ECON 366: Energy Economics

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.title[
# ECON 366: Energy Economics
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.subtitle[
## Topic 3.4: Electricity Generation
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.author[
### Andrew Leach, Professor of Economics and Law
]
.date[
### <a href="mailto:aleach@ualberta.ca"><i class="fa fa-envelope fa-fw"></i> aleach@ualberta.ca</a> <br> <a href="https://github.com/leachandrew"><i class="fa fa-github fa-fw"></i> leachandrew</a><br><a href="https://twitter.com/andrew_leach"><i class="fa fa-twitter twitter"></i> <span class="citation">@andrew_leach</span></a><br>
]

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# Electricity Generation Basics
- plant characteristics
- plant costs
- plant revenues
- levelized cost of electricity (equiv. supply costs)
- generation mix here and elsewhere in Canada (data assignment)
- challenges of renewable integration
- forward markets and hedging
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# Key plant characteristics
- capacity: peak generation, in MW
- capacity factor: average share of peak (%)
- dispatch: can I turn it on or off?
- seasonal constraints

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# Cost of New Generation
- we tend to express the costs of new generation as the levelized cost of electricity (LCOE)
- this is, like the supply cost for oil sands, a value that represents the electricity market revenue you need to earn to make a reasonable rate of return on capital and/or equity
- you can think of it as an gross or a net measure, and I'll show you what I mean in both cases

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# Simplified LCOE

You can simplify an LCOE using an annual amortization method (see [NREL](https://sam.nrel.gov/financial-models/lcoe-calculator.html)) to calculate a project's levelized cost of energy (LCOE), using the following inputs:

Capital cost, $ (TCC)
    Fixed annual operating cost, $ (FOC)
    Variable operating cost, $/kWh (VOC)
    **Fixed charge rate (FCR)**
    Annual electricity production, kWh (AEP)

NREL's LCOE calculator uses the following equation to calculate the LCOE:

`$$LCOE = \frac{( FCR \times TCC + FOC )}{AEP} + VOC$$`

The fixed charge rate, or FCR, is an annualized share of capital costs recovered each year, based on project financial parameters

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# True LCOE

The LCOE is no different from a supply cost that we did for oil sands projects:

Capital cost, $ (K)
    Fixed annual operating cost (FC)
    Variable operating cost (VC), $/MWh
    Discount rate (r), %
    Annual electricity production (Q), MWh

`$$LCOE = \sum_{t=0}^T\frac{1}{1+r}\frac{(K_t+FC_t+VC_t \times Q_t )}{Q_t}$$`

It's a production-weighted average of the net present value costs per unit of generation, generally calculated at a rate of return of 5-10%

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# LCOE vs supply cost

The LCOE is no different from a supply cost that we did for oil sands projects:

`$$LCOE = \sum_{t=0}^T\frac{1}{1+r}\frac{(K_t+FC_t+VC_t \times Q_t )}{Q_t}$$`

Think of it this way: if prices are such that:

`$$\sum_{t=0}^T\frac{1}{1+r} P_t = \sum_{t=0}^T\frac{1}{1+r}\frac{(K_t+FC_t+VC_t \times Q_t )}{Q_t}$$`
The project makes it's *break even* rate of return on capital
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# True LCOE

Excel model available [here](lcoe_calc.xlsx).

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# [Lazard LCOE](https://www.lazard.com/media/451905/lazards-levelized-cost-of-energy-version-150-vf.pdf)

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# [EIA AEO LCOE](https://www.eia.gov/outlooks/aeo/pdf/electricity_generation.pdf)

<img src="images/lcoe_eia.png" width="900px" style="display: block; margin: auto;" />
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# [EIA AEO LCOE](https://www.eia.gov/outlooks/aeo/pdf/electricity_generation.pdf)
<embed src="eia_lcoe.pdf" width="1100px" height="610px" style="display: block; margin: auto;" type="application/pdf" />

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# [NREL Solar LCOE](https://www.nrel.gov/docs/fy23osti/87303.pdf)
<img src="images/solar_costs_1.png" width="900px" style="display: block; margin: auto;" />

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# [NREL Solar LCOE Report](https://www.nrel.gov/docs/fy23osti/87303.pdf)
<embed src="nrel_lcoe.pdf" width="900px" height="610px" style="display: block; margin: auto;" type="application/pdf" />

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# What determines LCOE
- capital cost
- capacity factor
- operating costs
- taxes and subsidies incl. carbon prices
- fuel costs
- transmission costs (in some locations, not Alberta)
- debt and equity costs (WACC)
- non-electricity revenue (e.g. RECs or offsets)

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# What about revenue?

- dispatchable plants can avoid low cost periods and take advantage of high cost periods
- storage assets can arbitrage high and low prices
- some non-dispatchable assets may generate at peak price periods (e.g. solar)
- renewable generation tends to be correlated and thus associated with lower prices
- renewable generation can erode value of *base-load* plants

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# CAISO Daily Patterns of Prices and Loads

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# Dispatch and correlation lead to different average revenues

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# Dispatch and correlation lead to different average revenues

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# The *duck* curve

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# Carbon tax costs matter

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# But, so does the value of *output-based allocations*

<img src="images/oba_value.png" width="1200px" style="display: block; margin: auto;" />
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# Combined impacts on revenues

<img src="images/price_capture_ctax.png" width="1200px" style="display: block; margin: auto;" />
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# Dispatch and correlation lead to different average revenues

<img src="images/price_capture.png" width="1200px" style="display: block; margin: auto;" />
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# [Market Power And Economic Withholding](https://www.albertamsa.ca/assets/Documents/Q4-2022-Presentation.pdf)
- Lerner index (% markup of price over marginal cost)

- Market concentration metrics (3-firm, 4-firm concentration ratios, Herﬁndahl Hirschman
Index (HHI))

- `$$HHI=\sum_{i=1}^n S_i^2$$`, where `$$S_i$$` is the market share of each firm i in the market

- Is economic withholding a bad thing?

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# [Market Power And Economic Withholding](https://www.albertamsa.ca/assets/Documents/Q4-2022-Presentation.pdf)
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