KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Keuze van elektriciteitscentrales : economie versus milieu Prof. Stef Proost Centrum voor.

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CENTRUM VOOR ECONOMISCHE STUDIEN

Keuze van elektriciteitscentrales : economie versus milieu

Prof. Stef Proost

Centrum voor Ekonomische Studiën

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The Royal Ampere Commission

What type of new power plants in the future? Coal, Gas, Nuclear, Renewable…

Take into account Environmental constraints Economic considerations

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Literature

Ampere Group Report I Static Approach

Proost & Van Regemorter Dynamic or multi-period model Approach

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Outline and assumptions

Two methods Static comparison Dynamic comparison with Markal

Common Assumptions Opportunity costs = market prices for fuel, equipment

and labour Gross wage is in long term good indication of productivity so

gross wage is opportunity cost This implies that “employment” is not an objective when we

choose power plants Fuel price scenarios External costs (health damage) per type of pollutant Production in Belgium

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Methodology - Static Comparison - 1

Compare costs in BEF or EURO per kWhe Fuel cost (BEF/GJ) / plant efficiency (kWh/GJ) + Other variable costs

BEF/kWh + Fixed costs

Annuity or rental cost (BEF/kW) divided by expected max. operating hours per year

+ External costs BEF/kWh

Electricity production with Combined Heat and Power (CHP) Cost of electricity generated by CHP=Total cost CHP -

Avoided costs for heat production

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Assumptions Plants operate at maximal production per year Costs and benefits are discounted at 5% Estimated technical lifetime of different plants Technologies : efficiency, costs, emission factors

Long discussions among engineers, see Table I.2 for the outcome

Fuel prices (up to 2030) Oil and gas: steadily increasing prices Coal: stable prices

External costs Taken from Extern-E, see Table I.1

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1,18

0,04

1,24

0,04

1,31

0,33

1,37

0,92

1,38

0,67

1,41

0,74

1,67

0,03

1,67

0,75

1,76

0,62

1,81

0,04

2,35

0,04

2,62

0,04

2,87

0,36

3,14

0,12

3,15

0,64

3,38

1,41

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5A

P60

0 nu

clea

r (4

0 ye

ars)

PW

R n

ucle

ar (4

0 ye

ars)

STA

G p

ower

pla

ntP

ulve

rise

d C

oal (

SC

)

Pul

veri

sed

Coa

l (U

SC

,202

0)

Pul

veri

sed

Coa

l (A

SC

)

MH

TGR

nuc

lear

(30

year

s)

IGC

CW

aste

inci

nera

tors

Win

d tu

rbin

e on

shor

e, s

easi

de

Win

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e on

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TAG

Win

d tu

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e, in

land

gas

turb

ines

Ker

osen

e ga

stur

bine

s

Fuel, Non-fuel and External Costs (BEF per kWh - 2010)

Fuel and Non-fuel cost Fuel, Non-fuel and external cost

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Static Comparison - Ranking

Nuclear If accepted and if international tendering for construction

STAG power plant But gas remains transitory fuel for base load

Wind turbine off shore Limited potential Decentralised power supply means extra costs

Pulverised Coal Cheap but dirty fuel

CHP production (table I.6,Fig I.2) Small potential Not really cheaper, despite computation method

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Static Comparison - Caveats

Contribution to guaranteed power is not taken into account Production of CHP, wind and solar is not driven by demand

Real operating time during lifetime is not taken into account Determined by total demand and cost of alternatives

Demand reductions are not an option in this exercise Potential total capacity is very small for some

technologies Comparison only holds for locations with the lowest costs

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Dynamic Comparison - 1

Basic idea Use Markal for the Belgian energy sector

Period 1990-2030 Compute optimal investment strategy for electricity and other

sectors Subject to two types of constraints

Allow nuclear plants or not Kyoto obligation for the Belgian energy sector as a whole

Kyoto Target for Belgium Reduce 2010 GHG emissions by 7,5% relative to 1990 level Our assumptions

Extra efforts are needed and imposed after 2010 -15% in 2030

No emission permits are bought abroad

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Dynamic Comparison - 2

Advantages of this approach Issue is 2020 and later, not 2010 (see static approach) Analyse merits of plants over the whole lifetime Compare efforts in different sectors and in demand

reduction In the static comparison

One CO2 damage value was used in the assessment Demand reduction was missing as an option

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The MARKAL Model

Demand for energy services 40 types of energy services are identified

Heating of buildings, high temp heat for chemical industry…

Supply of energy services All energy saving and energy production technologies

in operation in Belgium

Major assumption Perfect foresight and no market barriers

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MARKAL Equations - 1

Example with one energy service (heating) X Produced by two technologies Z and Y

For every technology, we have Running costs c (fuel cost and other operation costs) Investment costs C (annuity formulation) Existing capacities Y°, Z° Emission rates

Simulate market equilibrium with perfect foresight and perfect emission taxes Equal to shadow value of the emission constraint

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MARKAL Graph

Z°

Y°

Energy service

Cost of energy service

Demand function energy services

c(y)

XmarketXopt

c(z)

Shadow value of emission constraint

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Reference Scenario Assumptions

Increasing oil and gas prices Reduce growth of energy demand Investment in nuclear power stations is possible

Non-GHG external costs of power production are not taken into account

No Kyoto constraint Electricity generation potential in Belgium

Nuclear Maximum of 8000 MW on existing sites is possible

Wind energy 400 + 100 MW onshore and 1000 MW offshore

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Reference+ Scenario - Results

Note: this scenario differs from the reference scenario only because of the internalisation of non-GHG costs in all sectors.

