KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Keuze van elektriciteitscentrales : economie versus milieu Prof. Stef Proost Centrum voor Ekonomische Studiën

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN The Royal Ampere Commission What type of new power plants in the future? Coal, Gas, Nuclear, Renewable… Take into account Environmental constraints Economic considerations

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Literature Ampere Group Report I Static Approach Proost & Van Regemorter Dynamic or multi-period model Approach

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Outline and assumptions Two methods Static comparison Dynamic comparison with Markal Common Assumptions Opportunity costs = market prices for fuel, equipment and labour Gross wage is in long term good indication of productivity so gross wage is opportunity cost This implies that “employment” is not an objective when we choose power plants Fuel price scenarios External costs (health damage) per type of pollutant Production in Belgium

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Methodology - Static Comparison - 1 Compare costs in BEF or EURO per kWh e Fuel cost (BEF/GJ) / plant efficiency (kWh/GJ) + Other variable costs BEF/kWh + Fixed costs Annuity or rental cost (BEF/kW) divided by expected max. operating hours per year + External costs BEF/kWh Electricity production with Combined Heat and Power (CHP) Cost of electricity generated by CHP=Total cost CHP - Avoided costs for heat production

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Methodology - Static Comparison - 3 Assumptions Plants operate at maximal production per year Costs and benefits are discounted at 5% Estimated technical lifetime of different plants Technologies : efficiency, costs, emission factors Long discussions among engineers, see Table I.2 for the outcome Fuel prices (up to 2030) Oil and gas:steadily increasing prices Coal: stable prices External costs Taken from Extern-E, see Table I.1

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Methodology - Static Comparison - 4

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Static Comparison - Ranking Nuclear If accepted and if international tendering for construction STAG power plant But gas remains transitory fuel for base load Wind turbine off shore Limited potential Decentralised power supply means extra costs Pulverised Coal Cheap but dirty fuel CHP production (table I.6,Fig I.2) Small potential Not really cheaper, despite computation method

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Static Comparison - Caveats Contribution to guaranteed power is not taken into account Production of CHP, wind and solar is not driven by demand Real operating time during lifetime is not taken into account Determined by total demand and cost of alternatives Demand reductions are not an option in this exercise Potential total capacity is very small for some technologies Comparison only holds for locations with the lowest costs

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Dynamic Comparison - 1 Basic idea Use Markal for the Belgian energy sector Period Compute optimal investment strategy for electricity and other sectors Subject to two types of constraints Allow nuclear plants or not Kyoto obligation for the Belgian energy sector as a whole Kyoto Target for Belgium Reduce 2010 GHG emissions by 7,5% relative to 1990 level Our assumptions Extra efforts are needed and imposed after % in 2030 No emission permits are bought abroad

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Dynamic Comparison - 2 Advantages of this approach Issue is 2020 and later, not 2010 (see static approach) Analyse merits of plants over the whole lifetime Compare efforts in different sectors and in demand reduction In the static comparison One CO 2 damage value was used in the assessment Demand reduction was missing as an option

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN The MARKAL Model Demand for energy services 40 types of energy services are identified Heating of buildings, high temp heat for chemical industry… Supply of energy services All energy saving and energy production technologies in operation in Belgium Major assumption Perfect foresight and no market barriers

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN MARKAL Equations - 1 Example with one energy service (heating) X Produced by two technologies Z and Y For every technology, we have Running costs c (fuel cost and other operation costs) Investment costs C (annuity formulation) Existing capacities Y°, Z° Emission rates Simulate market equilibrium with perfect foresight and perfect emission taxes Equal to shadow value of the emission constraint

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN MARKAL Graph Z° Y° Energy service Cost of energy service Demand function energy services c(y) X market X opt c(z) Shadow value of emission constraint

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Reference Scenario Assumptions Increasing oil and gas prices Reduce growth of energy demand Investment in nuclear power stations is possible Non-GHG external costs of power production are not taken into account No Kyoto constraint Electricity generation potential in Belgium Nuclear Maximum of 8000 MW on existing sites is possible Wind energy MW onshore and 1000 MW offshore

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Reference + Scenario - Results Note: this scenario differs from the reference scenario only because of the internalisation of non-GHG costs in all sectors.

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN No New Nuclear

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN No New Nuclear with Kyoto Constraint

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN With New Nuclear and Kyoto Constraint

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Who Should Make the Efforts Kyoto implies higher efforts for the energy sector and industry Energy sector:-26% Industry:-33% Residential & Service sector:-6% Transport:-3% Explanation Existing taxes on fuel in residential and transport sector Already Induce large energy efficiency efforts in these sectors

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Effect of High Oil Prices Decrease in energy demand helps to reduce CO 2 emissions from oil and gas Incentive to use coal power plants This increases CO 2 emissions On Balance no major effect on CO 2 emissions

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Caveats No European trade in emission rights Trade in emissions rights would reduce the difference between scenarios with and without Kyoto IF European electricity market in the model Requires more transmission capacity Easy to export pollution problem abroad by producing less But other countries will have to reduce emissions of CO2 further and Imported Electricity will become more expensive When prices are set at

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Conclusions Static comparison needs to be supplemented by a dynamic approach A nuclear moratorium is very costly when there is also a CO 2 emission constraint Not impossible but multiple policies are needed Demand reduction by announcing higher electricity prices Use more renewables but using different government policies Replace coal by gas

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Stef Proost CES-KULeuven Methodology - Static Comparison - 2 Comparing capital cost and variable cost Capital cost Investment costs Variable cost Fuel cost, non-fuel cost (operation, maintenance…) Two procedures Aggregation of all costs and benefits over the time horizon (see dynamic analysis) On an annual basis (annuity = C)

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Methodology - Static Comparison - 5

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN MARKAL Equations - 2 The optimisation problem Maximise Consumer Surplus – Costs Such that Emissions remain lower than what is allowed (Ẽ) Capacity limits are respected

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Models Used in this Exercise POLES A model for world energy demand and supply GEM-E3 A general equilibrium model for 15 EU countries Developed by European consortium MARKAL A partial equilibrium model for the Belgian energy system Developed for Belgium by CES - VITO

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Scenario’s Energy Price Assumptions (POLES) EU Macro-economic background (GEM-E3) GHG measures Energy efficient choices by agents (MARKAL) Reference scenario + No nuclear Kyoto constraint International energy prices Overall world economic activity level Reference case (nuclear No Kyoto) Belgian economic activity level by sector Demand for energy services Reference scenario + Kyoto constraint Reference scenario + No nuclear Ranking of measures in function of cost- efficiency Exogenous input on technological development and costs of alternatives

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Demand and Supply of Energy Services Step 1: B Step 2: C Step 3: D cost of GHG policy in 2010 cost in reference in 2010 cost in reference in 1990 Price or Cost of Energy Services X0X0 B D C Demand function in A in 1990 Demand function in A in 2010 Level of Energy Services X1X1 X2X2 GEM-E3

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Cost of Abatement Cost 1 The net cost for end users in the energy market No other externalities in energy market No distortions on other markets No income distribution concerns Cost 2 Cost 1 + secondary benefits on other energy externalities SO 2, NO x...