Production Costs of Electric Energy From Renewable Energy Sources

7/29/2019 Production Costs of Electric Energy From Renewable Energy Sources

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PRODUCTION COSTS OF ELECTRIC ENERGY FROM

RENEWABLE ENERGY SOURCES

Suzana Kostic

Electrical Engineering Institute Nikola Tesla, Koste Glavinica 8a, Belgrade

Abstract: Today, most of the electric energy production is from non-renewable sources such as

fossil fuels. As is well known, fossil fuels are non-renewable and have a negative consequence on

the environment (global warming). Therefore, more and more renewable energy sources are used,

such as solar, wind, tides, wave, hydro, small-power energy and geothermal heat.

Renewable energy sources are central issues in the current European Union energy policy. In

accordance to that, the European Parliament passed the Directive (2008) on climate changes and

energy (the 20-20-20), and therefore the EU is committed to reducing its emissions of greenhouse

gases by 2020 to at least 20% below the 1990 levels, increasing the energy efficiency by 20% and

increasing the share of renewable sources in the final energy to 20%.

In 2009, the Serbian Government passed two significant Decrees which systematically

regulate the status of producers of electricity using renewable energy sources the Decree on the

measures of incentives for production of electricity using renewable energy sources and combined

production of electricity and heat; and the Act on acquiring the status of privileged producers of

electricity.

Production costs for the different renewable energy sources are determined in this paper.

They are calculated for different investment costs, different annual electric energy production, the

given rate of interest and all that for the given life cycle of the plant. The costs established in this

way are compared with purchase prices of renewable energy sources in Serbia and finally, on the

basis of that, the economy of investing in renewable energy sources is analyzed.

Key words: renewable energy sources, privileged producers, purchase prices, production costs

1. INTRODUCTION

Renewable energy sources are energy sources that are found in nature and reproduced in whole or

in part especially watercourses energy, wind energy, solar energy, biomass, geothermal energy, bio-

fuels, biogas, synthetic gas, landfill gas, gas from sewage, water and waste water treatment plants

from food and wood processing industries that do not contain hazardous substances [1].

The utilization of the available sources of renewable energy is very high on the list of

priorities of the Energy Strategy. This is primarily in reference with Serbias energy demand on the


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local level, the reduction of energy imports and the improvement of the environmental aspects of

energy production.

Although the potentials of renewable energy sources are huge, the current technological

development does not make it possible to rely only on them. Most of the energy obtained from

renewable sources is water energy, whereas the share of other renewable sources of energy is

currently comparatively small [2].

Actually, in parallel with the technological development, the renewable sources of energy are

expected to economically compete with the conventional sources of energy. It may be said that the

technologies for using wind energy, biomass and solar energy are already becoming more and more

mutually competitive. The process of adopting new technologies is still slow, due to comparatively

high initial prices. In line with the recognized environmental importance of renewable sources,

greater construction of plants using such energy is being promoted. Accordingly, the Strategy of the

European Union is to increase the share of renewable energy sources by 2020 to 20% from 12%,

which was the average achieved in 2010.

When Serbia is concerned, it is evident that there is a significant available energy potential in

the form of renewable energy sources, which has been, apart from the hydro potential and fuel

wood insufficiently used [2]. For the purpose of planning and adequate use thereof, it is necessary

to establish which part of that potential is technically feasible and economically viable. It is also

essential to provide the conditions which would prevent any administrative and technical barriers

from slowing down the above process. The purpose of introducing incentives in Serbia (as well as

globally), is to reduce the dependence on import, as well as to preserve environmental quality.

2. THE ECONOMY OF THE GLOBAL RENEWABLE SOURCES

Owing to the impressive growth during the recent years, the renewable energy sources production

activity is becoming a major industrial branch in expansion. In 2009 and 2010 alone, almost 200

billion US Dollars were invested in this field per year (Table 2). Consequently, the European Union

had fulfilled all the planned predictions for the time horizon up to 2010. A testimony thereof is also

the fact that the set target of 40 GW for wind energy was achieved five years earlier than planned.

Estimates show that solar-power plants construction will experience a similar expansion in thefollowing years, but, in spite of that, wind-power plants will continue to be the leader in renewable

energy sources in Europe [3]. However, on the global level, solar-power plants are taking the lead

over the wind-power plants.

2.1. Capital investments in renewable energy sources and greater employment of the

population

Capital investments in renewable sources reached 211 billion dollars in 2010 (Fig. 1), therebyexceeding the investments in most of the other economic sectors. It may also be said that almost all

investments in the energy sector altogether are focusing more and more on renewable sources.


