Outline amazonaws com
Impact of Externality Cost Internalisation on Renewable Electricity Development in the APEC region Serguei Popov International Energy Workshop Cape Town, Town, June 27 27-- 29, 200 2006 6
Outline
§ Framework: APEC, NRE promotion, externalities. § Modelling methodology and study results: Leveraged cost, subsidies assessments, leastcost optimisation and sensitivity analysis § Implications
1
What is APEC? APEC is 21 economy, non-binding initiative to facilitate Pacific RIM economic development
Electricity production in the APEC region: history and projections APERC outlook 2006
APERC outlook 2002
APERC-2002 projections: [email protected]% for 1999-2020 APERC-2006 projections: [email protected]% for 2002-2030
2
APEC electricity consumption pattern (1975-2003)
Source: IAE, World Bank, UN habitat project
APEC electricity consumption pattern for developing economies (1975-2003)
Source: IAE, World Bank, UN habitat project
3
Reasons to look closer at New and Renewable Energy
§
High crude oil prices / “peak oil theory”
§
Energy security
§
Technology development
§
Energy poverty / remote areas powering
§
Environmental concerns
Common understanding of issues – from Arctic shores and Siberia to South Africa
Russia’s Far North regions and NRE
Moscow
Irkutsk Wind
Solar
Forest biomass
Geothermal
(>5 m/s)
(>2000h•a)
(>60% of land)
(perspective areas)
Source: SEI SB RAS, 2003
4
PRO and CONTRA for NRE development
§energy security, health and environment benefits, R&D and industries development (might be in different order)
§cost inefficiency without subsidies, low income in developing economies (high up-front cost), health and environment problems (long-run consequences of Genetic Engineering, competition to food production)
QUESTIONS TO ADDRESS [from phase I] How to eliminate or reduce the relatively high cost of renewable electricity technologies? What is the real cost of supplying electricity from fossil fuels? If there is any externality?
5
POLICY OPTIONS TO PROMOTE NRE
§“Let flowers blossom all” [Chairman Mao] (budget spending for R&D activity)
§Through Renewable Share Portfolio (command & control economy)
§Tax incentives and subsidies (more market oriented)
METHODOLOGY
§ analyse structure of electricity cost and assess subsidies/competitiveness of NRE toward conventional technologies
§ assess NRE share in power generation with and without external costs under fair competition among technologies
6
Defining EXTERNALITY “Fuel cycle externalities are the costs imposed on society and the environment that are not accounted for by the producers and consumers of energy, i.e. that are not included in the market price. They include damage to the natural and built environment, such as effects of air pollution on health, buildings, crops, forests and global warming; occupational disease and accidents; and reduced amenity from visual intrusion of plant or emissions of noise. Traditional economic assessment of fuel cycles has tended to ignore these effects.” European Commission
Optimal private and social costs for electricity demand
7
BASIC ASSUMPTIONS Leveraged cost of electricity production is the sum of four components : investment cost (incl. cost of financing), operation and management cost, fuel cost and externalities. Leveraged Cost [¢/kWh]= Investment Cost + O&M Cost + Fuel Cost + Externality Cost Externality costs are based on EU 2003 estimations
Subsidy assessments (lower boundary) InvestmentCost(RE) + O&Mcost(RE) + FuelCost(RE) + ExternalityCost(RE) = InvestmentCost(CT) + O&Mcost(CT) + FuelCost(CT) + ExternalityCost(CT)
InvestmentCost(RE) =
Specific_c ost(RE) × Loan_coefficient(RE) Lifetime(R E) × Capacity_factor(RE)
Specific_cost(RE) Ext =
InvestmentCost(CT)+ (O & Mcost(CT)- O & Mcost(RE))+ (FuelCost(CT) - FuelCost(RE) + (ExternalityCost(CT)- Externalit yCost(RE)) Lifetime(R E) * Capacity_factor(RE) × Loan_coefficient(RE)
8
Subsidy assessments (2) To provide the same amount of electricity on the equal leveraged costs,
NRE specific Investment cost
lower capital costs of renewable technology compete conventional one is calculated in order to, both for BAU and “Externality” cases. Area of conventional technology’ s efficiency
Threshold Lines Area of renewable technology efficiency
Fuel cost for conventional technology
Impact of externalities on leveraged cost for power generation technologies (Japan) • without externalities, coal is the cheapest option and NRE (except solar) are competitive to natural gas. Investment cost
Wind
Investment cost
Wind Hydro
Hydro
Fixed O&M cost
Fixed O&M cost Nuclear
Coal Nuclear
Geothermal
Fuel cost
Fuel cost
Biomass
Biomass
Externality cost
Externality cost
Geothermal
Ocean
Ocean
Natural Gas
Natural Gas
Coal
Solar thermal
Solar thermal
Petroleum
Petroleum
PV Electricity cost, c/kWh 0
PV 5
10
15
20
Electricity25cost, c/kWh 0
5
10
15
20
9
Impact of externality internalisation on renewable electricity competitiveness Externality internalisation in APEC region will ELIMINATE SUBSIDIES for wind, biomass, ocean and geothermal electricity towards COAL power generation. Wind became competitive to GAS for all APEC economies, except Indonesia, Malaysia and Russia. Biomass and ocean electricity will be LESS COMPETITIVE to NUCLEAR technology. Solar (PV and thermal) technologies remains ineffective options and will require substantial subsidies.
