The Short-Run Value of Nonutility-Generated Electricity

The Public Utilities Regulatory Policies Act (PURPA) of 1978 and the associated rulings of the Federal Energy Regulatory Commission (FERC) obligate the electric utilities to purchase electricity generated by qualifying facilities at the utility's avoided cost of alternative energy. They include no further indication of how this cost should be calculated and leave the actual implementation to the state's regulatory authorities. In this work, a computer simulation model was developed to study the short-run value of electricity that is generated by private entities and offered for sale to the electric utilities. Using the production simulation theory, the model determines how a set of generation units at different locations can be dispatched in the most economic way to meet a certain electric demand. The model then calculates the short-run value of nonutility-generated electricity by assuming the variable operational costs of electricity production will remain unchanged for any penetration of nonutility power. Several penetration scenarios were simulated using a hypothetical utility case. The short-run value of nonutility-generated electricity was found to increase with increased penetrations up to a maximum level before it starts decreasing as a result of the displacement of intermediate and base load capacity. Moreover, neither of the utility's marginal fuel costs calculated before and after the inclusion of the nonutility resources in the utility generation mix proved to capture the short-run value of the nonutility-generated electricity.