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In 2009, in global terms, China became a country with the greatest investments in renewable

energy sources (50 billion US Dollars, Fig. 2), primarily in wind-power plants. This trend continued

in 2010. Germany follows (41 billion US Dollars) with the greatest investments in wind-power

plants, and in 2010 it started with intensive investments in solar-power plants. The United States

follow, with annual investments of 30 billion US Dollars, holding the high third place and they also

invest mostly in wind-power plants. Brazil has recently been achieving a high rate of economic

growth and, in line with that, has started to make major investments in biomass fuels.

The importance and achieved scope of renewable energy activities, as an economic branch, is

also illustrated by the data on the number of employees on the global level and in some countries

where this industry is most developed, as shown in Table 1.

Figure 1. Investments in renewable sources in the period 2004-2010 [4]

Figure 2. Investment flows into renewable energy sources on the global level [4]

Table 1.Number of employees in the renewable energy sources activities in some countries, in 2010 [4]Type of power-plants

Country

World Brazil USA China Germany Spain

Wind power-plants 630 000 - 85 000 150 000 100 000 40 000Solar power-plants 350 000 - - 120 000 - 14 000Small hydro-power plants 50 000 - 8 000 - - 7 000Biofuels 1 500 000 730 000 - - - -Water solar heating 300 000 - - 250 000 - 7 000

The Rest 670 000 - - - - -Sum 3 500 000 - - - - -


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Large investments are followed by increased employment: research and industrial employees in developed countries where there is already a serial

production of the most expensive components of these power plants as well as elements for the assembly and assembling of such plants on selected sites, which makes around

one third of the total investment funds.

The latter may ensure a certain amount of employment in Serbia, and is therefore our chancefor development. If a certain reduction of energy dependence is added to that, there is more reasonfor greater investments in renewable energy sources. Also, reduced import of expensive fossil fuelswill indirectly result in strengthening the national currency.

2.2. Incentive measures for implementing renewable energy sources in the European Union

Due to its increasing importance, this sector is becoming one of the most important branches foreconomic investments and employment, which calls for greater involvement of economists inanalyzing the investment possibilities and the investment structure itself. In this respect, it isemphasized that there used to be a so-called three-thirds rule regarding investments in the energysector: 1/3 from the state, 1/3 from loans and 1/3 from the power companies own funds. Othermodels should also be sought for nowadays, particularly before the production from renewablesources becomes competitive and dominant on the electricity market.

Different forms of incentives have been used in the European Union in the recent years: netexchange, green labels, compensation of costs (Feed-in tariffs) and many1 others [5].

Net-exchange2 was established as a response to the need to simplify the electricity exchangeprocedure among households which had installed in their buildings systems for implementingrenewable energy sources. This measure assumes that the produced energy, not consumed but

delivered to the power transmission network, has the same economic value as the energy purchasedfrom the power distribution. Furthermore, this means that households only pay the difference

between the produced and consumed energy. This is particularly important for time spans of longercloudiness (in the case of solar cells) or reduced windiness (in the case of wind generators). This ishow the power distribution increases the stability of its supply during the summer or winter loads.

Thegreen labels represent the property rights of electricity producers from renewable energysources to certain environmental benefits. The so-called green beams can be subject to trade betweendifferent electricity producers. For example, in Italy, all large electricity producers are bound by lawto produce a certain amount of electricity from renewable energy sources. In this way, they obtain a

certain amount of green labels3

and acquire some rights on that basis.Economic compensation (Feed-in tariffs FIT) is the most widely used measure for

encouraging the use of renewable sources of energy. It is currently in effect in twenty countries ofthe European Union. The essence of this incentive measure lies in the power distributions liabilityto purchase all electricity on its territory obtained from renewable energy sources, assuming a payoffin precisely fixed amounts4 within a fixed time frame. The amount of this compensation varies

1 Reduction of value added tax, tax loans etc.2 Originated in California, and within the European Union this measure is applied by Italy for promoting theimplementation of the PV system.3 One green label is obtained by generation of 50 MWh of electricity from renewable energy sources. This measure isapplied by Italy for promoting wind energy.4The compensation is paid off to each producer of electricity from renewable energy sources in a fixed amount for eachdelivered kilowatt-hour.


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depending on the type of renewable energy source and the country5 concerned. It should beemphasized that the implementation of this measure shall not encumber the taxpayers nor thegovernment budget, but only the electricity consumers.

This latest measure (FIT), defined as a prescribed liability to buyout energy from renewablesources at incentive prices, after a defined time span, calls for putting forward a request for

correction. Namely, the correction shall inevitably be made, due to incurred changes in the businessenvironment, by cutting down prices, mostly due to lower investment costs of equipment to be

procured and installed at the power plants concerned.

