# Ee w07.1 w_ 2. electricity generation _ part 4 (missing money & capacity payments)

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Information about Ee w07.1 w_ 2. electricity generation _ part 4 (missing money &...

Published on March 11, 2014

Author: slvstr

Source: slideshare.net

1 Energy Economics

2 • theenergycollective.com – Schalk Cloete – Robert Wilson – Jeff St. John – Michael Davidson – Nathan Wilson – Severin Borenstein – Willem Post

3 • Homework

4 • 1. What is the main difference between Alternating Current (AC) and Direct Current (DC) transmission lines? • 2. Why cant an AC transmission be built to connect Finland and Russia (or Poland and BeloRus)? • 3, What is the frequency of the electricity grid in Europe, what in the USA and what in Japan?

5 Table 1 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 10 50 4. The (levelized) fixed and variable costs of 3 types of plants are given in Table 1 above. In the system, the maximum price is capped by Pcap = 1050, and we assume perfect competition. a) Determine the ranges of duration (in %) that will be used for the 3 types in an optimal investment and dispatch. (first draw a figure with the total (levelized) costs of the 3 types as a function of duration. As a hint, use the figure below from the lecture and make the modifications for the case when investment can also be done in Midload generators).

6 Table 1 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 10 50 4. The (levelized) fixed and variable costs of 3 types of plants are given in Table 1 above. In the system, the maximum price is capped by Pcap = 1050, and we assume perfect competition. b) assume that the daily load curve is as given in Figure 2. The maximal price in the system is set at Pcap = 1050. How much capacity (in MW) would be invested of each of the 3 types of generation in the case of optimal investment and dispatch?

7 DURATION (%)100500 1 2 3 Daily Demand in MW Daily Load Curve LC: Duration[y] = Pr[Demand > y]D=3-2* Duration Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 40 Peaker 10 50

8 0 60 40 Duration Baseload Peaker 100%66% 10 (=8760 hours/year) 0% Cost/MWh Use baseload when capacity factor > 66% Use peakers when capacity factor <50% Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 10 50 50% Midload Use Midload when 50%< capacity factor < 66% Demand Response 1%

9 Table 1 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 10 50 4. The (levelized) fixed and variable costs of 3 types of plants are given in Table 1 above. In the system, the maximum price is capped by Pcap = 1050, and we assume perfect competition. c) What is the duration of shortage? (the percentage of time that supply will be lower than demand) d) Show that the average price per MWh for a consumer is now E41.8/MWh. e) The regulator is very unhappy about any shortage. What would you recommend him to do? E40.1/MWh

10 DURATION (%) 10050 1 2 3 Daily Demand in MW Daily Load Curve LC: Duration[y] = Pr[Demand > y] D=3-2* Duration 672 2.98 1.67 baseload Midload Peaker Shortage

11 Table 1 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 10 50 5. The generation types are the same as in question 1. Also the demand-duration curve is the same. The regulator now has– secretly – written a contract for extra backup capacity in the amount of 0.4 MW with a foreign generator. The regulator uses this capacity only when there is a shortage. It allows the regulator to avoid the shortage and also to keep the electricity price at 50 (the marginal cost of the Peaker). a) Once the contract has stopped being a secret, how will Peaker generator investors react? What is now the equilibrium number of MW invested in Peaker generator capacity? b) What if the regulator would follow the procedure of NordPool: when there is a shortage, the regulator uses the backup capacity to avoid blackouts, but it sets the electricity price at the cap (E1050/MWh). How would Peaker generator investors react? What is now the equilibrium number of MW invested in Peaker generator capacity?

12 Table 1 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 10 50 c) The regulator now decides to make a Capacity Payment (CP) to all generation of E5/MWh. The costs of the capacity payment will be added to the electricity bill of consumers. What will be the duration of the different types of generation? What is the duration of the shortage?

