Quantifying the value that energy efficiency and renewable energy provide as a hedge against volatile natural gas prices

Conference · Wed May 15 04:00:00 EDT 2002

OSTI ID:796106

Bolinger, Mark ^[1]; Wiser, Ryan; Bachrach, Devra; Golove, William

---

1. LBNL Library

Advocates of energy efficiency and renewable energy have long argued that such technologies can mitigate fuel price risk within a resource portfolio. Such arguments--made with renewed vigor in the wake of unprecedented natural gas price volatility during the winter of 2000/2001--have mostly been qualitative in nature, however, with few attempts to actually quantify the price stability benefit that these sources provide. In evaluating this benefit, it is important to recognize that alternative price hedging instruments are available--in particular, gas-based financial derivatives (futures and swaps) and physical, fixed-price gas contracts. Whether energy efficiency and renewable energy can provide price stability at lower cost than these alternative means is therefore a key question for resource acquisition planners. In this paper we evaluate the cost of hedging gas price risk through financial hedging instruments. To do this, we compare the price of a 10-year natural gas swap (i.e., what it costs to lock in prices over the next 10 years) to a 10-year natural gas price forecast (i.e., what the market is expecting spot natural gas prices to be over the next 10 years). We find that over the past two years natural gas users have had to pay a premium as high as $0.76/mmBtu (0.53/242/kWh at an aggressive 7,000 Btu/kWh heat rate) over expected spot prices to lock in natural gas prices for the next 10 years. This incremental cost to hedge gas price risk exposure is potentially large enough - particularly if incorporated by policymakers and regulators into decision-making practices - to tip the scales away from new investments in variable-price, natural gas-fired generation and in favor of fixed-price investments in energy efficiency and renewable energy.

• Research Organization: Ernest Orlando Lawrence Berkeley National Laboratory, Berkeley, CA (US)
• Sponsoring Organization: USDOE Assistant Secretary for Energy Efficiency and Renewable Energy. Office of Power Technologies. Office of Geothermal and Wind Technologies (US)
• DOE Contract Number: AC03-76SF00098
• OSTI ID: 796106
• Report Number(s): LBNL--50272
• Country of Publication: United States
• Language: English

Related Subjects

03 NATURAL GAS
DECISION MAKING
ENERGY EFFICIENCY
HEAT RATE
INTEGRATED RESOURCE PLANNING RENEWABLE ENERGY NATURAL GAS HEDGING RISK MANAGEMENT DERIVATIVES
MARKET
NATURAL GAS
PRICES
STABILITY
VOLATILITY