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Energy Economics
- 1. Electricity Pricing andOther Topics Environmental Economics II Spring 2014 Lecture based on Borenstein and Field Ch. 11 Prof. Maggie Winslow
- 2. Levelized Cost ofElectricity • 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. 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. Why is LCOEImportant? • These estimates can affect policy decisions regarding alternative energy production options. • However, LCOE is difficult to estimate.
- 5. Difficulties in EstimatingLCOE • 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. 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. How to PromoteRenewables? • 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. 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. Energy Subsidies (Borenstein pg.12) •Fossil fuel subsidies from 2002- 2008 = $72 billion • = about $0.0011 per kWh
- 10. Shadow Pricing • Whentrue 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. Electricity Generation andEnvironmental Externalities: Case Studies, DOE/EIA-0598 1995
- 13. Net Metering • Smallscale 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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- 20. Current Issue –Energy Independence
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- 23. Import Dependence: TheSimple Economics of Petroleum Importation (from Field Chapter 11) P SD SI P* Demand q2 q1 Q
- 24. Increase ratio domesticand decrease imports through decreased demand P SD SI P* Demand q2 q1 Q
- 25. Increase total domsticamount and decrease imports through investing in domestic extraction P SD SI P* Demand q2 q1 Q
- 26. Increase the costof imports through tarriffs P SD SI P* Demand q2 q1 Q
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Editor's Notes
- #6 Timing – renewable generation during peak load times has more value than during off peak times.
- #7 Ask what would be included in LCOE calculation. Externalities case studies paper – EIA.
- #10 Not enough to change cost in relation to renewables.
- #24 The world price doesn’t change but domestic supply is upward sloping. In order to encourage more production, prices should increase.