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Power generation cost analysis.power generation_cost_analysis

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Capacity Building Program “Pricing Renewables: Feed-in Tariff (FiT) Design and Structure for Wind Farms and Solar Plants” - October 23-27, 2011

Capacity Building Program “Pricing Renewables: Feed-in Tariff (FiT) Design and Structure for Wind Farms and Solar Plants” - October 23-27, 2011


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  • 1. Euro-MediterraneanEnergy Market Integration Project Germany France Lebanon Power Generation Cost Analysis Belgium What really matters ? Cairo, 24 October 2011 Dr. Albrecht Kaupp, Team Leader “The contents of this publication are the sole responsibility of the author and can in no way be taken to reflect the views of the European Union”. This project is funded by the European Union 1
  • 2. Birds View of the Cash Flow SheetThis project is fundedby the European Union
  • 3. Is there a science, logic, politics, or common sense behind some published FIT ?900 kWh/kW FIT = US$ 0.38/kWh ( Germany 2011 Data)1,500 kWh/kW Price = US$ 0.35/kWh (California, average) FIT = US$ 0.23/kWh Common sense is missing! 1500/900 = 1.67 and therefore southern FIT should be around US$ 0.23/kWh This project is funded assuming all other parameters including risk assessment are equal by the European Union 3
  • 4. Finance Practices Loan B ( 5 -12 ) years Loan A ( 3 -7 years ) Working Capital Loan Equity (= “own money”)This project is fundedby the European Union
  • 5. “Plain Vanilla” Coupon Bond Expensive Shareholder loan Equity optionsThis project is fundedby the European Union
  • 6. US$ 100,000 for 5 years at annual 8% fixed interest =8,000+8,000+8,000+8,000+8,000 + 100,000 + = US$ 140,000 Plain Fixed maturity bond Vanilla Fixed interest rate ( coupon) Known cash flow pattern Known face value Investor risk medium Sometimes tradable This project is funded by the European Union
  • 7. Shareholder Firm listed on stock exchange (RoE) Return on Equity expectation LI- Model for FIT calculation No security for shareholder Shareholder risk highThis project is fundedby the European Union
  • 8. Shareolder (RoE) RoE can be a misleading concept. Assume you buy a business for $ 100,000. If your business makes an annual net profit of $ 10,000 on these $ 100,000 than the RoE is 10% for this year. However if $ 50,000 had been borrowed from the bank and the bank is paid $ 3500 interest a year than only $ 50,000 are your equity. The net profit is then only $ 10,000 - $3, 500 = $ 6,500 and the RoE becomes 6,500/50,000 = 13% while the Return on Capital remains 10%. Consequently assuming in FIT calculations excessive debt financing of RE power plants may allow for very high RoE although the return on Capital is meager and the firm is a very high risk. What really counts is the Net Present ValueThis project is fundedby the European Union
  • 9. US$ 100,000 for 5 years at annual 8% fixed interest =60 monthly annuities x 2028 = US$ 121,680 paid back Expensive Treated the same as a the other Loan loans A, B, C….. Fixed Maturity Fixed annuity payment Cash flow to bank known Requires securities This project is funded by the European Union
  • 10. What is a Feed-in-Tariff anyway ? Parliament Eminent Experts Treasury Electricity ConsumersThis project is fundedby the European Union 10
  • 11. What is a Feed-in-Tariff anyway- Part 1 ? Sponsoring Minister and Parliamentarians“ An Act to provide a leveled playing field and improvecompetiveness of renewable energy based electricitygeneration with the objective of creating additional jobsfor the local industry, or even export opportunities” This project is funded by the European Union 11
  • 12. What is a Feed-in-Tariff anyway- Part 2 ? Eminent Expert“ Tariff for renewable energy based electricitygeneration which should provide investors “fullcost recovery + profit” over the economic life ofthe investment. In other words almost risk free !This project is fundedby the European Union 12
  • 13. What is a Feed-in-Tariff anyway- Part 3 ? Treasury’s expectations“ A tariff that covers the incremental costs ofrenewable energy based electricity generation butthat should not increase the energy subsidies inthe national budget“ . In other words tax it !This project is fundedby the European Union 13
  • 14. What is a Feed-in-Tariff anyway- Part 4 ? Opinion of those electricity consumers that do not participate in a FIT scheme“ We all love clean and green electricity as longas the FIT does not impose a tax of between 3%and 10% on our monthly electricity bill.This project is fundedby the European Union 14
  • 15. Relevant inputs - 1- No matter which power plant is analyzed, each one hasa specific annual NET YIELD in kWh/kW or MWh/MWthat must be specified in the technical offer.- For RE plants avoid any other specification such aspower plant efficiency or plant load factor.- The NET YIELD is quantified at the feed-in-meter thatmeasures the kWh sold and refers to first year averagedperformance or the expected initial performance. This project is funded by the European Union
  • 16. Technical Information Typical average Net Yield and PLF figures Technology Net Yield PLF Nuclear Power Plant 8200 94 Base Load Coal 7700 88 Combined Cycle Gas Turbine 5500 63 Wind average Egypt ~ 3100 ~ 35 CSP with storage (3 - 8 hours) > 3000 > 35 CSP (no storage) Egypt 1930 22Wind average 25,000 MW Germany 1840 21 PV Egypt 1670 19 PV Germany 880 10 Peak Load Gas Turbine 800 9 This project is funded by the European Union
