1. LUCIANO LOSEKANN DIOGO LISBONA EDMAR DE ALMEIDA
Competitiveness and System Value of Electricity Generation Technologies The Brazilian Case
LUCIANO LOSEKANN
DIOGO LISBONA
EDMAR DE ALMEIDA

2. Energy Planning questions
How to compare different types of electricity generation technologies?
What is the value of the electricity generated by each source?

3. Traditional answer: levelized cost of electricity – LCOE
annualized capital cost
internalizing externalities
𝐋𝐂𝐎𝐄 = 𝐝𝐢𝐬𝐜𝐨𝐮𝐧𝐭 𝐫𝐚𝐭𝐞 × 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐜𝐨𝐬𝐭𝐬 + 𝐟𝐢𝐱𝐞𝐝 𝐎&𝐌 𝐚𝐧𝐧𝐮𝐚𝐥 𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐠𝐞𝐧𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐡𝐨𝐮𝐫𝐬 +𝐯𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐎&𝐌+𝐟𝐮𝐞𝐥
+ 𝐜𝐚𝐫𝐛𝐨𝐧 𝐩𝐫𝐢𝐜𝐞
$/MWh
projected capacity factor
Treats electricity as a homogeneous good (subject to single price law)
Academics, policy makers, and industry actors compare different sources in terms of LCOE

4. LCOE is based on evident misconception: electricity is not a homogeneous good
It is not economically viable store electricity on a large scale
Real-time balancing between supply and demand
Renewable energy diffusion
Electricity can be generated both through dispatchable and non- dispatchable sources (availability depends on the weather)
Electricity is a heterogeneous good in space and time dimensions
Value depends on “when, where, and how” it is produced
Joskow (2011), Boresntein (2012), Hirth (2013), Schmalensee (2016), Finon (2016), and many others recognize that we must compare different types of technologies according to their expected generation profiles and respective market values

5. Benefit-cots analysis (LACE – LCOE) levelized avoided cost of electricity (LACE)
expected generation weighted by marginal price
different time periods
backup cost
(LCOE of SCCT)
capacity contribution for peak hours
𝐋𝐀𝐂𝐄= 𝐭=𝟏 𝐓 𝐦𝐚𝐫𝐠𝐢𝐧𝐚𝐥 𝐠𝐞𝐧𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐩𝐫𝐢𝐜 𝐞 𝐭 ×𝐝𝐢𝐬𝐩𝐚𝐭𝐜𝐡𝐞𝐝 𝐡𝐨𝐮𝐫 𝐬 𝐭 + 𝐜𝐚𝐩𝐚𝐜𝐢𝐭𝐲 𝐩𝐚𝐲𝐦𝐞𝐧𝐭×𝐜𝐚𝐩𝐚𝐜𝐢𝐭𝐲 𝐜𝐫𝐞𝐝𝐢𝐭 𝐚𝐧𝐧𝐮𝐚𝐥 𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐠𝐞𝐧𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐡𝐨𝐮𝐫𝐬
projected capacity factor
$/MWh
LACE: expected revenue from energy market + capacity market
Benefit (marginal value) = avoided cost by the displacement of more costly dispatches and by avoided additional capacity reserve
US EIA annually publishes estimates for several sources since 2013

6. Variable renewable energy (VRE) Avoided costs or additional (hidden) costs?
In traditional power systems
(not designed for VRE), a high
VRE penetration level imposes:
DYNAMIC EQUILIBRIUM PROBLEMS
(SYSTEM ADEQUACY)
MERIT-ORDER EFFECT
SELF-CANNIBALIZATION EFFECT
STATIC EQUILIBRIUM PROBLEMS
(REAL-TIME BALANCING)
GRID CONSTRAINTS

7. VRE: a new protagonist Prominence imposes challenges
LOAD
(GW)
LOAD DURATION CURVE
LOW CAPACITY
CREDIT
NET LOAD DURATION CURVE
VARIABLE RENEWABLES
DISPATCHABLE PLANTS
BASELOAD REDUCTION
HOURS OF ONE YEAR
OVERPRODUCTION