13 0 60 35 Duration Baseload Peaker 100%66% 5 (=8760 hours/year) 0% Cost/MWh Use baseload when capacity factor > 66% Use peakers when capacity factor <50% Fixed cost per MWh (Net of capacity payments) Variable cost per MWh Baseload 35 0 Midload 15 30 Peaker 5 50 50% Midload Use Midload when 50%< capacity factor < 66% Demand Response 0.5%

14 Table 1 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 10 50 c) The regulator now decides to make a Capacity Payment (CP) to all generation of E5/MWh. The costs of the capacity payment will be added to the electricity bill of consumers. What will be the duration of the different types of generation? What is the duration of the shortage? d) Show that the average price for consumers (including the capacity payment) is still equal to 41.8.E40.1/MWh

15 Table 1 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 10 50 e) The regulator now decides – to save money – to follow the Spanish example and make the Capacity Payment (CP) of E5/MWh only to Peakers. Show that Midload will now leave the market. f) What will be the duration of the different types of generation? g) What is the duration of the shortage? Show that the average price is now 43.49/ MWh. Why has the system become more expensive?

16 0 60 40 Duration Baseload Peaker 100%67% 5 (=8760 hours/year) 0% Cost/MWh Use baseload when capacity factor > 66% Use peakers when capacity factor <50% Fixed cost per MWh (Net of capacity payments) Variable cost per MWh Baseload 40 0 Midload 20 30 Peaker 5 50 75% Midload Use Midload when 50%< capacity factor < 66% 20

17 • Previous lecture

18 • Is the “energy-only” model valid?

19 19 •Source: ERU •Jiří Krejsa •Yearly Load-Duration Curve: •Duration[y] = Pr[Demand > y]

20 Installed power capacity 2011 (MW) Steam 10787,5 53,27% Nuclear 3970 19,60% PV 1971 9,73% Pumped-storage 1146,5 5,66% Hydro 1054,6 5,21% Gas 1101,7 5,44% Wind 218,9 1,08% Total 20250,2 100,00% Source: ERU Jiří Krejsa About 2x more capacity than peak demand!!!

21 • Remains of the good old times of electricity being run as state-owned Vertically Integrated Utilities (VIUs) (up to 2000) – Civil engineers “gold-plate” the system: excess generation reserves for “just-in-case” disregarding the costs – Prices calculated as average costs + an uplift for capital expenses • 1990-2000: Onset of liberalization, privatization and competition – Prices are marginal prices – Due to the excess capacity they are relatively low – Thus: no investment in new capacity • Now: “sweating” the assets • Source: Helm, D. 2005. The assessment: the new energy paradigm. Oxford review of economic policy, vol. 21, no. 1

22 • This lecture

23 23 Missing Money & Capacity Payments

24 24 0 60 40 Capacity factor Baseload Peaker 100%60% 10 (=8760 hours/year) Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 10 50 0% Cost/MWh Use baseload when capacity factor > 60% Use peakers when capacity factor < 60% -8 -8 Capacity payment of \$8 per MWh for all producers Technology Costs Table

25 25 0 60 40 Capacity factor Baseload Peaker 100%60% 10 (=8760 hours/year) Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 10 50 0% Cost/MWh Use baseload when capacity factor > 60% Use peakers when capacity factor < 60% -8 -8 Capacity payment of \$8 per MWh for all producers Technology Costs Table

26 26 0 60 32 Baseload Peaker 100%60% 2 Fixed cost per MWh Variable cost per MWh Baseload 32 0 Peaker 2 50 0% Cost/MWh Use baseload when capacity factor > 60% Use peakers when capacity factor < 60% Capacity payment of \$8 per MWh for all producers Technology Costs Table Capacity factor (=8760 hours/year)

27 27 P=0 S 50 0 0 1.81 32 P P=50 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 10 50 40% 58% PCAP=550 2% πPEAKER= 0 πPEAKER= 0 πPEAKER=0.02 * 500= 10 Capacity payment of \$8 per MWh for all producers Total πPEAKER=8+10=18 Zero-profit condition Supply & demand curve Technology Costs Table DMAXDMIN