BASIC ASSUMPTIONS AND SCOPE least-cost lp model
• • • •
Two different estimations - with and without externality accounting (Externality case and BAU case) - are compared Two time periods: 2005 to 2010 and 2011 to 2020 Total electricity demand according to APERC projections (incl. interconnections) Capacity projections based on: § official national and/or industry outlook for thermal and nuclear facilities § technical potential for NRE (allowing maximum room for expansion)
10
BASIC ASSUMPTIONS AND SCOPE least-cost lp model (2)
• Sensitivity analysis: § investment and O&M costs +20%
+7%
§ externality cost multiply by factors: 0
1/3
2/3
1
4/3
RESULTS AND FINDINGS • the real cost of generation would be twice as much as that without externalities, US$ 1,171 Billion (Generation cost + Externality cost) • economies could actually save up to 5% of real cost with the application of externality
Unit
2020 2005
Externality case
BAU
Difference
TWh Bln USD Bln USD
10,173 329 454
15,659
15,659
-
511 609
480 691
31 - 82
Leveraged generation cost
¢ per kWh
3.2
3.3
3.1
0.2
External Cost Total generation cost
¢ per kWh ¢ per kWh
4.5 7.7
3.9 7.2
4.4 7.5
-0.5 -0.3
Electricity generation Leveraged generation cost External Cost
11
RESULTS AND FINDINGS (2) Individual sensitivities of APEC member economies to the application of externality costs
• Internalising externalities, almost half of the APEC member economies have significant changes (more than 5% ) in generation structure toward NRE • estimations didn’t take into account the costs of transmission lines construction, and power dispatching.
RESULTS AND FINDINGS (3) Annual externality cost for top nine APEC economies in year 2020 will be 67 bln USD LESS while it need some 173 bln USD MORE NRE investments for “Externality” case in the next 15 years. Thus average pay-back term for investments is less then three years.
NRE
12
RESULTS AND FINDINGS (4) • Southeast Asia economies are the most to gain in the internalisation of external cost
Sensitivity Analysis • Ranking of electricity generation technologies for various externality cost a) externality cost 1/3 less; b) adopted (normal) externality cost; c) externality cost 1/3 more
13
Sensitivity Analysis (2) • Assessment of increasing investment and O&M costs for NRE due to they intermittence nature and more transmission lines requirements. The case of China lead to conclusion that technology ranking is also very stable and in favour of NRE
Sensitivity Analysis (3) • Comparison between normal and case of increasing investment (+20%) and O&M (+7%) costs for NRE. Eight instead of nine economies gained from externalities internalisation for more then 5 percent.
14
Sensitivity Analysis (4) • Comparison between normal and of increasing investment (+20%) and O&M (+7%) costs for NRE. Same nine top economies has the same externality effect of 67 bln USD. Average pay-back term is slightly more then 3 years.
Sensitivity Analysis (5) Impact of externality cost internalisation to the average growth rate of renewable electricity in the APEC region,difference of “Externality” to BAU cases
15
Implications Internalising externality cost within APEC region would: § Increase the renewable electricity share less then 3 to 4 percent of total electricity production in the APEC region (or 430 to 600 TWh). § Increase by about 3 to 4 percent the average annual growth rates of renewable electricity production in comparison to the BAU case. § Increase the average generation cost of electricity, twice that of its current level.
Implications (2) § An average of 2 to 3 yield of externality cost per renewable electricity investment cost could be expected. § Additional investments for renewable electricity will reach about US$200 billion in the next 15 years. § Externality costs based on ExternE assessments are considered to be close to optimal for the purpose of renewable electricity promotion.
