Download - 3A. Economics of electric generation
ECONOMICS OF ELECTRICITY GENERATION
dr. Péter KaderjákDirector, REKK
NARUC Training on Tariff Development and Utility Regulation
May 7-11, 2007, Baku, Azerbaijan
2
OUTLINE
• Costs of generation• Demand for and supply of electricity in
the short run• Technology choice in the long run • Price setting at the plant level• Price setting at the wholesale level
3
UNDERSTANDING GENERATION
• Converting one form of energy into electric energy
• Electricity generation:• Fossil: combustion – heat – steam cycle• Nuclear, geothermal: heat – steam cycle • Direct: wind, hydro
• Investment creates power or capacity (MW)
• Both capacity and energy are flows and the price of them can be measured in $/MWh
4
COSTS OF GENERATION
• Total cost (TC) = Fixed cost (FC) + Variable cost (VC)
• FC: related mostly to investment and economic profits to be earned; in the short run O&M, wages, depreciation social fund and other obligations are also fixed; independent of the level of production
• VC: fuel cost; depends on the level of production
• Marginal cost (MC): the change of TC when output is increased by 1 unit
• MC = constant, when VC is linear (we assume)
5
EXAMPLE: MARGINAL COST BY TECHNOLOGY AND MERIT ORDER
3026700CCGT
4060400OCGT
4020800Coal
4041000Nuclear
Life-time years
Marginal production
cost($/MWh)
Installed capacity
(MW)
Technology
6
MARGINAL COST ESTIMATION
• Costing fuel conversion into electricity: short run marginal cost of generation• Cost of fuel ($/m3) • Heat content of the fuel (GJ/ m3)• Conversion of GJ into kWh• Heat rate (efficiency) of conversion
• Comparing costs to electricity prices• Spark spread: gas-to-electricity market
prices• Dark spread: coal-to-electricity prices
7
COST OF FUEL
• Transparent market benchmarks• Coal• Gas: Henry Hub (US)• Oil (Brent)• Oil – gas link (log-term gas contracts)
• Long term contract prices• Self-reports• Extraction cost estimates (in case of own fuel
base; e.g. integrated generation and lignite mine)
8
EXAMPLE: GAS PRICING FORMULA IN A TYPICAL EARLY TOP
si=96,8*(0,5*A/Ao+0,5*B/Bo)
A: average of last 9 months diesel priceB: average of last 9 months heavy fuel oil priceAo: diesel price on January 1, 1996 (147,95 $/t)Bo: heavy fuel oil price on January 1, 1996 (135 $/t)96,8 $/1000 m3: agreed starting price by January 1, 1996
Estimated gas import price / oil price link:
Si=4,9+4,4*brent
9
CONVERSION TABLES
• Costing fuel conversion into electricity:
10
HEAT RATE ESTIMATES
G a s /O il S T C o a l S T N u c le a r S T C C G T G a s G a s /O il G T1 9 6 0 3 7 ,0 % 3 5 ,0 % 2 5 ,0 %1 9 7 0 3 9 ,0 % 3 7 ,0 % 2 7 ,0 %1 9 8 0 4 1 ,0 % 3 9 ,0 % 2 9 ,0 % 3 0 ,0 %1 9 9 0 4 3 ,0 % 4 1 ,0 % 3 1 ,0 % 5 0 ,0 % 3 4 ,0 %2 0 0 0 4 5 ,0 % 4 3 ,0 % 3 3 ,0 % 5 5 ,0 % 3 6 ,0 %2 0 1 0 4 6 ,0 % 3 6 ,0 % 5 8 ,0 % 3 8 ,0 %2 0 2 0 4 9 ,0 % 3 9 ,0 % 6 0 ,0 % 4 0 ,0 %2 0 3 0 5 2 ,0 % 4 2 ,0 % 6 2 ,0 % 4 1 ,0 %2 0 4 0 5 5 ,0 % 4 5 ,0 % 6 4 ,0 % 4 2 ,0 %
S T : s te a m tu rb in eC C G T : c o m b in e d -c y c le g a s tu rb in e
G r o s s f u e l e f f ic ie n c y p a r a m e t e r s a s s u m e d in t h e K E M A s t u d y fo r p o w e r p la n t s c o m m is s io n e d in t h e in d ic a t e d y e a r s . F o r y e a r s in b e t w e e n , f u e l e f f ic ie n c y c a n b e l in e a r ly e x t r a p o la t e d .
