Page 15 - CARILEC CE Journal Nov 21

Figure 2. Effects of hedging on the tariff for utility customers in the
hotel, industrial and commercial sectors in St. Lucia in 2011
Source: LUCELEC monthly newsletter (2011)
Utilities who do not wish to engage in the intricacies of hedging themselves, or lack the capacity to do so, can
choose to outsource to an external organization such as a bank or firm. While such an arrangement may be
useful in obtaining price stability, the advantages for the utility are limited. This is because the firm may not
actively seek the utility’s best interests in terms of managing costs but may rather view them as just another
client. There is, however, another way that utilities may be able to manage the risks associated with fuel prices.

DISCUSSION
This is where renewable energy (RE) comes in. When used for power generation and strategically connected
to the grid in terms of capacity and location, RE can reduce the volume of fossil fuel needed and hence reduce
exposure to the associated price volatility. Figure 3 illustrates this using randomized market fuel price data with
an example of a utility in the process of increasing its RE capacity. The graph shows that although fluctuations
are still present, fuel costs decrease when there is a higher share of RE in the electricity mix, and those peak
costs are reduced significantly. In addition to mitigating some of the volatility in fuel costs, RE options are
generally less expensive than operating, existing, fossil fuel resources, resulting in overall cost savings.

Figure 3. Effect of Fluctuating Fuel Prices on Fuel Costs for a Caribbean Utility

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