How to Evaluate Economic Benefits of an Energy Option

An earlier article in this series – Evaluating Benefits of Energy Options – showed that a second step in a decision-making process for adopting a renewable energy option might look decision-makers evaluating benefits of energy options available for adoption.  In this article, I’m going to show how anyone can evaluate the economic benefits of any energy option.

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An energy option might be said to deliver economic benefits to the extent that economic cost savings (in dollars) from adopting the option exceed the economic cost (in dollars) of adopting the option. When energy cost savings exceed economic costs, the option might be said to “pay for itself.”

Decision-makers might evaluate economic benefits of an energy option by modeling and/or measuring energy cost savings in dollars ($) per unit of electric power service in kilowatt-hours (kWh), per unit of heating or cooling service in kWh or gigajoules (GJ), or per unit of transportation service in person∙kilometers (person∙km) or kilogram-of-freight∙kilometers (kg_FRT∙km), supplied or saved by the energy option.

Economic benefits of an energy option might look like (1) the difference between (a) the sum of the economic costs incurred to adopt and operate the option over its expected service life (“Incurred Costs”), and (b) the sum of the economic costs of already-adopted energy options that are avoided through adoption of the energy option (“Avoided Costs”), and (2) dividing that difference by the sum of the energy service (electric power, heating & cooling, transportation) supplied or saved by the energy option over its expected service life, as shown in Figure 1:

Economic benefits of an energy option for electric power uses might look like this:

Decision-makers evaluating economic benefits of an energy option for electric power uses might look like this:

Hawaii Story: A 19 MW photovoltaic (PV) generation plus 70 MWh battery energy storage system (BESS) is a renewable energy option for electric power uses that might or might not deliver economic benefits. Decision-makers in Hawaii have entered into and approved a 25-year power purchase agreement (PPA) under which the electric utility on the island of Kauai is buying dispatchable renewable energy from such a system at an incurred cost of about $.1085 per kilowatt-hour (kWh). For each $.1085 per kWh of incurred cost paid for that dispatchable renewable energy, the utility (and its member-customers) are saving about $.16490 per kWh of avoided costs for diesel fuel that the utility does not have to burn to generate a kWh of dispatchable energy for its member-customers. The difference of about -$.0564 per kWh between the $.1085 per kWh of incurred costs being paid and the $.1649 per kWh of avoided costs being saved might be said to be an economic benefit of the 19 MW PV generation plus 70 MWh battery energy storage renewable energy option:

Economic benefits of an energy option for heating & cooling uses might look like this:

Decision-makers evaluating economic benefits of an energy option for heating & cooling uses might look like this:

Hawaii Story: A solar water heater (SWH) is a renewable energy option for heating & cooling uses that might or might not deliver economic benefits. A SWH in Hawaii having a total installed cost of $6,625 and an expected service life of 15 years might be said to have an incurred cost of $442 per year. If the SWH avoids using 2065 kWh per year of electric power — at a cost of $.347 per kWh — that otherwise would be needed to heat the water to the desired temperature, the SWH might be said to have an avoided cost of $717 per year. If the difference of -$275 — between the incurred cost of $442 per year and avoided costs of $717 per year – is divided by the 2065 kWh of electric power saved per year, then the SWH option might be said to deliver an economic benefit of -$.133 per kilowatt-hour:

For purposes of evaluating economic benefits (and environmental preservation benefits) of demand-side options for mobile uses, such demand-side energy options might be divided into 2 categories – transport & infrastructure options that move a person, and transport & infrastructure options that move a kilogram (kg) of freight, as shown in Figure 6:

Economic benefits of an energy option for mobile uses that moves a person might look like this:

Economic benefits of an energy option for mobile uses that moves a kilogram of freight (kg_FRT) might look like this:

Decision-makers evaluating economic benefits of an energy option for mobile uses that moves a person might look like this:

Hawaii Story: A battery-powered electric-drive light duty passenger vehicle (EV) is a demand-side transport option for mobile uses that might or might not deliver economic benefits. The annual incurred electric power cost of driving such an EV in Hawaii has been calculated to be about $1,106 per year. The annual avoided gasoline cost of driving a typical gasoline-powered vehicle in Hawaii has been calculated to be about $1,509 per year. If the difference of -$403 — between the incurred cost of $1106 per year and avoided costs of $1509 per year – is divided by the average 9285 vehicle∙miles (14943 vehicle∙kilometers) traveled each year by a vehicle in Hawaii, then the EV option might be said to deliver an economic benefit of -$.043 per vehicle∙mile (-$.027 per vehicle∙kilometer):

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To evaluate economic benefits of an energy option, decision-makers might use a computer model called a “production cost model.” A production cost model simulates the economic costs (in dollars) of flows of an energy service (electric power, heating & cooling, transportation) on an energy service system (an electric power grid, a heating and/or cooling system, a transportation system) serving a locality or region, as the energy service system presently exists.

