Accounting for Fuel Price Risk When Comparing Renewable to Gas-Fired Generation: The Role of Forward Natural Gas Prices

TitleAccounting for Fuel Price Risk When Comparing Renewable to Gas-Fired Generation: The Role of Forward Natural Gas Prices
Publication TypeReport
Year of Publication2004
AuthorsMark Bolinger, Ryan H Wiser, William H Golove
Pagination28
Date Published01/2004
InstitutionLBNL
CityBerkeley
Keywordselectricity markets and policy group, energy analysis and environmental impacts department
Abstract

Unlike natural gas-fired generation, renewable generation (e.g., from wind, solar, and geothermal power) is largely immune to fuel price risk. If ratepayers value long-term price stability, then – contrary to common practice – any comparison of the levelized cost of renewable to gas-fired generation should be based on a hedged gas price input, rather than an uncertain gas price forecast. This paper compares natural gas prices that can be locked in through futures, swaps, and physical supply contracts to contemporaneous long-term forecasts of spot gas prices. We find that from 2000 – 2003, forward gas prices for terms of 2-10 years have been considerably higher than most contemporaneous long-term gas price forecasts. This difference is striking, and implies that comparisons between renewable and gas-fired generation based on these forecasts over this period have arguably yielded results that are biased in favor of gas-fired generation.

LBNL Report Number

LBNL-54751

Refereed DesignationUnknown