Economics of Energy Production

Towards Fair Comparisons:

Developing Economic Valuation and Contribution Tools for Renewable and Non-Renewable Energy Resources

One day workshop at Michigan State University

Objective: Develop a comprehensive and practical framework for comparing the economic value and contribution of renewable and non-renewable energy resources using economic methods and tools

Format: One-day workshop among a small group (~15) of experts with similar experience in economic analysis of different energy resources.

Date: May 7, 2024

Location: Rooms 1110Q and 1110S, STEM Teaching & Learning Facility, Michigan State University, East Lansing, MI, 48824 

Synopsis: Electricity generation from renewable energy sources has become increasingly important in the U.S. and abroad as technologies evolve, and countries transition to low-carbon and self-sufficient energy economies. Renewable energy has emerged as an important focus of investment, clean energy, and potential climate change mitigation strategies. As states increasingly adopt policies for achieving climate goals by regulating the technologies that are allowed to supply electricity to the grid, there is an emerging need to develop an apples-to-apples comparison framework among different energy sources. The existential feasibility of a particular power-generating technology, like biomass, and its financial/economic feasibility, depend to a large extent on its policy-defined categorization. In many states, biomass power or industrial fuel/heat is the only outlet for chips containing bark obtained from harvest residues and hazardous fuel reduction treatments. Yet, increasingly, biomass power plants are closing under pressure from utilities to match cheap natural gas costs and in the absence of subsidies and tax credits available to other renewable power generation industries. In some states, such as New York, energy generated from biomass does not qualify as renewable, thus limiting its consideration as a source of clean energy and depriving biomass power plants of access to incentives available for other renewable energy sources. The biomass power industry is an important part of many states' forest-based economies in the U.S. and may be under-recognized for its role in providing market-based outlets for hazardous fuels materials, low-value forest products, and mill or manufacturer residues.

The policy debate on subsidies, tax incentives, and financial assistance for different renewable energy sources has become highly polarized. There is a need to bolster the center by exploring pathways through which we can develop consensus on a methodology for conducting apples-to-apples economic comparisons among fossil fuel and renewable power generation industries among economists. The various subsidies, regulations, caps, credits, carbon footprints, and land use trade-offs should be considered.

Regarding the economic valuation of power generation facilities in the U.S., we aim to explore an understanding of the different valuation methods adopted, such as the discounted cash flow approach, financial options approach, and LCA/TEA. We will identify the pros and cons associated with each method. For instance, the levelized cost of electricity is a commonly used cost measure to compare the economic competitiveness of various energy generation technologies. However, the U.S. Energy Information Agency does not recommend a direct comparison of such measures across technologies. Instead, joint consideration of the levelized cost of electricity and its avoided cost is thought to be a better measure for gauging the economic competitiveness of various energy generation technologies. Given this, we would like to understand the viewpoint of different energy economists on appropriate valuation methods for assessing the economic competitiveness of power generation facilities.

We hope that people will engage critically with this provocation and contribute to a useful specification of what the economist can and should do to develop comparable economic valuation and contribution analysis for renewable and non-renewable resources. We expect the invited participants to contribute 4-5 pages of written responses to this provocation. The synthesis of these responses and discussion from the workshop will be developed into a white paper or a peer-reviewed journal article, and all participants contributing to the workshop will be co-authors.

Output: To recommend a procedure or approach for conducting economic valuation and contribution analysis of renewable and non-renewable energy resources.

Funding source: This workshop is part of a study funded by the Michigan Department of Natural Resources, Forest Resources Division for the U.S. Department of Agriculture Forest Service 2021 LSR (Landscape Scale Restoration) grant.

Please contact the event coordinator and host team if you have any questions. Details are in the Host and Participants page.