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No New Nuclear

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No New Nuclear with Kyoto Constraint

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With New Nuclear and Kyoto Constraint

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Who Should Make the Efforts

Kyoto implies higher efforts for the energy sector and industry Energy sector: -26% Industry: -33% Residential & Service sector: -6% Transport: -3%

Explanation Existing taxes on fuel in residential and transport

sector Already Induce large energy efficiency efforts in these sectors

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Effect of High Oil Prices

Decrease in energy demand helps to reduce CO2 emissions from oil and gas

Incentive to use coal power plants This increases CO2 emissions

On Balance no major effect on CO2 emissions

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Caveats

No European trade in emission rights Trade in emissions rights would reduce the difference

between scenarios with and without Kyoto

IF European electricity market in the model Requires more transmission capacity Easy to export pollution problem abroad by producing

less But other countries will have to reduce emissions of CO2

further and Imported Electricity will become more expensive When prices are set at

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Conclusions

Static comparison needs to be supplemented by a dynamic approach

A nuclear moratorium is very costly when there is also a CO2 emission constraint Not impossible but multiple policies are needed

Demand reduction by announcing higher electricity prices Use more renewables but using different government policies Replace coal by gas

Stef Proost CES-KULeuvenKATHOLIEKE

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Comparing capital cost and variable cost Capital cost

Investment costs

Variable cost Fuel cost, non-fuel cost (operation, maintenance…)

Two procedures Aggregation of all costs and benefits over the time

horizon (see dynamic analysis) On an annual basis (annuity = C)

AW C C

C

i i i iC

t nt

n

,..., , ,...n perioden 0

1

1 1

11

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Fuel, Non-fuel and External Costs (BEF per kWh - 2010)1,

18

1,24

1,31

1,37

1,38

1,41 1,67

1,67

1,76

1,81 2,

35 2,62 2,87 3,14

3,15 3,38

1,48 2,

05 2,69

3,63

2,00 2,

76

1,68 2,

15 2,42 2,

82

3,77 4,00 4,

73

5,75

11,9

2

0,04

0,04 0,

33 0,92

0,67

0,74

0,03 0,

75

0,62

0,04

0,04 0,

04 0,36 0,12 0,

64

1,41

0,42

0,47

0,52

0,64

0,12

0,43

0,18 0,

06

2,92

0,49

0,45 0,

66

0,65

-0,3

1

-0,2

9

-1

0

1

2

3

4

5

6

7

8

AP

600

nucl

ear

(40

year

s)

PW

R n

ucle

ar (4

0 ye

ars)

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Pul

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Coa

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Pul

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SC

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Pul

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Coa

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MH

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(30

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Fuel

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ine

(650

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Die

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H

Fuel

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ls (n

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, 201

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cel

ls (n

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as),

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ls (h

ydro

gen)

, SH

Woo

d ga

sific

atio

n

Hay

/Str

aw/M

isc.

Gas

ifica

tion

SH

Fuel and Non-fuel cost Fuel, Non-fuel and external cost


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MARKAL Equations - 2

0

0

0

Max ( ) ( ) ( ) ( ) ( )

. .

x

x

y z

P x dx c z c y C Z C Y

st x y z

e y e z E

y Y Y

z Z Z

- - - -

£ +

+ £

£ +

£ +

ò

%

The optimisation problem Maximise Consumer Surplus – Costs

Such that Emissions remain lower than what is allowed (Ẽ) Capacity limits are respected

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Models Used in this Exercise

POLES A model for world energy demand and supply

GEM-E3 A general equilibrium model for 15 EU countries

Developed by European consortium

MARKAL A partial equilibrium model for the Belgian energy

system Developed for Belgium by CES - VITO

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Scenario’s 2000 - 2030Energy PriceAssumptions

(POLES)

EU Macro-economicbackground (GEM-E3)

+ 1990-1997 GHGmeasures

Energy efficient choices by agents(MARKAL)

Reference scenario +No nuclear

Kyoto constraint

International energy prices

Overall world economic activity level

Reference case(nuclear No Kyoto)

Belgian economic activity level by sector

Demand for energy services

Reference scenario +Kyoto constraint

Reference scenario +No nuclear

Ranking of measures in function of cost-efficiency

Exogenous input on technological development and

costs of alternatives

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Demand and Supply of Energy Services

Step 1: BStep 2: CStep 3: D

cost of GHGpolicy in 2010

cost in referencein 2010

cost in referencein 1990

Price or Cost of Energy Services

X0

B

D

C

Demand functionin A in 1990

Demand functionin A in 2010

Level ofEnergy ServicesX1X2

GEM-E3

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Cost of Abatement

Cost 1 The net cost for end users in the energy market

No other externalities in energy market No distortions on other markets No income distribution concerns

Cost 2 Cost 1 + secondary benefits on other energy

externalities SO2, NOx...

KATHOLIEKE UNIVERSITEIT LEUVEN CENTRUM VOOR ECONOMISCHE STUDIEN Keuze van elektriciteitscentrales : economie versus milieu Prof. Stef Proost Centrum voor.

Documents

year costs

extra costs

lowest costs

heat production slide

belgium slide

total cost chp avoided

stable prices external

technologies comparison