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Executive Summary
This study represents an
independent analysis of prospects and means for implementing a Renewable Portfolio
Standard (RPS) of 20% by 2017 at the Los Angeles Department of Water and Power
(LADWP).
When taking into account
the declining cost of renewable energy and the steadily rising cost of natural
gas, along with the benefits of maintaining a diversified energy portfolio containing
fixed price resources, investing in renewable energy becomes a smart business
decision. This study finds that implementing an RPS will not raise rates for
LADWP customers, and may in fact save money in the long run.
Establishing a renewable
target of 20% by 2017, the level recently established by state lawmakers for
investor owned utilities, will enhance reliability and may prevent future rate
increases by diversifying away from natural gas.
Moving to 20% renewable
energy will require 6,209 GWh of generation from renewables by 2017, based on
an expected net energy load of 31,040 GWh. This report compares the cost of
meeting that amount of energy sales through renewable energy with the cost of
meeting it through conventional energy, and finds that renewables can be substituted
at comparable costs.
Principal Findings of
this Report:
1. There is a good chance
that renewable energy will not impose any additional costs above conventional
energy sources. Taking the conservative numbers used in this report, it is possible
that factoring in renewable energy will lead to a net savings for Los Angeles.
Expected costs for conventional energy sources run from $44/MWh to $67/MWh.
These are conservative numbers, and do not account for the risk of future carbon
regulation. Meanwhile, expected costs for renewable energy sources run from
$38/MWh (10-year landfill gas project) to $52/MWh (20-30 year geothermal or
wind project).
2. The report also evaluates
the Worst-Case Scenario in which renewable energy costs exceed those for conventional
energy, and concludes that these costs would average no more than $5/MWh of
above-market rates over the first 10 years of an RPS. This equates to $11 million/year,
or 0.49% of LADWP revenues at current rate levels. For illustration, if these
costs were funded from rate increases alone, the average consumer would see
their monthly bill rise by only 38.5 cents.
3. DWP has numerous options
for funding any worst-case scenario additional costs attributed with meeting
a 20% RPS by 2017 without raising rates, including:
•
Reallocate
14% of public goods funding away from lower priority programs, including research,
development, and demonstration (RD&D);
•
Slightly
increase operations and maintenance (O&M) productivity over time;
•
Apply
profits from the sale of 10% of the Mohave coal plant toward the RPS;
•
Accept
a 3-4% reduction in equity return, which was $257 million in 2001-2002;
•
Change
the line rate for connecting new construction to the energy grid to value energy
efficiency.
4. Meeting a 20% by 2017
standard may save Los Angeles money. Recent forecasts project the cost of natural
gas to rise steadily over time. In this climate, fixed-price renewable energy
resources are projected to have prices below natural gas resources in the long
run. Furthermore, renewables serve as a hedge against natural gas prices, providing
portfolio diversity and actually decreasing demand for natural gas. LADWP currently
relies on natural gas power plants to generate 25% of its energy.
Figure 1: Cost Comparison: Natural Gas vs. Renewable Energy
(click on the chart
below for a larger version)
Conclusion
In sum, LADWP can generate
and provide the energy Los Angeles needs to live and work from renewables without
materially impacting its financial outlook. The City should move ahead quickly
to increase its use of renewable energy to 20% over the next 15 years with a
minimum 1% ramp up each year, and should buy this energy like any other conventional
generation resource. Doing so will provide Los Angeles with added energy reliability,
price stability, and independence from fossil fuels.
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