide energy equation, ending with a hard look at the future of the world’s water resources. Analysis of global energy trajectories projects more than doubling the use of water by 2035. “(This amount is) equal to the residential water use of every person in the United States over three years, or 90 days’ discharge of the Mississippi River.”
Already-constrained global water resources will be impacted by expected increases in use of more water-intensive energy production methods for gas, oil, coal and biofuels. These effects could be compounded by the fact that much of the water used in these methods will not returned to its source.
Future planning for growth in the key areas of energy production, population and economic development will be essential to managing vulnerable global water resources. Implementation of fuel-free, low-water use clean, renewable energy technologies could be a bright part of the future’s picture.
In September 2012, Ceres published a report discussing the effects that the increasing number and severity of storms are having on insurance providers, consumers and the broader economy in the United States. Drought, fires, hurricanes, flooding and winter storms are all key discussion topics. In 2011, insured damage costs totaled $44 billion, the second highest only to those from 2005 when hurricanes Katrina, Rita, and Wilma occurred, causing insured damage costs to total $60 billion (pg 10). Below is a graph from the report which represents the natural disaster trends in the United States, showing that the number of events has generally been increasing since 1980.