Prudent Electricity Procurement by a Load Serving Entity

Motivated by the projected solar and wind capacity additions around the world, we model the energy procurement decision of a load serving entity (LSE) faced with alternatives of solar power purchase agreements (PPAs), wind PPAs, non-renewable energy forward contracts, and spot energy purchases in a wholesale electricity market with uncertain prices. Using a pseudo-data sample of over one million observations, we estimate a translog cost function to find that the LSE’s own-price elasticity estimates range from −1.87 for nighttime spot MWh demands to −13.1 for forward MWh demands. MWh demands are influenced by solar and wind capacity factors, daytime and nighttime retail sales, and spot energy price forecasts. The LSE’s optimal procurement of solar capacity is roughly twice the wind capacity, corroborating the ratios of projected solar and wind capacity additions in regions around the world. If the LSE’s existing energy mix is nearly all renewable, it becomes carbon-free when solar and wind power purchase agreements have declining energy prices or when forward energy price and spot energy price forecasts increase over time. These results imply that piecemeal policy measures can have conflicting outcomes, calling for integrated resource planning under wholesale market competition and price uncertainty.