Energy Economics


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These slides cover the levelized cost of electricity, and the simple economics of energy imports.

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Energy Economics

  1. 1. Electricity Pricing and Other Topics Environmental Economics II Spring 2014 Lecture based on Borenstein and Field Ch. 11 Prof. Maggie Winslow
  2. 2. Levelized Cost of Electricity • LCOE is the price for electricity required to equate the NPV of the revenue from electricity production with the NPV of the cost of production. N LCOE Cn(qn ,...qN ) å qn ´ (1 + r )n = å (1 + r )n n=1 n=0 N
  3. 3. N Cn (qn ,...qN ) å (1+ r)n LCOE = n =0 N qn å (1+ r)n n =1 • This is the discounted stream of costs divided by the discounted stream of quantity produced.
  4. 4. Why is LCOE Important? • These estimates can affect policy decisions regarding alternative energy production options. • However, LCOE is difficult to estimate.
  5. 5. Difficulties in Estimating LCOE • Forecasts of future fuel prices important but lots of uncertainty. High variance in forecasts. • Some generation just for peak times, other for base times so LCOE not comparable (capacity factor issue) • Timing of generation is important due to difficulties with storage – how do you value this? – Electricity demand is fairly inelastic in the short term so supply must be very elastic to avoid brownouts. – Dispatchable vs. intermittent • Location of generation can make a difference in value due to cost of transmission. • Doesn’t include changes in price of electricity year to year which is relevant to timing of costs and generation.
  6. 6. LCOE and Externalities • Cost of externalities not included, but costs of meeting regulations are. – Would including cost of externalities matter in choice of generating facility?
  7. 7. How to Promote Renewables? • Subsidies for green power helpful but not the right approach: – Makes power cheaper so doesn’t promote energy conservation, – Doesn’t recognize the variations in the power being replaced. e.g. replacing coal fired plant more beneficial than replacing gas fired plant. – Not clear that it helps develop the industry for the international market. • Not the same as taxing brown power
  8. 8. Energy Subsidies (Field, pg.197) • Reduced taxes for producers to encourage certain types of production (ethanol, domestic) • Public support for R&D (ex. coal gasification) • Public insurance (nuclear power) • Not charging for externalities (free use of public goods) • Direct payment for adopting certain technologies.
  9. 9. Energy Subsidies (Borenstein pg.12) • Fossil fuel subsidies from 2002- 2008 = $72 billion • = about $0.0011 per kWh
  10. 10. Shadow Pricing • When true value does not show up in the market, shadow pricing provides a proxy value. • This could be used to include the cost of externalities when evaluating the cost of various generation options.
  11. 11. Electricity Generation and Environmental Externalities: Case Studies, DOE/EIA-0598 1995
  12. 12. Net Metering • Small scale electricity generators being paid for the electricity they generate. • Varies in different areas. • Difficult due to high fixed cost associated with electricity generation and distribution. • Fixed costs can vary little when customers generate their own electricity. • Off-setting peak power could reduce fixed cost needs.
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  14. 14. Current Issue – Energy Independence
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  16. 16. Import Dependence: The Simple Economics of Petroleum Importation (from Field Chapter 11) P SD SI P* Demand q2 q1 Q
  17. 17. Increase ratio domestic and decrease imports through decreased demand P SD SI P* Demand q2 q1 Q
  18. 18. Increase total domstic amount and decrease imports through investing in domestic extraction P SD SI P* Demand q2 q1 Q
  19. 19. Increase the cost of imports through tarriffs P SD SI P* Demand q2 q1 Q
  20. 20. In Class Exercises