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