16
Thank you for your attention! Report could be found on APERC site www.ieej.or.jp/aperc
17
Outline
§ Framework: APEC, NRE promotion, externalities. § Modelling methodology and study results: Leveraged cost, subsidies assessments, leastcost optimisation and sensitivity analysis § Implications
1
What is APEC? APEC is 21 economy, non-binding initiative to facilitate Pacific RIM economic development
Electricity production in the APEC region: history and projections APERC outlook 2006
APERC outlook 2002
APERC-2002 projections: [email protected]% for 1999-2020 APERC-2006 projections: [email protected]% for 2002-2030
2
APEC electricity consumption pattern (1975-2003)
Source: IAE, World Bank, UN habitat project
APEC electricity consumption pattern for developing economies (1975-2003)
Source: IAE, World Bank, UN habitat project
3
Reasons to look closer at New and Renewable Energy
§
High crude oil prices / “peak oil theory”
§
Energy security
§
Technology development
§
Energy poverty / remote areas powering
§
Environmental concerns
Common understanding of issues – from Arctic shores and Siberia to South Africa
Russia’s Far North regions and NRE
Moscow
Irkutsk Wind
Solar
Forest biomass
Geothermal
(>5 m/s)
(>2000h•a)
(>60% of land)
(perspective areas)
Source: SEI SB RAS, 2003
4
PRO and CONTRA for NRE development
§energy security, health and environment benefits, R&D and industries development (might be in different order)
§cost inefficiency without subsidies, low income in developing economies (high up-front cost), health and environment problems (long-run consequences of Genetic Engineering, competition to food production)
QUESTIONS TO ADDRESS [from phase I] How to eliminate or reduce the relatively high cost of renewable electricity technologies? What is the real cost of supplying electricity from fossil fuels? If there is any externality?
5
POLICY OPTIONS TO PROMOTE NRE
§“Let flowers blossom all” [Chairman Mao] (budget spending for R&D activity)
§Through Renewable Share Portfolio (command & control economy)
§Tax incentives and subsidies (more market oriented)
METHODOLOGY
§ analyse structure of electricity cost and assess subsidies/competitiveness of NRE toward conventional technologies
§ assess NRE share in power generation with and without external costs under fair competition among technologies
6
Defining EXTERNALITY “Fuel cycle externalities are the costs imposed on society and the environment that are not accounted for by the producers and consumers of energy, i.e. that are not included in the market price. They include damage to the natural and built environment, such as effects of air pollution on health, buildings, crops, forests and global warming; occupational disease and accidents; and reduced amenity from visual intrusion of plant or emissions of noise. Traditional economic assessment of fuel cycles has tended to ignore these effects.” European Commission
Optimal private and social costs for electricity demand
7
BASIC ASSUMPTIONS Leveraged cost of electricity production is the sum of four components : investment cost (incl. cost of financing), operation and management cost, fuel cost and externalities. Leveraged Cost [¢/kWh]= Investment Cost + O&M Cost + Fuel Cost + Externality Cost Externality costs are based on EU 2003 estimations
Subsidy assessments (lower boundary) InvestmentCost(RE) + O&Mcost(RE) + FuelCost(RE) + ExternalityCost(RE) = InvestmentCost(CT) + O&Mcost(CT) + FuelCost(CT) + ExternalityCost(CT)
InvestmentCost(RE) =
Specific_c ost(RE) × Loan_coefficient(RE) Lifetime(R E) × Capacity_factor(RE)
Specific_cost(RE) Ext =
InvestmentCost(CT)+ (O & Mcost(CT)- O & Mcost(RE))+ (FuelCost(CT) - FuelCost(RE) + (ExternalityCost(CT)- Externalit yCost(RE)) Lifetime(R E) * Capacity_factor(RE) × Loan_coefficient(RE)
8
Subsidy assessments (2) To provide the same amount of electricity on the equal leveraged costs,
NRE specific Investment cost
lower capital costs of renewable technology compete conventional one is calculated in order to, both for BAU and “Externality” cases. Area of conventional technology’ s efficiency
Threshold Lines Area of renewable technology efficiency
Fuel cost for conventional technology
Impact of externalities on leveraged cost for power generation technologies (Japan) • without externalities, coal is the cheapest option and NRE (except solar) are competitive to natural gas. Investment cost
Wind
Investment cost
Wind Hydro
Hydro
Fixed O&M cost
Fixed O&M cost Nuclear
Coal Nuclear
Geothermal
Fuel cost
Fuel cost
Biomass
Biomass
Externality cost
Externality cost
Geothermal
Ocean
Ocean
Natural Gas
Natural Gas
Coal
Solar thermal
Solar thermal
Petroleum
Petroleum
PV Electricity cost, c/kWh 0
PV 5
10
15
20
Electricity25cost, c/kWh 0
5
10
15
20
9
Impact of externality internalisation on renewable electricity competitiveness Externality internalisation in APEC region will ELIMINATE SUBSIDIES for wind, biomass, ocean and geothermal electricity towards COAL power generation. Wind became competitive to GAS for all APEC economies, except Indonesia, Malaysia and Russia. Biomass and ocean electricity will be LESS COMPETITIVE to NUCLEAR technology. Solar (PV and thermal) technologies remains ineffective options and will require substantial subsidies.