11
ESTIMATION: INDIVIDUAL GENERATION UNIT
1. Generating plant2. Number and type of units3. Unit capacity – Total plant capacity –
Available capacity4. Year of commissioning5. Fuel type6. Fuel cost (cent/GJ) (C)7. Marginal cost: C*0,036/e 8. Correction for self consumption
Gross efficiency (e)
12
LOAD DURATION (SUPPLY) CURVE: EXAMPLE
26
60
$/MWh
2900
20
MW250018001000
13
hydronuclear lignite
coal
CCGT
GT
Supply
Capacity
Mar
gina
l Cos
t
Prices are set by the marginal plantPrice formation on competitive short-term electricity markets
Market price
Demand
hydronuclear lignite
coal
CCGT
GT
Supply
Capacity
Mar
gina
l Cos
t
Prices are set by the marginal plantPrice formation on competitive short-term electricity markets
Market price
Demand
Source: EU Energy Sector Inquiry Report
SHORT RUN MERIT ORDER AND MARKET PRICES
14
Preis
Menge
P1
Q1
D1
S
Price
Volume
P2
S2
P2
Q2
D2
Preis
Menge
P1
Q
D
S1
Price
Volume
PRICE FORMATION BY CHANGES IN DEMAND AND SUPPLY
15
APPLICATION BASED ON PUBLIC DATA –estimated merit order for SEE markets
-
10.00
20.00
30.00
40.00
50.00
60.00
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000MW
€/M
Wh
ROBG
RS
BA
HR
MKUNMIK
ME
AL
16
APPLICATION BASED ON PUBLIC DATA –estimated aggregate merit order for SEE
-
10.00
20.00
30.00
40.00
50.00
60.00
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
MW
€/M
Wh
17
APPLICATION BASED ON PUBLIC DATA –peak demand, January 2006; source: UCTE
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
AL BA BG HR ME MK RO RS UNMIK
MW
18
APPLICATION BASED ON PUBLIC DATA –estimated equilibrium in peak and off-peak periods
-
10.00
20.00
30.00
40.00
50.00
60.00
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
MW
€/M
Wh
Supply
Peak demand
Off-peak demand
19
EFFICIENT INVESTMENTS: ACCOUNTING FOR FIXED COSTS
• Coal vs. gas based generation unit: which is the better investment option?
• Additional information is needed:• Price of capacity ($/kW)• Capacity factor (usage % of 8760 hours)
• Price of capacity: conversion of the overnight cost of capacity into the annual fixed cost of a kW
• Overnight cost of capacity: lump sum up front payment to construct the capacity
20
LONG RUN: ACCOUNTING FOR FIXED COSTS
$12,21$106,96$1050$87.6$10Coal plant
$4,62$40.48$350$306.6$35Gas turbine
FC(/MWh)
FC(/kWy)
OC(/kW)
VC(/kWy)
VC(/MWh)
Technology
TrT rOCr
eOCrFC
)1/(111 +−∗
≈−∗
= −Converting overnightcost into fixed cost:
r: discount rate (in % per year); here r = 10% (or 0,1)
T: life of the plant; T = 20 years for gas turbines and 40 for coal plants
21
SCREENING CURVES (OR TOTAL COST CURVES)
$106.96$12.21
$/MWh $/kwy
$40.48
coalgas turbine
ARR
Capacity factor 10.3Annual Revenue Requirement: ARR = FC + cf x VC
22
LOAD DURATION CURVE
6000
8500
MW
Capacity factor 10.3
Efficient generation park (only coal and gas): 6000 MWcoal, 2500 MW gas
gas turbine
coal
23
• Objective:
Total Revenue (TR) = ARRPrice*electricity sold = FC + VC
Price = (FC + VC) / electricity sold
GENERATION PRICE REGULATION
24
• Cost of capital• Weighted average cost of equity and debt
• Cost of equity (e.g.12%)• Cost of debt (e.g.10%)• Financing structure (e.g. 70% equity and
30% debt)• WACC = 0,7*12 + 0,3*10 = 11,4%
• Capital employed for electricity production• Combined generation?• Overnight cost?• Book value?
COSTS: FIXED OR VARIABLE?
25
• Depreciation• Operating & Maintanence• Wages• Social obligations (if any)• Taxes• Fines• Fuel cost
• Is pass-through efficient?+ Production projection
• Uncertainties?
COSTS: FIXED OR VARIABLE?
26
GENERATION PRICE REGULATION
Follow the example of Azeri wholesale revenue requirement worksheets
27
SUMMARY
• Fixed cost, variable cost, marginal cost• Short run operations
• Demand curve• Merit order (marginal cost) curve
• Investment planning• Load duration curve• Overnight cost of capacity• Screening (total cost) curve
• Price regulation• Annual revenue requirement• Weighted average cost of capital