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falko.ueckerdt@pik-potsdam.de
falko.ueckerdt@pik-potsdam.de
System LCOE: What are the costs of variable renewables? Falko - - PowerPoint PPT Presentation
System LCOE: What are the costs of variable renewables? Falko - - PowerPoint PPT Presentation
System LCOE: What are the costs of variable renewables? Falko Ueckerdt, Lion Hirth, Gunnar Luderer, Ottmar Edenhofer Working paper available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2200572 Paris, June 20, 2013 32th International
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Annual Energy Outlook 2013 (DOE/EIA)
Levelized costs of electricity (LCOE) are the full life-cycle costs (fixed and variable) of a technology per generation unit
Projected LCOE for the US in cents per kWh
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Projected Costs of Generating Electricity (IEA, 2010) LCOE for plants commissioned in 2015 at 5% discount rate
Levelized costs of electricity (LCOE) are the full life-cycle costs (fixed and variable) of a technology per generation unit
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When will wind power be competitive? (investor)
Average electricity price LCOE of wind
„As soon as wind LCOE will be fallen below those of conventional plants!“
- r equivalently
„When LCOE are equal to the average electricity price!“ What is the optimal amount of wind? (modeler/policy maker)
However, this is all wrong!
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When will wind power be competitive? (investor)
Average electricity price LCOE of wind
„As soon as wind LCOE will be fallen below those of conventional plants!“ Don‘t compare LCOE of different technologies!
- r equivalently
„When LCOE are equal to the average electricity price!“ Don‘t compare generation costs with the average price! What is the optimal amount of wind? (modeler/policy maker)
However, this is all wrong!
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Electricity is a unique commodity
Demand is variable, storage is costly Demand is uncertain. Ramping of plants is costly Transmission is costly The value (price) of electricity varies over time Short-term balancing is costly The value of electricity varies between locations Generation of different technologies is no perfect substitute, e.g. „nuclear power“ is not „wind power“ Do not compare LCOE Electricity is a heterogeneous good
- ver time
Heterogeneous w.r.t. lead-time between contract and delivery Heterogeneous across space
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Variable renewables make electricity even more unique
Output is fluctuating Output is uncertain Bound to certain locations
- Wind speeds and
solar radiation vary
- ver time
- Thus its value
depends on when it is produced
- Winds and radiation
is uncertain day- ahead
- Forecast errors are
costly
- Resource quality
varies geographically
- Thus its value
depends on where it is generated „Profile costs“ „Balancing costs“ „Grid-related costs“
Integration costs
(are neglected in LCOE comparison)
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System LCOE are defined as the sum of generation and integration costs
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Profile costs: Residual load duration curve shows challenges
Load (GW) Hours of one year (sorted)
Reduced full-load hours Low capacity credit Overproduction
Load duration curve Residual load duration curve
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Profile costs: Residual load duration curve shows challenges
- 100
- 50
50 100 hours of a year (sorted) Residual load (% of peak load) 0% Solar PV 10% Solar PV 20% Solar PV 30% Solar PV 40% Solar PV 50% Solar PV
- 100
- 50
50 100 hours of a year (sorted) Residual load (% of peak load) 0% Wind 10% Wind 20% Wind 30% Wind 40% Wind 50% Wind
Wind Solar German data
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System LCOE are defined as the sum of generation and integration costs
Static Dynamic
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When will wind power be competitive? (investor)
Average price LCOE of wind
What is the optimal amount of wind? (modeler/policy maker)
System LCOE of wind
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When will wind power be competitive? (investor)
Average price = margin inal l value o e of „power er“ LCOE of wind = margin inal costs ts o
- f „win
ind“
What is the optimal amount of wind? (modeler/policy maker)
System LCOE of wind = marginal cos costs of
- f „powe
wer“ when produced from wind plant
Interpretation
- There are two goods “wind” and “power”
- „Power“ is perfectly matching load
- Additional costs needed to transform „wind“ into „power“ integration costs
- The total costs to cover load with „wind“ are System LCOE
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falko.ueckerdt@pik-potsdam.de
16 €/MWh Average electricity price Profile Costs Balancing Costs Grid- related Costs Wind Market Value
Integration costs
€/MWh Wind’s LCOE Profile Costs Balancing Costs Grid- related Costs Wind’s System LCOE
Market Value Perspective System LCOE Perspective
Two perspectives, one framework: System LCOE and market value
marg rginal v l value
- f „
„powe wer“ marg rginal c l costs
- f „
„wi wind“ marg rginal l costs s
- f „
„powe wer“ marg rginal v l value
- f „
„wi wind“
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Profile Costs: The “Cannibalization” Effect
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Market value of wind decreases with increasing share
Integration costs increase
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Average price = margin inal l value o e of „power er“ LCOE of wind = margin inal costs ts o
- f „win
ind“ System LCOE of wind = marginal cos costs of
- f „powe
wer“ when produced from wind plant
Two perspectives, one framework: System LCOE and market value
Market value = marg rginal l value o e of „wi wind“
Integration costs
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System LCOE – magnitude and shape
5 10 15 20 25 30 35 40 20 40 60 80 100 120 140 Final electricity share of Wind (%) System LCOE Short-term System LCOE LCOE Long-term capacity adjustment Grid costs Balancing costs Profile costs Generation costs
Integration costs Generation costs
Wind: System LCOE
Final elecitricity share of wind (%)
- Integration costs of wind power can be in the same range as generation costs at moderate
shares (~20%)
- A significant driver of integration costs are profile costs, especially the reduced utilization of
capital-intensive thermal plants. Integration costs can become an economic barrier to deploying VRE at high shares. An economic evaluation of wind and solar power must not neglect integration costs.
- From literature: Grid and balancing costs
(Holttinen et al. 2011; Gross et al. 2006; Hirth 2012a, dena 2010)
- From a simple model: profile costs.
- Parameterized from German data,
representative for thermal systems in Europe
- Caveats that increase integration costs
- No import/export
- No demand elasticity
- No storage
- Power sector only
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The market value (here value factor) reduces: Market Data, Model Results, Literature Review
At 30% penetration, the value factor of wind falls to 0.5 – 0.8 of the base price. In Germany, it has already fallen from 1.02 to 0.89 as penetration increased from 2% to 8%.
1. 2. 3.
Hirth, Lion (2013): "The Market Value of Variable Renewables", Energy Economics 38, 218-236.
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Conclusions
- 1. We show that LCOE are a flawed indicator to evaluate power technologies
- 2. We propose a better metric ‘System LCOE’
- 3. We present a framework of System LCOE and market value and link it to welfare
theory
- 4. Integration costs of wind power can be in the same range as generation costs at
moderate shares (~20%)
- 5. A significant driver of integration costs are profile costs, especially the reduced
utilization of capital-intensive thermal plants.
- 6. Integration costs can become an economic barrier to deploying VRE at high
shares.
- 7. An economic evaluation of wind and solar power must not neglect integration