Box 2: Assumptions Behind the Proposal The evaluation undertaken here assumes that the proposed insurance program would have certain effects — for example, that it would encourage a certain quantity of green capacity, that it could tolerate a certain “erosion” in demand for green power, etc. The justification for these assumptions can be found in a financial spreadsheet model developed by Princeton Economic Research, Inc., for DOE and available at <http:// www.realliance.org/insurance/gp_matrix.html>. The model considers eight scenarios. Four reflect costs for renewable energy taken from the DOE Energy Information Administration’s National Energy Modeling System; the other four use cost data from a collabo-rative report of DOE and the Electric Power Research Institute.12 The scenarios vary in three respects: the difference in the cost of conventional and green power, or the “green premium”; the amount the insurance policy would pay out per kilowatt-hour; and the installed capacity of renewable energy projects supported: 500 or 1,000 megawatts (MW). In addition, the eight scenarios shared common assumptions concerning program design, including: a coverage period of 10 years, corresponding to debt payments; an annual insurance premium paid by green marketers of 3% of maximum annual coverage, equivalent to 0.3 mills per 1¢ of coverage;13 state and federal subsidies totaling $50 million, invested in a level fashion over a five-year period; and a yield of 6% from investing these subsidies plus earnings from premiums paid by policyholders. For each scenario, the model calculates the annual “erosion rate” of the green power market that a fixed amount of new capacity can support. For example, in a scenario specifying 1,000 MW of capacity, the model determines that the insurance can support 6.2% annual erosion. This can be interpreted to mean either that 6.2% of all customers decline to renew their green power contracts each year, or that the green premium falls an average of 6.2% annually. In this scenario, 1,000 MW can be supported even if 6.2% of all customers leave the program each year. At the end of 15 years, however, green marketers’ claims would have completely depleted the $50-million subsidy. Thus, if the actual erosion rate were less than 6.2%, the program either could support more than 1,000 MW of new capacity, or could support 1,000 MW while returning a surplus to the federal and state treasuries. On the other hand, if the erosion rate were higher than 6.2%, the program would be able to support less than 1,000 MW, or it could support 1,000 MW with a negative balance, presumably underwritten by the private insurance carrier.

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