2.3. Costs of electricity produced from renewable energy sources on the global level

The renewable energy sources economy includes an analysis of achieved typical production

costs (cUSD/kWh), investment costs per unit of power (USD/kW), energy efficiency of sources

(kWh/kW annually), the procedure and costs of capital acquisition, in order to determine the real

production costs. Continuous and periodical production cost finding per unit is required, as particular

components of the input costs are bound to change in time. In this respect, a particularly important

item of the input costs are the investment costs per unit of power (USD/kW) which have a tendency

of constant fall due to the technological development following the expansion of new generations

of such sources.

Figure 3. Trends showing a fall in the costs of electricity production from [4]:

a) Solar (photovoltaic) sourcespower plants and b) wind-power plants

Actually, in parallel with more intensive implementation of renewable energy sources,

continuous progress has been made in the technology applied in the production of all components

intended for power plants using renewable energy sources, which shall result in lower prices, after

ensuring a more massive production (larger series and economy of scale), and will furthermore be

reflected in lower investment costs for the construction thereof. For that reason, some countries,

primarily those which were among the first ones (a few years ago) to fix the above prices at a

5Due to different technologies applied, the socio-political landscape, market and climate conditions.


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comparatively high level6, have put into force (and are still putting into force) a correction for the

purpose of reducing the formerly fixed incentive prices for energy from renewable sources.

As these prices are still higher than the prices of conventional energy sources (which providemore than 95% of the total electricity), they must be fixed (approved) on the basis of the costcriterion. As the investment costs per 1 kW of installed power are different, so are the incentive

prices different for particular types of sources. The efficiency in terms of production (in kWh perkW of installed power) is also different, which is also an important factor for the average

production costs (in USD/kWh) from different renewable energy sources. The relative costs shouldtherefore be fixed in order to be stimulating for electricity production on sites with an average andabove average potential and accordingly with average and above average efficiency (inkWh/kW of power). It is obvious that when fixing the incentive prices of electricity from renewableenergy sources, detailed technological and economical estimates and analyses should be made

both at the time of initial determination of such prices, and also after a certain lapse of time, whenestimates show that there is ground for making such correction (reduction)7. In addition to the

above, there are some other factors which have an impact on incentive prices: the economic stabilityof a country, energy demand, as well as other factors under specific circumstances social,

political, market, as well as the genuine features of a particular country or region.For the purpose of illustration, Table 2 includes typical costs of electricity production from differentrenewable energy sources, achieved in 2011.

Table 2. Typical costs of electricity production from different renewable energy sources [4]Type of power plant Installed power Mean prices

in cUSD/kWh

Small hydro-power plants 1 10 MW 5 12Mini hydro-power plants 0.1 1 MW 5 12

Micro hydro-power plants 1 100 kW 7 30Wind power plants onshore 1.5 3.5 MW 5 9Wind power plants offshore 1.5 5 MW 10 12Small wind power plants 3 100 kW 15 25Small house wind power plants 0.1 3 kW 15 35Big solar thermal plants 50 500 MW 14 18Big solar PH power plants 1 100 MW 15 30Small solar PH power plants 2 5 kW 18 40

Data in Table 2 show that there are still great differences in the costs of electricity production

from different renewable energy sources. The respective difference also greatly depend on the size-installed power of a power plant, as well as on the technology on which the generators are based,

e.g. solar power plants generate energy from turbine generators, but more and more from PH power

plants (generators). These prices essentially depend both on the coefficient of utilization of sources,

as well as on the natural potential of each particular renewable energy source. The differences are

actually considerably larger than in the case of power plants using un-renewable sources, so that the

technical and economic estimates and analyses carried out in expert surveys and specific projects

6 Pursuant to the former current costs thereof. Germany is a typical example of such country.7 Mostly due to lower investment costs for procurement and installation of these power plants, and in the case of

photovoltaic sources, energy efficiency has also considerably increased.


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of alternative energy resources which have priority for subsidies, tax, customs and other incentives

according to the law and according to other customs and tax regulations.

