New Frontiers in Utility Valuation of Renewable Resources

The report argues that utilities often undervalue renewable resources by failing to account for their contribution to overall system reliability and the benefits of geographic diversification. It proposes using financial portfolio theory to minimize variability through dispersed siting and suggests that the costs of integrating intermittent renewables are relatively low compared to the risks of fossil fuel price volatility. The authors conclude that failure to apply these valuation techniques leads to unnecessary investment in conventional generation capacity.

• Intermittent renewable resources provide a non-zero contribution to system reliability, which should be measured as the amount of conventional generation capacity they can displace. This reliability value depends on the correlation between weather patterns driving the resource and the patterns driving power demand; for example, solar power in California has shown an expected load carrying capacity (ELCC) greater than 80% because the sun drives both output and peak load.
• The marginal reliability contribution of intermittent renewables decreases as the penetration rate increases, while the marginal costs of system integration rise. This suggests an optimum penetration rate exists where the marginal reliability benefit equals the marginal integration cost, increasing the economic importance of energy storage and accurate forecasting.
• Applying modern financial portfolio theory to renewable energy can reduce overall system risk and variability. Because wind resources in different geographic locations are often uncorrelated or negatively correlated, blending multiple sites into a portfolio reduces variance. For instance, a study by Eric Hirst found that the standard deviation of output from five dispersed wind farms was 30% lower than if they were co-located.
• Operational costs associated with integrating intermittent renewables—such as those for frequency regulation, load following, and unit commitment—are relatively low in practice, typically ranging between $2 and $6 per megawatt-hour. These costs are comparable to the value of carbon dioxide emissions credits at $8/ton for gas-fired plants and are significantly lower than the costs of hedging against gas price volatility.
• The failure of U.S. utilities to correctly value the capacity credit of renewables leads to the overbuilding of conventional generation capacity. Based on 6,740 MW of installed wind and solar capacity at the end of 2004 and a conservative 10% ELCC, the report estimates that U.S. utilities have overspent on generation capacity by approximately $320 million.
• Demand response (DR) can function as 'virtual' energy storage to manage intermittent variability and is generally more cost-effective than building peaking combustion turbines. Costs for DR range from roughly $30 per kW-yr for commercial buildings with energy management systems to $50 per kW-yr for residential air conditioning control.

APA

Datta, E. K., & Hansen, L. M. (n.d.). New Frontiers in Utility Valuation of Renewable Resources. RMI. https://rmi.org/app/uploads/2017/05/RMI_Document_Repository_Public-Reprts_2006-08_NewFrontiersUtilityValuation.pdf

Chicago

Datta, E. Kyle, and Lena M. Hansen. New Frontiers in Utility Valuation of Renewable Resources. RMI, n.d. https://rmi.org/app/uploads/2017/05/RMI_Document_Repository_Public-Reprts_2006-08_NewFrontiersUtilityValuation.pdf.

Wikipedia

{{cite report |last1=Datta |first1=E. Kyle |last2=Hansen |first2=Lena M. |title=New Frontiers in Utility Valuation of Renewable Resources |publisher=RMI |url=https://rmi.org/app/uploads/2017/05/RMI_Document_Repository_Public-Reprts_2006-08_NewFrontiersUtilityValuation.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{dattandnew, author = {Datta, E. Kyle and Hansen, Lena M.}, title = {{New Frontiers in Utility Valuation of Renewable Resources}}, institution = {RMI}, url = {https://rmi.org/app/uploads/2017/05/RMI_Document_Repository_Public-Reprts_2006-08_NewFrontiersUtilityValuation.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }