Page 15 - CARILEC CE Journal CENOV 2021
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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.

                   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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