Inserting risk in the calculation of the Levelised Cost of Electricity (LCOE) Athanasia Arapogianni Research Officer The European Wind Energy Association 23 April 2010
Jan 29, 2016
Inserting risk in the calculation of the Levelised Cost of Electricity (LCOE)
Athanasia ArapogianniResearch OfficerThe European Wind Energy Association 23 April 2010
Outline
1. Objectives
2. Methodology and Results
3. Conclusion
1. Objectives
i. Assess wind competitiveness based on EWEA scenarios on a fair basis of comparison.
ii. Develop a model to calculate the levelised cost of electricity generated by newly built power plants.
iii. Projection of the cost for the years 2020, 2030
iv. Including the risks associated with the operation of the different power technologies.
2. Methodology
• 3 phases:1. Building the mathematical model and choosing the
assumptions to calculate and project the levelised cost of electricity for the different technologies (no risk included).
2. Include the risks associated to fuel cost and carbon price volatility to the calculation and projection of the cost.
3. Comparison of the different results.
2. Methodology1. Levelised cost without risks
Cost components: capital cost, O&M, fuel and carbon costs.
LCOE (€/MWh)
The levelised cost of electricity
DCf(€/y) Annual discounted fuel cost
L.I. (€/y) Levelised InvestmentDCCO2
(€/y)Annual discounted carbon emission cost
DO&M (€/y)
Annual discounted operation and maintenance cost
E (MWh/y)
Annual Discounted Energy Production
E
DCDCMDOILLCOE COf 2&..
2. Methodology1. Levelised cost without risks
CRFPCL.I.
Nd
dCRF
11
C(€/kW) Capital Cost d(%) Discount rate
P(MW) Installed Capacity N(y) Lifetime
CRFCapital Recovery Factor
CRF: converts the present value of the cost components into equal annual payments over a specified time (N) using specified discount
rate (d)
Levelisation of all the cost components
• Challenge our model using reference assumptions.
• The results of our model are as valid as the reference results.
2. Methodology1. Levelised cost without risks – Assumptions
•Final range of Assumptions chosen from a set of references narrowed with the criterion : Less than <10% difference between the reference and our model’s results.
2. Methodology1. Levelised cost without risks – Assumptions
WIND POWER ONSHORE OFFSHORETotal Plant Capacity (MW) 40 40Size of Wind Turbines(MW) 2 5Inflation (%) 2% 2%Nominal Discount rate (%) 7.5% 7.5%Real Discount rate (%) 5.61% 5.61%Capital, Investment Cost (€/kW) 1250 2500O&M costs (including the fixed annual costs, €/kWh) 0.0145 0.019Balancing Costs (€/kWh) 0.003 0.003Capacity Factor 25.00% 35.00%
•The assumptions are based on EWEA targets and scenarios presented in the Economics of Wind and Pure Power reports.
•Similar sets of assumptions exist for the different technologies based on the literature.
2. Methodology2. Projection of the costs (2020, 2030)
2ln
1ln LR
present
futurepresentfuture P
PCC
Cfuture , Cpresent
Future and current cost
Pfuture , Ppresent
Future and current installed capacity in Europe (GW)
LR Learning rate
GAS References 2010 2020 2030
Fuel cost(€/kWh) 0.0246 0.0288 0.0339 WEO 2009
Carbon Cost (€/tCO2) 20 30 40 EWEA
Capacity installed (GW) 185.60 208.00 242.00 WEO 2009
Learning Rate(%) 5.00% 5.00% 5.00% IEA, EC
WIND ONSHORE WIND OFFSHORE References 2009 2020 2030 2009 2020 2030
Capacity installed (GW) 74 190 250 1.47 40 150 Pure Power
Learning Rate (%) 10% 10% 5% 7% Economics of Wind
How?• Differentiating Wind Energy from Gas, Coal and
Nuclear…– because the main cost components of fossil and
nuclear generation: fuel and carbon emission costs– High volatility and uncertainty to forecast fuel and
carbon costs Risk • Necessary to include in the LCOE calculation the
corresponding risk Forming a fair basis of comparison between the technologies.
• Using a risk-adjusted discount rate when discounting future fuel and carbon costs.
2. Methodology3. Including risks
2. Methodology3. Including risks
Risk – adjusted discount rate (Awerbuch) to fuel costs and carbon prices
Following Awerbuch’s methodology, β is considered to be negative for fossil fuels, therefore the new discount rate is lower.
RPdd freeriskadjustedrisk
drisk-free 30 – years government bond’s yield
β Correlating Factor
RP Risk Premium
2. Methodology3. Including risks
Risk adjusted discount rates:Risk Assumptions
Cost Component GAS COAL URANIUM CARBON
Risk – free discount rate 3.90% 3.90% 3.90% 3.90%β (based on Awerbuch and
assumptions from the literature) -0.2 -0.4 -0.1 -0.4
Risk Premium (based on the literature) 5% 5% 5% 5%
Risk – adjusted discount rate 2.90% 1.90% 3.40% 1.90%
Discount Rate without taking into account the risk (real)
5.61% 5.61% 5.61% 5.61%
Lower discount rate Higher present value Avoid to underestimate the impact of risky cost components
• Increase of the LCOE if risks are included• High impact of future installed capacity, future cost of fuel and carbon.
2.Results
+30%
+34%+47%
3. Conclusions
In order to compare the LCOE of different technologies on a fair basis, the risk on fuel and carbon price volatility has to be included.
The volatility of fuel and carbon prices has a great impact on the final LCOE.
Without risk wind becomes competitive only in 2030, whereas when comparing the cost on a fair basis, it is competitive in 2020.
Wind energy (on and offshore) is becoming more preferable not only as a renewable energy technology but also as an investment which will not suffer from unpredictable and volatile costs.
Thank you for your attention
ANNEX
Assumptions
First Results Without Risk
Assumptions of future costs for Coal and Nuclear
COAL NUCLEAR References 2010 2020 2030 2010 2020 2030 Fuel cost(€/kWh) 0.0843 0.0728 0.0765 0.0050 0.0050 0.0050 WEO 2009
Carbon Cost (€/tCO2)
20 30 40 20 30 40EWEA
Capacity installed (GW)
202.60 182.00 158.00 127.00 108.00 103.00WEO 2009
Learning Rate(%) 6.00% 6.00% 6.00% 3.00% 3.00% 3.00% IEA, EC
Results Without Risk
Results With Risk