BASIC ASSUMPTIONS AND SCOPE least-cost lp model
• • • •
Two different estimations - with and without externality accounting (Externality case and BAU case) - are compared Two time periods: 2005 to 2010 and 2011 to 2020 Total electricity demand according to APERC projections (incl. interconnections) Capacity projections based on: § official national and/or industry outlook for thermal and nuclear facilities § technical potential for NRE (allowing maximum room for expansion)
10
BASIC ASSUMPTIONS AND SCOPE least-cost lp model (2)
• Sensitivity analysis: § investment and O&M costs +20%
+7%
§ externality cost multiply by factors: 0
1/3
2/3
1
4/3
RESULTS AND FINDINGS • the real cost of generation would be twice as much as that without externalities, US$ 1,171 Billion (Generation cost + Externality cost) • economies could actually save up to 5% of real cost with the application of externality
Unit
2020 2005
Externality case
BAU
Difference
TWh Bln USD Bln USD
10,173 329 454
15,659
15,659
-
511 609
480 691
31 - 82
Leveraged generation cost
¢ per kWh
3.2
3.3
3.1
0.2
External Cost Total generation cost
¢ per kWh ¢ per kWh
4.5 7.7
3.9 7.2
4.4 7.5
-0.5 -0.3
Electricity generation Leveraged generation cost External Cost
11
RESULTS AND FINDINGS (2) Individual sensitivities of APEC member economies to the application of externality costs
• Internalising externalities, almost half of the APEC member economies have significant changes (more than 5% ) in generation structure toward NRE • estimations didn’t take into account the costs of transmission lines construction, and power dispatching.
RESULTS AND FINDINGS (3) Annual externality cost for top nine APEC economies in year 2020 will be 67 bln USD LESS while it need some 173 bln USD MORE NRE investments for “Externality” case in the next 15 years. Thus average pay-back term for investments is less then three years.
NRE
12
RESULTS AND FINDINGS (4) • Southeast Asia economies are the most to gain in the internalisation of external cost
Sensitivity Analysis • Ranking of electricity generation technologies for various externality cost a) externality cost 1/3 less; b) adopted (normal) externality cost; c) externality cost 1/3 more
13
Sensitivity Analysis (2) • Assessment of increasing investment and O&M costs for NRE due to they intermittence nature and more transmission lines requirements. The case of China lead to conclusion that technology ranking is also very stable and in favour of NRE
Sensitivity Analysis (3) • Comparison between normal and case of increasing investment (+20%) and O&M (+7%) costs for NRE. Eight instead of nine economies gained from externalities internalisation for more then 5 percent.
14
Sensitivity Analysis (4) • Comparison between normal and of increasing investment (+20%) and O&M (+7%) costs for NRE. Same nine top economies has the same externality effect of 67 bln USD. Average pay-back term is slightly more then 3 years.
Sensitivity Analysis (5) Impact of externality cost internalisation to the average growth rate of renewable electricity in the APEC region,difference of “Externality” to BAU cases
15
Implications Internalising externality cost within APEC region would: § Increase the renewable electricity share less then 3 to 4 percent of total electricity production in the APEC region (or 430 to 600 TWh). § Increase by about 3 to 4 percent the average annual growth rates of renewable electricity production in comparison to the BAU case. § Increase the average generation cost of electricity, twice that of its current level.
Implications (2) § An average of 2 to 3 yield of externality cost per renewable electricity investment cost could be expected. § Additional investments for renewable electricity will reach about US$200 billion in the next 15 years. § Externality costs based on ExternE assessments are considered to be close to optimal for the purpose of renewable electricity promotion.
16
Thank you for your attention! Report could be found on APERC site www.ieej.or.jp/aperc
17