8. From cost to value Assimilating integration costs
All sources are subject to integration cost (even if negative = benefit)
It is not a market failure, but it is inherent to any kind of source
In the policy debate is often suggested that once the cost of a source reaches a certain level (in relation to the wholesale average electricity price or the grid parity), this source becomes competitive
This is completely misleading! Given the integration cost recognition, a certain source is never competitive “ad infinitum”
At a certain cost level, a certain AMOUNT of a source power is competitive

9. System Value Approach and the Brazilian case
The IEA advocates and spreads the system value approach in its reports
The IEA has also studied the Brazilian case, BUT
Neglected the comparison method deployed in centralized auctions to selected the source of new capacity

10. BRAZIL HYDRO RESERVOIRS = 212 TWh POWER CONSUMPTION TWh
SOUTHEAST/MIDWEST
BRAZIL
POWER CONSUMPTION
TWh
SOURCE: CCEE, ONS, EPE

11. High complementarity between hydro and VRE Lower Integration Costs?
SOURCE: CCEE

12. Expansion through centralized auctions
SOURCE: CCEE

13. Cost-benefit Index (ICB)
Compares and selects different sources that are contracted by "availability contracts" in the expansion auctions
Thermal power (NG, coal, oil products, biomass), wind, and solar
Objective: estimate future operation costs and availability costs (the cost of new capacity contracted and not dispatched in the future)
ICB captures the system value of backup thermal complementation and the complementarity of VRE in face of hydro predominance
Calculation depends on operation marginal cost (OMC) projected
2000 monthly hydrological series (values of OMC)
Horizon of simulation: 60 months

14. Cost-benefit Index (ICB) calculation
𝐂𝐎𝐏= 𝐢=𝟏 𝟔𝟎 𝐣=𝟏 𝟐𝟎𝟎𝟎 [𝐂𝐕𝐔×(𝐆𝐄𝐑 𝑨 𝐢,𝒋 −𝐈𝐍𝐅𝐋𝐄𝐗)×#𝒉𝒐𝒖𝒓𝒔] 𝐢×𝒋 ×𝟏𝟐
𝐂𝐄𝐂= 𝐢=𝟏 𝟔𝟎 𝐣=𝟏 𝟐𝟎𝟎𝟎 [𝐏𝐋𝐃×(𝑮𝑭−𝐆𝐄𝐑 𝑨 𝐢,𝒋 )×#𝒉𝒐𝒖𝒓𝒔] 𝐢×𝒋 ×𝟏𝟐
= Fixed Revenue
𝐈𝐂𝐁≡ 𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭𝐬+𝐄 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐂𝐨𝐬𝐭𝐬 +𝐄 𝐀𝐯𝐚𝐢𝐥𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐂𝐨𝐬𝐭 𝟖𝟕𝟔𝟎 𝐱 𝐏𝐡𝐲𝐬𝐢𝐜𝐚𝐥 𝐆𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞
$/MWh
estimated benefit of capacity for the future supply (reduces capacity credit by taking into account expected capacity factor)

15. Energy contracted in all expansion auctions
GWavg
36%
18% 6%
15%
46% 7% 5%
12%
22% 1%
SOURCE: CCEE

16. Energy contracted in auctions with ICB
16 GWavg [Oil 33% | Hydro 30%]
10 GWavg [NG 35% | Wind 33%]
GWavg
SOURCE: CCEE

17. Integration Costs in Brazil backward-looking or forward-looking?
ICB is in accordance with hydrological variability
favored flexible thermal power plants (low fixed cost and high variable cost) and complementary sources to hydropower (wind)
But ICB is insensitive about VRE variability
Does not account for short-term variability, neither the location of power plants
System is changing  transformations point to a new operation paradigm
Loss of the hydro reservoirs regularization degree
Higher annual depletion  higher thermal complementation
Higher penetration level of VRE (new dimension of variability)
Short-term variability (cost) must be internalized
Flexibility (benefit) must be recognized (pricing)
FORWARD-LOOKING

18. System transformation marginal value of water (shadow electricity price) is changing
“water tank” is losing importance due to load increases and stagnation of storable energy
SOURCE: ONS

19. After all, what is the moral of the story?
We cannot compare different sources without taking into account integrations costs For expansion purposes, we must look to dynamic integration costs The big challenge of system value approach lies in correctly identifying, at an appropriate time, the ongoing system transformations

20. Thanks for your attention!