Quantifying the value of investing in distributed natural gas and renewable electricity systems as complements: Applications of discounted cash flow and real options analysis with stochastic inputs

Abstract

One energy policy objective in the United States is to promote the adoption of technologies that provide consumers with stable, secure, and clean energy. Recent work provides anecdotal evidence of natural gas (NG) and renewable electricity (RE) synergies in the power sector, however few studies quantify the value of investing in NG and RE systems together as complements. This paper uses discounted cash flow analysis and real options analysis to value hybrid NG-RE systems in distributed applications, focusing on residential and commercial projects assumed to be located in the states of New York and Texas. Technology performance and operational risk profiles are modeled at the hourly level to capture variable RE output and NG prices are modeled stochastically as geometric Ornstein-Uhlenbeck (OU) stochastic processes to capture NG price uncertainty. The findings consistently suggest that NG-RE hybrid distributed systems are more favorable investments in the applications studied relative to their single-technology alternatives when incentives for renewables are available. In some cases, NG-only systems are the favorable investments. Understanding the value of investing in NG-RE hybrid systems provides insights into one avenue towards reducing greenhouse gas emissions, given the important role of NG and RE in the power sector.