28 28 P=0 S 50 0 0 1.81 32 P P=50 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 10 50 40% 59.6% PCAP=550 0.4% πPEAKER= 0 πPEAKER= 0 πPEAKER=0.004 * 500= 2 Capacity payment of \$8 per MWh for all producers Total πPEAKER= 8 + 2 = 10 Zero-profit condition Supply & demand curve Technology Costs Table DMAXDMIN

29 29 S 50 0 0 1.81 32 P P=50 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 10 50 59.6% PCAP=550 0.4% Total πPEAKER=8+2=10πPEAKER= 0 πPEAKER= 0 πPEAKER=0.004 * 50= 2 Capacity payment of \$8 per MWh for all producers P¯=P¯=8* (0.996) + 0.4* 0 + 0.59.6* 50 + 0.004* 550P¯=8* (0.996) + 0.4* 0 + 0.59.6* 50 + 0.004* 550 =8 + 0 + 29.8 + 2.2 = 40 Zero-profit condition Supply & demand curve Technology Costs Table DMAX P=0 40% DMIN

30 30 0 60 40 Capacity factor Baseload Peaker 100%60% 10 (=8760 hours/year) Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 10 50 0% Cost/MWh Use baseload when capacity factor > 60% Use peakers when capacity factor < 60% -8 Capacity payment of \$8 per MWh only for Peakers Technology Costs Table

31 31 0 60 Capacity factor Baseload Peaker 100%76% 2 (=8760 hours/year) Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 2 50 0% Cost/MWh Use baseload when capacity factor > 76% Use peakers when capacity factor < 76% Capacity payment of \$8 per MWh only for Peakers Technology Costs Table 60% 40

32 32 Use baseload when capacity factor > 76% Use peakers when capacity factor < 76% 0 60 40 Capacity factor Baseload Peaker 100%76% 10 DURATION (%)100500 1 2 3 BASELOAD D=3-2* Duration 1.48 PEAKER Daily Demand in MW 60 Daily Load-Duration Curve: Duration[y] = Pr[Demand > y] Screening curve (Capacity-cost based) 76

33 33 P=550 DURATION (%)100500 1 2 3 BASELOAD D=3-2* Duration 1.48 PEAKER Daily Demand in MW 60 Daily Load-Duration Curve: Duration[y] = Pr[Demand > y] 76 Supply & demand curve Uniformly distributed 50 0 0 1.481 32 P P=0 P=50 24% 76%-x% Supply & demand curve DMAXDMIN X%

34 34 P=0 S 50 0 0 3 P P=50 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 10 50 76-x P=550 X=0.4% Total πPEAKER=πPEAKER= 0 πPEAKER= 0 πPEAKER=x * 500= 2 2 0.004 500 x = = Capacity payment of \$8 per MWh only for Peakers Total πPEAKER= 8+0+0+2=10 Zero-profit condition Supply & demand curve Technology Costs Table DMAX 24% DMIN 1.481

35 35 P=0 S 50 0 0 3 P P=50 Fixed cost per MWh Variable cost per MWh Baseload 40 0 Peaker 10 50 76-x P=550 X=0.4% P=0.24 * 0= 0 P=0.756* 50= 37.8 P=0.004* 550= 2.2 P=0.76* 8= 6.08 Capacity payment of \$8 per MWh only for Peakers P=6.08 +37.8+2.2=46.08>40! Zero-profit condition Supply & demand curve Technology Costs Table DMAX 24% DMIN 1.481

36 36 • Capacity payments: - Is a subsidy that allows the system to - Lowers the price spikes and the duration of spikes - Can distort generation technique choice if capacity payments are not equal for all techniques - Example: Spain

37 Electricity generation and climate change

38

39

40

41

42

43 Renewables Efficiency Carbon emissions EU’s 20-20-20 strategy for 2020

44 • 20-20-20 strategy a) 20 reduction of CO2 b) 20% increase in efficiency c) 20% renewables

45 b) 20% increase in efficiency

46 • What is the effect of an increase in efficiency on fuel demand? – Substitution effect – Income effect

47 Other consumptio n goods Car Usage Effect of a fall in the price of car fuel (here a normal good) 5 2010 Substitution effect Income effect Total effect Fuel=12

48 Other consumptio n goods Car Usage If car useage were an inferior good (it is not!), the income effect could undo a part of the substitution effect 5 2010 Substitution effect Income effect Total effect

49 • Both substitution and income effect contribute to an increase in demand • What can be done? • Price must increase too.

