06/02086 Accounting for fuel price risk when comparing renewable to gas-fired generation: the role of forward natural gas prices: Bolinger, M. et al. Energy Policy, 2006, 34, (6), 706–720.

Abstract

Accounting for Fuel Price Risk When Comparing Renewable to Gas-Fired Generation: The Role of Forward Natural Gas Prices Mark Bolinger, Ryan Wiser, and William Golove* Unlike natural gas-fired generation, renewable generation (e.g., from wind, solar, and geothermal power) is largely immune to fuel price risk. If ratepayers are rational and 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. This article, which is adapted from a longer Berkeley Lab report that can be accessed at http://eetd.lbl.gov/ea/EMS/reports/53587.pdf, was funded by the Assistant Secretary of Energy Efficiency and Renewable Energy of the U.S. Department of Energy under Contract No. DE- ACO3-76SF00098. *Lawrence Berkeley National Laboratory, MS 90-4000, One Cyclotron Road, Berkeley, CA 94720, USA. E-mail: MABolinger@lbl.gov.