Stochastic Dominance of Renewables to Replace Hydropower Under Policy Uncertainty

Abstract

Regional energy managers and decision-makers face a world where climate change is introducing uncertainty over future power generation, as well as financial impacts from potential carbon taxation. A unique opportunity to explore is the rising interest in hydropower substitution with renewable resources, either to promote ecosystem services such as increasing the survivability of migratory fish or mitigating future loss of generation due to severe drought conditions. To address these concerns, a case study of the Columbia River Basin was conducted to evaluate the substitution of four Lower Snake River dams. A multistage methodology was chosen to evaluate grid adequacy, climate change performance, and the implications of tax uncertainty on the substitution portfolios. A specialized energy model was used to provide the adequacy and input for a Monte Carlo simulation to test the impact of an uncertain tax. The outcome is a carbon tax strategy region that suggests preferences under different taxes for risk-averse decision makers, alongside adequacy and climate metrics. We conclude that policymakers should consider a carbon tax between <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> <tex-math notation="LaTeX">$\$ $ </tex-math></inline-formula> 86 and <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> <tex-math notation="LaTeX">$\$ $ </tex-math></inline-formula> 132 to incentivize a portfolio that marginally reduces emissions compared to the pre-dam removal baseline or a tax greater than <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> <tex-math notation="LaTeX">$\$ $ </tex-math></inline-formula> 135 to incentivize another portfolio that significantly reduces emissions. This study makes three important contributions: (1) it provides a methodology for evaluating electricity generating portfolios in the presence of a carbon tax, (2) it evaluates adequacy metrics for technology substitutions with intermittent alternatives and climate change impacts, and (3) it offers specific guidance for energy policy making.