50 Other consumptio n goods Car Usage Increase in price makes consumers use less. Both income and substitution effect lower care useage 5 209 Income effect Substitut ion effect Total effect Fuel=12

51 Other consumptio n goods Car Useage Effect of a fall in the price of car fuel (here a normal good) 5 2010 Substitution effect Income effect Total effect Fuel=12 PPizza=10

52 c) 20% renewables

53 Wind turbines Solar panels Renewable energies

54 • Do subsidized renewables lower the price of electricity? • Price versus charge

55 10 50 P=10 P=50 DL DH Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 prob DL DH 50% 50% 10% 10 50 1 20 0

56 Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 prob DL DH 50% 50% 10% 10 50 50% 10 50% 50 30P = × + × = 10 50 DL DH P=10 P=50 Average electricity price 50% ( ) 50% ( )L HQR P MC P MC= × − + × − 50% 50%L HP P P= × + × 50% (0) 50% (40) 20QR = × + × =

57 10 50 P=10 P=50 Wind output Units Probability 2 10% 1 20% 0 70% Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 Wind 2 23.5 0 DL DH 1 20 0 Heavily subsidize to get 30% electricity from wind

58 P=10 P=50 10 50 0 P=0 P=0 Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 Wind 2 23.5 0 DL DH 1 20 Wind output Units Probability 2 10% 1 20% 0 70%

59 P=10 P=50 10 50 0 P=0 P=10 Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 Wind 2 23.5 0 DL DH 1 20 Wind output Units Probability 2 10% 1 20% 0 70%

60 P=10 P=50 10 50 0 Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 Wind 2 23.5 0 DL DH 1 20 Wind output Units Probability 2 10% 1 20% 0 70%

61 Wind availability prob DL DH 50% 50% 2 10% 0 0 1 20% 0 10 0 70% 10 50 ( ) 70% 10 20% 0 10% 0 7LP D = × + × + × = ( ) 70% 50 20% 10 10% 0 37HP D = × + × + × = 50% 7 50% 37 22P = × + × =0 Average electricity price 10 50 P=10 P=50 70% DL DH 10 50 P=0 P=10 20% DL DH 1 0 50 0 P=0 P=0 10% DL DH Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 Wind 2 23.5 0 Electricity price

62 Wind availability prob DL DH 50% 50% 2 10% 0 0 1 20% 0 10 0 70% 10 50 ( )20% 50% (10 0)QR = × × − 1= 0 Average earnings of Wind 10 50 P=10 P=50 70% DL DH 10 50 P=0 P=10 20% DL DH 1 0 50 0 P=0 P=0 10% DL DH Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 Wind 2 23.5 0 Electricity price

63 50% 7 50% 37 22P = × + × = Average electricity price 23.5 1 22.5 15 50% 1 50% 2 1.5 − = = × + × Uplift on electricity price 22 15 37+ = Average electricity charge 23% increase in charges for consumers! 10 50 P=10 P=50 70% DL DH 10 50 P=0 P=10 20% DL DH 1 0 50 0 P=0 P=0 10% DL DH Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 Wind 2 23.5 0 Average charge without wind: 30

64 Units Fixed cost Variable cost Baseload 1 20 10 Peaker 1 0 50 Wind 2 22.5 0 ( )70% 50% (50 10)QR = × × − ( )70% 20 14= × = 0 10 50 P=10 P=50 70% DL DH 10 50 P=0 P=10 20% DL DH 1 0 50 0 P=0 P=0 10% DL DH Average Baseload earning (QR) Wind availability prob DL DH 50% 50% 2 10% 0 0 1 20% 0 10 0 70% 10 50 Electricity price

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