Revisiting the “Buy versus Build” Decision for Publicly Owned Utilities in California Considering Wind and Geothermal Resources

In this report, we revive the "buy versus build" debate and apply it to the two sectors of the industry traditionally underrepresented in the discussion: publicly owned utilities and renewable energy. Contrary to historical treatment, this debate is quite relevant to public utilities and renewable because publicly owned utilities are able to take advantage of some renewable energy incentives only in a "buy" situation, while others accrue only in a "build" situation. In particular, possible economic advantages of public utility ownership include: (1) the tax-free status of publicly owned utilities and the availability of low-cost debt, and (2) the renewable energy production incentive (REPI) available only to publicly owned utilities. Possible economic advantages to entering into a PPA with a NUG include: (1) the availability of federal tax credits and accelerated depreciation schedules for certain forms of NUG-owned renewable energy, and (2) the California state production incentives available to NUGs but not utilities. This report looks at a publicly owned utility's decision to buy or build new renewable energy capacity – specifically wind or geothermal power – in California. To examine the economic aspects of this decision, we modified and updated a 20-year financial cash-flow model to assess the levelized cost of electricity under four supply options:

1. public utility ownership of new geothermal capacity,
2. public utility ownership of new wind capacity,
3. a PPA for new geothermal capacity, and
4. a PPA for new wind capacity.

Within these four options, we consider multiple sensitivity scenarios intended to inform our analysis. We focus on geothermal and wind because both resources are abundant and, in some cases, potentially economic in California. Our analysis is not intended to provide precise estimates of the levelized cost of electricity from wind projects and geothermal plants; nor is our intent to compare the levelized costs of wind and geothermal power to one another. Instead, our intent is simply to compare the possible costs of buying wind or geothermal power to the costs of building and operating wind or geothermal capacity under various scenarios. Of course, the ultimate decision to buy or build cannot and should not rest solely on a comparison of the levelized cost of electricity. Thus, in addition to quantitative analysis, we also include a qualitative discussion of several important features of the "build vs. buy" decision not reflected in the economic analysis.