Risks & Cost of Wind Energy Global Challenges and Opportunities European Wind Energy Conference Milan, Italy 9 May, 2007 Soren Krohn, World Bank Group, ESMAP, Energy Sector Management Assistance Program

Summary Global Risk & Cost: Climate Change & Mitigation Cost Global Risk & Cost: Climate Change & Mitigation Cost National Risk & Cost: Optimal Generation Portfolio National Risk & Cost: Optimal Generation Portfolio Project Risk & Cost: Optimal Risk Sharing Buyer / Seller Project Risk & Cost: Optimal Risk Sharing Buyer / Seller

Global Risk & Cost Climate change debate (Stern) driving policy planning Climate change debate (Stern) driving policy planning Key Variables for Economists: Key Variables for Economists: Temperature = f(greenhouse gas concentration)Temperature = f(greenhouse gas concentration) Mitigation cost / ton CO 2 equivalent...and development over timeMitigation cost / ton CO 2 equivalent...and development over time Baseline energy consumption pathBaseline energy consumption path GDP / Capita developmentGDP / Capita development Elasticity of marginal utility of incomeElasticity of marginal utility of income Pure rate of time preferencePure rate of time preference

Global Risk & Cost Concern that wind turbine prices have grown as much as oil prices Concern that wind turbine prices have grown as much as oil prices Could lead to wind being left out in favor ofCould lead to wind being left out in favor of Energy Efficiency Energy Efficiency Other Renewables (Solar PV case) Other Renewables (Solar PV case) Nuclear Nuclear "Clean" coal "Clean" coal Adaptation to climate change Adaptation to climate change Doing nothing Doing nothing Concern about uncertainty of CO 2 prices Concern about uncertainty of CO 2 prices Global carbon price neededGlobal carbon price needed

(National) Economic Risk & Cost WBG Guideline: Neither risk aversion nor risk seeking at project level WBG Guideline: Neither risk aversion nor risk seeking at project level Exception: Population welfare at stake (oil-GDP effect) Exception: Population welfare at stake (oil-GDP effect)

(National) Economic Risk & Cost Traditional method, China: Traditional method, China: Find least cost technology solutionFind least cost technology solution

(National) Economic Risk & Cost Systematic resource risk (bad hydro experience) => diversification away from hydro Systematic resource risk (bad hydro experience) => diversification away from hydro Fuel price volatility => Weighing cost against risk (not happening at present) Fuel price volatility => Weighing cost against risk (not happening at present) Models inadequate Models inadequate

Accounting for fuel price risk in power systems planning Accounting for fuel price risk in power systems planning Economic methodology development with more to come… Madness or Method?

Risk in Power Systems Planning Develop quantitative model based on: Develop quantitative model based on: National fuel prices (large uncertainty)National fuel prices (large uncertainty) O&M costs (some uncertainty)O&M costs (some uncertainty) Capital costs (no uncertainty)Capital costs (no uncertainty) Other risks, e.g. CO 2 value (large uncertainty)Other risks, e.g. CO 2 value (large uncertainty) Risk preferencesRisk preferences Develop recommendations on data Develop recommendations on data Test model on 2 countries (backcasting), discuss, upgrade Test model on 2 countries (backcasting), discuss, upgrade Plug-in for WASP, train users & use it! Plug-in for WASP, train users & use it!

Project Risk & Cost Develop tool for energy regulators for optimal risk sharing between buyer and seller Develop tool for energy regulators for optimal risk sharing between buyer and seller Exogenous risks Exogenous risks Oil prices, exchange rate, interest rate,...Oil prices, exchange rate, interest rate,... Endogenous risk Endogenous risk Seller controlled Project cost overrun, generator availability, mean wind,...Seller controlled Project cost overrun, generator availability, mean wind,... Buyer controlled Grid availability, nationalization,...Buyer controlled Grid availability, nationalization,...

WBG Wind Energy Projects Argentina, Bolivia, Brazil, Bulgaria, Argentina, Bolivia, Brazil, Bulgaria, Cap Verde, Chile, China, Colombia, Cap Verde, Chile, China, Colombia, Costa Rica, Croatia, Djibouti, Costa Rica, Croatia, Djibouti, Dominican Republic, Ecuador, Egypt, Dominican Republic, Ecuador, Egypt, Estonia, Ghana, Honduras, Hungary, Estonia, Ghana, Honduras, Hungary, India, Jordan, Kazakhstan, Latvia, India, Jordan, Kazakhstan, Latvia, Malaysia, Mexico, Kenya, Morocco, Malaysia, Mexico, Kenya, Morocco, Nicaragua, Outer Mongolia, Pakistan, Nicaragua, Outer Mongolia, Pakistan, Panama, Philippines, Poland, Romania, Panama, Philippines, Poland, Romania, Russia, South Africa, Slovakia, Sri Lanka, Russia, South Africa, Slovakia, Sri Lanka, Tanzania, Tunisia, Turkey, Ukraine, Tanzania, Tunisia, Turkey, Ukraine, Uruguay, Western Balkans, Yemen Uruguay, Western Balkans, Yemen

Thank You ! Contact Contact Soren Krohn,World Bank worldbank.org ESMAP.org worldbank.org/retoolkitSoren Krohn,World Bank worldbank.org ESMAP.org worldbank.org/retoolkit