The U.S. electricity sector faces significant uncertainty as it makes large capital investments to replace aging infrastructure and to comply with forthcoming environmental regulations. Near- and long-term uncertainties include fuel prices, demand growth, and environmental and climate policy. Utilities and regulators must manage these risks in order to maintain reliable electricity at affordable prices. Energy efficiency investments can provide an important tool for managing risk by reducing exposure to uncertain costs, deferring major generation investments, and reducing environmental emissions. This paper describes an example analysis of an investment in a natural gas power plant with and without energy efficiency under natural gas price uncertainty and the value of efficiency as a hedge against a price spike. The example presented illustrates a method to quantify the value of energy efficiency as a hedge against a variety of risks.
Nicholas Institute for Environmental Policy Solutions