In recent years, large amounts of natural gas-fired power generation capacity have been added to the nation’s portfolio of power generation assets. In addition, a number of analyses and market projections imply that this trend will continue for a variety of reasons, including large and growing supplies of natural gas due to the "shale boom" along with commensurate low natural gas prices and imposition of increasingly stringent environmental regulations related to coal-fired power generation. This potential increased reliance on natural gas to meet our nation’s electricity needs is causing some concern among electric industry executives, electric power generation planners, electricity customers, and electricity market regulators.
Many market participants and observers are keenly aware of recent periods during which the electric sector in the United States became heavily reliant on a single generation technology for the dominant share of electricity production and/or capacity additions, and they remember the problems that resulted from this situation. These concerns have led some observers to develop a concept referred to variously as "generation portfolio diversity" or "generation fuel diversity." This concept implies that it is valuable to have a broad diversity of power generation technologies and fuels included in the mix of national and local power generation sources.
In the past, generation capacity expansion decisions have been evaluated based on their impact to company profitability in the case of non-regulated generation companies or the cost of serving customers for regulated companies. These criteria still apply and are appropriate to be used to address capacity expansion in the face of concerns related to power generation diversity.
This report describes analytic methods that can be used by electric industry participants to improve decision making with regard to new generation capacity additions. It builds upon a 2013 Electric Power Research Institute (EPRI) report (3002001214) that argued that the decision problem faced by electricity planners pertaining to "generation diversity" is similar to those faced in the past related to "capacity expansion." The analysis approach described in this 2013 EPRI report was analogous to the use of portfolio diversification strategies used to increase expected gains and minimize risks in an equity stock portfolio.
In this report, we describe the results of two different types of generation expansion analyses we conducted in 2014. First, we analyze how different types of new capacity may impact the levelized cost of electricity associated with potential development of a single new power generation asset. Second, we analyze the potential addition of new generation capacity to an existing portfolio of generation assets, and track the profitability of the assets as they participate in a regional power market. For this analysis, EPRI evaluated what types of changes in the underlying economic and regulatory assumptions might alter the decision in the base case to build new natural gas-fired generation and instead invest in other generation technologies.