  • 17. Technical Information Typical range of over night investment costs 2010 Technology US$ Million / MW CSP with storage (3 - 8 hours) >100 MW 5-9 CSP (no storage) > 100 MW 3-5 PV (rooftop very small < 5 – 20 kW) 4-5 PV large >100 MW 2-3Base load coal power plant, 800 MW block 1.8 - 2.5 Wind > 1 MW 1.6 - 2 Combined cycle gas turbine 0.7 -1 Peak load gas turbine 0.5Note that in particular PV power plant as well as gas turbinepower plant prices are changing constantly due to highlyfluctuating demand and supply. All figures are order of magnitude. This project is funded by the European Union
  • 18. Relevant Inputs - 2- The Plant Load Factor (PLF) in percent is always calculatedby dividing the Net Yield by 8760 hours.- Each power plant has operation and maintenance costs thatcan be expressed as a percentage of the investment costs.Variable fuel and consumable costs are not included- O&M costs are exposed to an annual inflation in % This project is funded by the European Union
  • 19. Technical Information Typical average operation and maintenance costs Technology % of investment PV larger grid connected power plant 0.5 -1.0 Wind( excludes royalties for land of US$ 1.5 – 2.0 2,000-15,000 per MW/year) Thermal CSP (depending on technology) 2.0 – 4.0 Combined Cycle Gas Turbine 5 -10- Operation and maintenance costs do not include anyvariable fuel costs or consumables but may includeannual royalties or fees paid for the land.- The fixed O&M costs are linked to the investmentcosts and not to the kWh generation costs ! This project is funded by the European Union
  • 20. Relevant Inputs - 3- Some power plants experience an annual deterioration in %of the first year’s expected Net Yield- One may calculate the incremental generation cost againsta Base Tariff in Currency / MWh and also assume an annualinflation rate of this Base Tariff in % .- The generation costs are calculated over an observationperiod which may or may not be the useful power plant life This project is funded by the European Union
  • 21. Relevant Inputs - 4- Fossil fuel fired thermal power plants are specified by theirefficiency. Best expressed in “Net GWh(e) / HHV of fuel”- The fuel costs are universally expressed in “Currency perMWh of energy based on the higher heating value (HHV)”- Fuel cost change with annual inflation / deflation in % This project is funded by the European Union
  • 22. Technical Information Energy, mass and volume converter http://www.iea.org/stats/unit.asp1 Barrel of oil = 1.72 MWh1 Million BTU = 0.293 MWh1000 cubic feet natural gas about 1 Million BTU1000 cubic feet = 28.3 cbm Natural Gas Price Conversion to MWhUS$ / Million BTU 5 10 20 US$ / MWh 17 34 68 Barrel of Oil Price Conversion to MWh US$ / Barrel 50 75 100 US$ / MWh 29 44 58 This project is funded by the European Union
  • 23. Technical InformationThis project is fundedby the European Union
  • 24. Technical InformationRange of fossil fuel power plant efficiency figures Technology Efficiency % District heating or cooling power plant 60 - 85 Diesel generator set with heat recovery 50 - 90 Combined Cycle Gas Turbine 50 - 52Base load coal (sub to super critical range ) 38 - 45 Large diesel generator set > 1 MW 40 - 44 Small diesel generator set 10 - 50 kW 32-36 Jet engine peak load power plant 30 This project is funded by the European Union
  • 25. Technical InformationReal example of a large subcritical 600 MW hard coalfired power plant performance based on four differentdefinitions of power plant efficiency.• The green colored definition is recommended sinceit reflects on reality. However it is also always thelowest figure of all four definitions GCV NCV Net MWh 36.0% 37.4% Gross MWh 39.1% 40.7% This project is funded by the European Union
  • 26. Relevant Inputs - 5- To simulate dual firing specify how many more GWh ofelectricity in % of the RE based Net Yield shall be generated- There may additional investments costs in US$ / MW for thefossil fuel option necessary.- MW-f calculates the necessary MW capacity of the fossil fueloption under a PLF=85% scenario for this option. This project is funded by the European Union
  • 27. Relevant Financial Inputs - 5- The financing model covers all common financing scenariosincluding grant, equity and up to four loans.- The length of repayment of each loan, the nominal annualinterest rate in % and the grace period must be specified foreach loan contributing to financing of the investment costs This project is funded by the European Union
  • 28. Example : 100 MW PV plant Important features• Nominal cash flows over 20 years to show arealistic picture of the cost and price developments• Actual annual payments to pay back the loanwith interest including the return on equity for theprivate sector investors over 20 years• The important inflation of services and goods isinfluencing three cost items: The O&M cost, fuelcosts and reference base tariff. This project is funded by the European Union
  • 29. This project is fundedby the European Union
  • 30. Annual generation over 20 years ……This project is fundedby the European Union
  • 31. Generation costs and weighted average ……This project is fundedby the European Union
  • 32. Operation and Maintenance Costs ……This project is fundedby the European Union
  • 33. Operation and Maintenance Costs, Cents/kWh ……This project is fundedby the European Union
  • 34. Total annual costs in US$ Million ……This project is fundedby the European Union
  • 35. This project is fundedby the European Union
  • 36. Incremental Cost or Savings , Cents / kWh ……This project is fundedby the European Union
  • 37. Incremental Cost or Savings , US$ Million ……This project is fundedby the European Union
  • 38. Accumulated incremental Cost or Savings ……This project is fundedby the European Union
  • 39. THANK YOU albrecht.kaupp@giz.deThis project is fundedby the European Union 39