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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
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Energy Planning questions
How to compare different types of electricity generation technologies? What is the value of the electricity generated by each source?
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Traditional answer: levelized cost of electricity โ LCOE
annualized capital cost internalizing externalities ๐๐๐๐ = ๐๐ข๐ฌ๐๐จ๐ฎ๐ง๐ญ ๐ซ๐๐ญ๐ ร ๐๐๐ฉ๐ข๐ญ๐๐ฅ ๐๐จ๐ฌ๐ญ๐ฌ + ๐๐ข๐ฑ๐๐ ๐&๐ ๐๐ง๐ง๐ฎ๐๐ฅ ๐๐ฑ๐ฉ๐๐๐ญ๐๐ ๐ ๐๐ง๐๐ซ๐๐ญ๐ข๐จ๐ง ๐ก๐จ๐ฎ๐ซ๐ฌ +๐ฏ๐๐ซ๐ข๐๐๐ฅ๐ ๐&๐+๐๐ฎ๐๐ฅ + ๐๐๐ซ๐๐จ๐ง ๐ฉ๐ซ๐ข๐๐ $/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
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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 โwhen, where, and howโ 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
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Benefit-cots analysis (LACE โ 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 ๐๐๐๐= ๐ญ=๐ ๐ ๐ฆ๐๐ซ๐ ๐ข๐ง๐๐ฅ ๐ ๐๐ง๐๐ซ๐๐ญ๐ข๐จ๐ง ๐ฉ๐ซ๐ข๐ ๐ ๐ญ ร๐๐ข๐ฌ๐ฉ๐๐ญ๐๐ก๐๐ ๐ก๐จ๐ฎ๐ซ ๐ฌ ๐ญ + ๐๐๐ฉ๐๐๐ข๐ญ๐ฒ ๐ฉ๐๐ฒ๐ฆ๐๐ง๐ญร๐๐๐ฉ๐๐๐ข๐ญ๐ฒ ๐๐ซ๐๐๐ข๐ญ ๐๐ง๐ง๐ฎ๐๐ฅ ๐๐ฑ๐ฉ๐๐๐ญ๐๐ ๐ ๐๐ง๐๐ซ๐๐ญ๐ข๐จ๐ง ๐ก๐จ๐ฎ๐ซ๐ฌ 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
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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
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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
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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 โad infinitumโ At a certain cost level, a certain AMOUNT of a source power is competitive
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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
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BRAZIL HYDRO RESERVOIRS = 212 TWh POWER CONSUMPTION TWh
SOUTHEAST/MIDWEST BRAZIL POWER CONSUMPTION TWh SOURCE: CCEE, ONS, EPE
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High complementarity between hydro and VRE Lower Integration Costs?
SOURCE: CCEE
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Expansion through centralized auctions
SOURCE: CCEE
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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
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Cost-benefit Index (ICB) calculation
๐๐๐= ๐ข=๐ ๐๐ ๐ฃ=๐ ๐๐๐๐ [๐๐๐ร(๐๐๐ ๐จ ๐ข,๐ โ๐๐๐
๐๐๐)ร#๐๐๐๐๐] ๐ขร๐ ร๐๐ ๐๐๐= ๐ข=๐ ๐๐ ๐ฃ=๐ ๐๐๐๐ [๐๐๐ร(๐ฎ๐ญโ๐๐๐ ๐จ ๐ข,๐ )ร#๐๐๐๐๐] ๐ขร๐ ร๐๐ = Fixed Revenue ๐๐๐โก ๐
๐ข๐ฑ๐๐ ๐๐จ๐ฌ๐ญ๐ฌ+๐ ๐๐ฉ๐๐ซ๐๐ญ๐ข๐จ๐ง ๐๐จ๐ฌ๐ญ๐ฌ +๐ ๐๐ฏ๐๐ข๐ฅ๐๐๐ข๐ฅ๐ข๐ญ๐ฒ ๐๐จ๐ฌ๐ญ ๐๐๐๐ ๐ฑ ๐๐ก๐ฒ๐ฌ๐ข๐๐๐ฅ ๐๐ฎ๐๐ซ๐๐ง๐ญ๐๐ $/MWh estimated benefit of capacity for the future supply (reduces capacity credit by taking into account expected capacity factor)
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Energy contracted in all expansion auctions
GWavg 36% 18% 6% 15% 46% 7% 5% 12% 22% 1% SOURCE: CCEE
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Energy contracted in auctions with ICB
16 GWavg [Oil 33% | Hydro 30%] 10 GWavg [NG 35% | Wind 33%] GWavg SOURCE: CCEE
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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 ๏จ transformations point to a new operation paradigm Loss of the hydro reservoirs regularization degree Higher annual depletion ๏จ 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
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System transformation marginal value of water (shadow electricity price) is changing
โwater tankโ is losing importance due to load increases and stagnation of storable energy SOURCE: ONS
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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
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Thanks for your attention!
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