Wednesday, April 3, 2013

How Diverse Is Your State’s Electricity Generation Portfolio?

How Diverse Is Your State’s Electricity Generation Portfolio?:
Energy resource diversity in the electricity sector is important to any region’s energy portfolio. Having a range of energy options increases grid stability, reduces consumers’ exposure to price spikes in any energy source, and makes policy changes (including a price on carbon) easier to handle. While resource diversity is intuitively valuable, it’s often used as a catchphrase to defend the status quo or argue against renewable portfolio standards at the state level.
In a recent House subcommittee hearing on electricity diversity, Rep. Ed Whitfield (R-KY) spoke out in favor of a diverse energy mix, but added that “the best way to strike the right balance is through market forces – not government mandates or other market distorting policies.” In this post we’re attempting to add some rigor to the conversation by measuring the electricity generation diversity in each state over the past 20 years.
To measure generation diversity, we used the Herfindahl-Hirschman Index (HHI), which is commonly used to determine market concentration in an industry as well as economic diversity. The HHI measures the extent to which an industry is dominated by a few firms. We chose to use this index because it measures the level of concentration in an industry (or, in this case, the level of concentration in the electricity sector).
The HHI is simply the sum of the square of each market participant’s market share. The resulting value, the HHI, is a fraction between 0 and 1, which represents the competitiveness of an industry. A market with only one participant — who would have 100% market share – has an HHI of 1. As more firms enter the market and each participant’s market share decreases, the HHI goes down, with extremely diverse markets having an HHI near zero. In our case, the HHI represents energy diversity within the electricity sector. We took the percentage of the generation mix from each energy resource (coal, natural gas, wind, solar, hydropower, nuclear, and others) in each state, according to Energy Information Administration data. We then squared each percentage, and added them together, repeating this calculation for every year from 1990 to 2011. If the HHI moves closer to 0 over the years measured, then the energy mix has become less concentrated and more diverse. If the HHI value increases over time and moves closer to 1, then the energy mix has become more concentrated and less diverse.
The table below shows how each state’s generation portfolio diversity has changed from 1990 to 2011 and provides two separate rankings — one based on 2011 energy diversity and one based on the change in energy diversity (found by subtracting the 2011 HHI value from the 1990 HHI value for every state).

The majority of states have seen their diversity increase, although electricity generation is still relatively highly-concentrated among a small number of fuels in most states. In future research, we are going to explore the most important drivers of increasing generation diversity, and the economic benefits of a diverse generation portfolio.

Richard Caperton is the Director of the Clean Energy Investment program at the Center for American Progress.

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