Purchased power - hidden costs or benefits?

Journal Article · Thu Sep 01 04:00:00 EDT 1994 · Electricity Journal

DOI:https://doi.org/10.1016/1040-6190(94)90306-9· OSTI ID:35604

Kolbe, A L; Johnson, S; Pfeifenberger, J ^[1]; Weinstein, D

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1. Brattle Group, Cambridge, MA (United States)

Purchased power may provide great rewards, but it carries associated risks which must be identified and accounted for. Better decisions about existing and future resource options will result if utilities and regulators accurately assess these risks and benefits. Purchased power is an increasingly important component of utilities` supply portfolios. Today, over 4,200 independent power projects with more than 55,000 MW of capacity are in operation and approximately 93,000 MW are under development. Long-term purchases of power from non-utility generators (NUGs) may be the major source of new power in the future. An Edison Electric Institute study forecasts that NUGs will supply 30 percent of incremental generating capacity between 1991 and 2000, and other studies forecast that over 50 percent will by supplied by NUGs. While some utilities` main concern is the negotiation of contracts to meet future capacity needs, others are faced with the challenge of renegotiating existing contracts that, although deemed beneficial at the time, turned out to be excessively expensive. If sound decisions about existing and future purchased power agreements (PPAs) are to be made, both utilities and their regulators must learn to assess these risks and net benefits more accurately. The relevant question for assessing a particular PPA is not whether purchased power increases or decreases a utility`s risk relative to utility-owned generation, but how much risk the PPA imposes on the utility. Whether it involves prospective PPAs or the renegotiation of existing contracts, such an assessment requires an explicit analysis of who bears what risks at what cost. This article analyzes the risks of purchased power agreements and their implications for electric utilities, NUGs and regulators, by exploring the following three questions: do utilities bear risks of purchased power? should utilities be compensated for purchased power risks they bear? are there implications for resource planning?

• OSTI ID: 35604
• Journal Information: Electricity Journal, Journal Name: Electricity Journal Journal Issue: 7 Vol. 7; ISSN ELEJE4; ISSN 1040-6190
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
COMPETITION
COST BENEFIT ANALYSIS
ELECTRIC POWER INDUSTRY
ELECTRIC UTILITIES
REGULATIONS
RISK ASSESSMENT
SMALL BUSINESSES
SUPPLY AND DEMAND