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

The last two decades have seen a dramatic increase in the market share of independent, nonutility generators (NUGs) relative to traditional, utility-owned generation assets. Accordingly, the ''buy versus build'' decision facing utilities--i.e., whether a utility should sign a power purchase agreement (PPA) with a NUG, or develop and own the generation capacity itself--has gained prominence in the industry. Very little of this debate, however, has focused specifically on publicly owned electric utilities, and with few exceptions, renewable sources of supply have received similarly scant attention. Contrary to historical treatment, however, the buy versus build debate is quite relevant to publicly owned utilities and renewables 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 article looks at a publicly owned utility's decision to buy or build new renewable energy capacity--specifically wind and geothermal power--in California. To examine the economic aspects of this decision, we used 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. We focus on wind and geothermal 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 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 ''buy versus build'' decision not reflected in the economic analysis