Modern Portfolio Theory and Electricity Generation Planning

I mentioned on Saturday that I had gotten some ideas which I planned to use in testimony before the Colorado Public Utilities Commission Least Cost Plan.

Yesterday, I ran my ideas by my friend Morey Wolfson, who is currently serving as head of the utilities program at the Govenor’s Energy Office. Like many members of the local energy advocacy community, Morey was recently tapped by Governor Ritter to help jumpstart Colorado’s New Energy Economy.

I hit the jackpot by talking to Morey, because he turned me on to the work of Shimon Awerbuch, who has been thinking along these lines for years. I’ve just read the first couple pages of his working paper Applying Portfolio Theory to EU Electricity Planning and Policy Making and I’m confident that he’s done a lot of the hard work for me. Here’s one great quote:

    Least Cost procedures are roughly analogous to trying to identify yesterday’s single best performing stock and investing in it exclusively for the next 30 years. Clearly, modern finance theory offers better tools.

Dick Kelley, are you listening? I have a hunch Ron Binz will be….

So what’s the big deal?

I almost forgot to say why this is such a big deal: According to Awerbuch and me, renewable energy and energy efficiency projects deserve a lower discount rate than conventional generation when projects are being evaluated, due to the fact that their costs have low (or even negative, in the case of solar) correlation with electricity prices in general. To use the stock valuation metaphor again, renewable resources are like low and negative beta stocks: the benefits in reduced risk to your portfolio justify paying a higher price for the same level of earnings or dividends.

What this means when evaluating utility projects is that the typically relatively high up-front costs of renewable energy resources do not have to be justified solely by their lower operating costs, but it gives a methodology for taking into account the benefits of reduced risk. This is something that renewable energy advocates have been arguing for a long time. The relatively new part is this gives us a way to quantify those benefits, and utility commissions are very fond of numbers to back up thier decisions.

2 Comments

  1. Shimon Awerbuch was killed in a small plane crash last February:

    http://www.sussex.ac.uk/press_office/media/media633.shtml

  2. Tom said

    That’s very sad to hear. Thanks for letting me and reader know.

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