Decision-makers might use such a production cost model to determine:

• what energy services supplied or saved
• in what amounts by what available energy options
• serve user demand for those energy services at the lowest total dollar cost (called the “Total Economic Cost”) for the producers and users of those energy services.

Hawaii Story: Decision-makers in Hawaii have created and validated two sets of production cost models – General Electric Multi-Area Production Simulation (MAPS) models, and Energy + Environmental Economics (E3) RESOLVE models – that simulate the economic costs of electric power flows on the electric power grids for the islands of Oahu, Hawaii and Maui. A “HOMER” production cost model also has been created that simulates the economic costs of electric power flows on the electric power grid for the island of Kauai.

Decision-makers might evaluate the economic benefits of an energy option by using an evaluation method that looks like this:

(1)       Create and validate a “base case” for a production cost model of an energy service system that assumes that economic costs of energy service flows on an energy service system remain as they presently exist (adjusted for known future changes in such economic costs)

(2)       Identify an energy option available for adoption and having specified incurred economic costs (in dollars)

(3)       Assume that the energy option being evaluated is adopted with the energy service system as it presently exists

(4)       Input assumptions – into the base case of the production cost model – about the incurred economic costs (in dollars) of the energy option

(5)       Use the production cost model to calculate the Total Economic Cost (in dollars) of the base case

• with the energy option, and
• without the energy option

(6)       Subtract the Total Economic Cost without the energy option from the Total Economic Cost with the energy option, and divide that difference (in dollars) by the amount of energy service (kWh, GJ, person∙km, kg_FRT∙km) supplied or saved by the energy option, to obtain a figure expressed in dollars per unit of energy service ($ per kWh, $ per GJ, $ per person∙km, $ per kg_FRT∙km).

Here’s a summary of such a method for evaluating economic benefits of an energy option for electric power uses:

An energy option might be said to deliver an economic benefit to the extent that the figure expressed in dollars per unit of energy service is negative (reflecting savings from avoided economic costs in excess of incurred economic costs) because Total Economic Cost with the energy option is less than Total Economic Cost without the energy option. An energy option that delivers an economic benefit might be said to “pay for itself” because its avoided economic cost savings exceed its incurred economic costs.

An energy option might be said to deliver an economic detriment to the extent that the figure expressed in dollars per unit of energy service is positive (reflecting incurred economic costs in excess of avoided economic costs) because Total Economic Cost with the energy option is more than Total Economic Cost without the energy option. Such an energy option might be said to be adopted at a net increase in the economic costs borne by users of the energy service.

Hawaii Story: Decision-makers in Hawaii created and validated Energy + Environmental Economics (E3) RESOLVE production cost models for electric power flows on the electric power grids serving the islands of Oahu, Hawaii and Maui. E3 proposed using the E3 RESOLVE production cost models to evaluate economic benefits delivered by utility-provided equipment-based distribution-level mitigation options through a method that looked like this:

(1) identify a plausible utility-provided equipment-based distribution-level mitigation option having a specified economic cost

(2) input assumptions — into a selected “base case” of the E3 RESOLVE model — about:

• the economic value of “grid services” (system performance benefits) provided by the mitigation option,
• the economic value of avoided costs attributable to the mitigation option, and
• the economic cost of the mitigation option,

(3) use the E3 RESOLVE model to calculatethe “Total Resource Cost” (Total Economic Cost) of the selected “base case”

• with the mitigation option, and
• without the mitigation option

(4) calculate the difference (in dollars) between the Total Resource Cost of the selected base case with the mitigation option, and the Total Resource Cost of the selected base case without the mitigation option; that difference is a net economic benefit to the extent that the Total Resource Cost with the mitigation option is less than the Total Resource Cost without the mitigation option; that difference is a net economic detriment to the extent that the Total Resource Cost with the mitigation option is more than the Total Resource Cost without the mitigation option.

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An energy option delivers an economic benefit to the extent that avoided economic costs attributable to the option are greater than its incurred economic costs (color-coded green in Figure 11 below). Such an option creates economic wealth — and “pays for itself” – because the economic cost savings from adopting and using the option exceed the economic costs of acquiring and using the option.

An energy option delivers an economic detriment to the extent that its incurred economic costs are greater than avoided economic costs attributable to the option (color-coded red in Figure 11 below).  Decision-makers might be expected to resist adopting options that deliver an economic detriment if other options are available that deliver both performance benefits and an economic benefit.

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If decision-makers are in consensus on a method for evaluating economic benefits of available energy options, they next might ask themselves, “What might evaluating environmental preservation benefits of an energy option look like?”

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Got questions about how you can swiftly achieve 100% renewable energy?  About how you can reverse global warming?  If you do, I hope that you will send me a message at extraordinary@erikkvam.com.

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In the next article in this Reversing Global Warming series, I’m going to show how anyone can evaluate the environmental preservation benefits of any energy option.

Thank you for reading this article.  I’m grateful for your comments.