Revisiting the 'Buy versus Build' Decision for Publicly Owned Utilities in California Considering Wind and Geothermal Resources Page: 2 of 6
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simply to compare the costs of buying wind or geothermal power to the costs of building and
operating wind or geothermal capacity under various scenarios. Of course, the ultimate decision
to buy or build cannot and should not rest solely on a comparison of the levelized cost of
electricity. Thus, in addition to quantitative analysis, we also include a qualitative discussion of
several important features of the "buy versus build" decision not reflected in the economic
analysis.
This article summarizes a longer LBNL report intended to inform the actions of the Public
Renewables Partnership, an organization currently comprised of representatives from publicly
owned utilities in California whose purpose is to facilitate the development of large amounts of
renewable generation to serve public power loads. The full report can be downloaded from
http://eetd.lbl.gov/ea/EMS/reports/48831 .pdf.
2. Model Description
Our cash-flow model consists of a spreadsheet containing projected cash flows for representative
geothermal and wind projects from 2002 (when construction occurs) through 2022 (i.e., a
twenty-year operational life). Projected cash flows are based on input assumptions that are
derived from industry standards and through discussions with wind and geothermal developers.
Because we are concerned solely with ownership comparisons rather than technology or resource
comparisons, in some cases we have standardized or simplified our input assumptions in order to
facilitate comparison.
" For NUG ownership and sale (i.e., the "buy" options), the model uses an iterative process to
optimize the capital structure (i.e., debt/equity ratios) and minimize the price of electricity in
order to meet minimum debt service coverage ratio (DSCR) and internal rate of return on
equity (IRR) constraints. The model outputs are the fixed price of energy (escalating at
1%/year) that a NUG would be willing to offer a utility through a long-term (20-year) PPA,
as well as the optimized capital structure. For ease of comparison, we convert this price
stream into a nominal levelized cost of electricity using the utility's 5.0% cost of debt as the
discount rate.
" Under public utility ownership (i.e., the "build" options), the model simply adjusts the price
of electricity to where projected revenues equal operating expenses and debt payments on a
yearly basis (i.e., to where the DSCR equals one). Model output represents the nominal
levelized cost of energy from the facility over a 20-year period, assuming a utility discount
rate of 5.0%.
Table 1 lists the input assumptions for each of the four supply options. See the full report for a
detailed discussion of these assumptions.2
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Bolinger, Mark; Wiser, Ryan & Golove, William. Revisiting the 'Buy versus Build' Decision for Publicly Owned Utilities in California Considering Wind and Geothermal Resources, article, December 11, 2001; Berkeley, California. (https://digital.library.unt.edu/ark:/67531/metadc786789/m1/2/: accessed March 29, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.