Table 4. Purchase price (given in Decree) determined in eurocent per kilowatt hour [7]No. Type of power plant Installed power (MW) Incentive measure

purchase price (c/1kWh)

1. Hydro-power plants1.1. Micro hydro-power plants < 0.5 MW 9.71.2. Mini hydro-power plants 0.5 MW 2 MW 10.316 1.233*R1.3. Small hydro-power plants 2 MW 10 MW 7.851.4. On the existing infrastructure < 2 MW 7.351.5. On the existing infrastructure 2 MW 10 MW 5.92. Biomass power plants2.1. Micro biomass power plants


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Where the actualization coefficient (A) is defined:

nr

rA

1

)1(1

(2)

Production costs (c/kWh) for the different renewable energy sources (solar-power plants,wind-power plants, small hydro-power plants and biomass-power plants) are determined in this

paper. They are calculated for different investment costs Ci (/kW), different current Operating &Maintenance cost Co&m (/kW), different annual electric energy production E(kWh/kW), thegiven rate of interest (r= 5%) and all that for the given life cycle of the plant ( n = 20 years). At

biomass power plants only, the fuel costs Cf (c/kWh) have also been taken into consideration.Such established production costs are compared with the purchase prices of renewable energysources in Serbia (given in Decree) and finally, on the basis of that, the investment economy inrenewable energy sources is analyzed. See Table 5.

On the basis of the calculated values in table 5, it is shown that there are large differences inthe production costs per unit between the analyzed sources of renewable energy. The electricalenergy obtained from solar power plants has the largest production costs per unit, while electricalenergy obtained from small hydro-power plants has the least production costs per unit. This clearlyshows why the purchase prices for different renewable energy sources given in the Decree have beendetermined on different levels.

Taking that into consideration, it is interesting to do a comparative analysis of the calculatedproduction costs per unit (Table 5) and the given purchase prices of corresponding renewable energysources in the Decree (Table 4).

Table 5. Mean production costs of electricity for particular renewable energy sources expressed in eurocentper kilowatt hour

Solar powerplants

Wind powerplants

Small hydro-power plants

Biomass power plants

Investment cost ofthe power plant perunit in /kW (Ci)

2 600 4 000 1 200 1 800 1 500 2 000 1 800 2 600

1 200 1 200 1 500 1 500 2 000 3 000 5 500 5 500Annual electricalenergy producedin kWh/kW (E)[9]

1 800 1 800 2 300 2 300 3 000 4 000 7 500 7 500

Current Operate &Maintenance cost

/kW (Co&m)*52 80 20 30 24 40 54 78

5 8 5 8Fuel cost inc/kWh (Cf)

- - - - - -

5 8 5 8

Actualizationcoefficient (A)

0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08

21.7 33.3 8.0 12.0 7.5 10.0 8.6 11.6 10.2 13.2Mean productioncost in c/kWh(MPC) 14.4 22.2 5.2 7.8 5.0 5.0 7.6 10.6 8.8 11.8

*Co&m = 2% Ciat solar power plants, wind power plants and small hydro-power plants;*Co&m = 3% Ciat biomass power plants.


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Calculated production cost per unit (depending on supposed annual production, investment

cost of the power plant per unit and current Operating & Maintenance costs) for electrical energy

produced from [10]:

(1) Solar power plants are in the interval from 14.4 to 33.3 c/kWh, while their purchase price

amounts to 23 c/kWh;

(2) Wind power plants are in the interval from 5.2 to 12.0 c/kWh, while their purchase price

amounts to 9.5 c/kWh;

(3) Small hydro-power plants are in the interval from 5.0 to 10.0 c/kWh, while their purchase price

is from 7.85 to 9.7 c/kWh;

(4) Biomass power plants are in the interval from 7.6 to 13.2 c/kWh, while their purchase price is

from 11.4 to 13.6 c/kWh.

Figure 4. Mean production cost of electrical energy from renewable energy sources

5. CONCLUSION

An approximate amount of 211 billion US Dollars was invested in the RES industry in 2010. Also,on the global level, around 3.5 million people were employed in this field of activity.

All forms of energy are expensive, but as time goes by, RES are becoming generally

cheaper, whereas fossil fuels are becoming more and more expensive. Actually, in order to make the

renewable energy sources more competitive, states have been introducing incentive measures. The

most widely used incentive measure is the feed-in tariffs (FIT).

When Serbia is concerned, the fact is that it is significantly below the global average, in terms

of the installed capacities. On the other hand, Serbia evidently has a significant available potential of

renewable energy sources, which is even above the global average. For the purpose of greater use of

the mentioned potential, the Government of Serbia passed a Decree on incentive measures in the

form of feed-in tariffs, at the end of 2009.


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The Analysis results given in this paper show that the approved prices (FIT) for electricity

generation from renewable energy sources are sufficiently profitable on sites with average and

above average energy potential.

The results of the Analysis show that the average value of calculated production costs of

electricity per unit from renewable energy sources already corresponds to the purchase prices given

in the Decree. This confirms that purchase prices are determined on the real level which gives a

stimulus for an even more rapid growth and development of this part of the energy sector in Serbia.

REFERENCES

[1] Decree about conditions for acquisition the status of privileged producers of electricity andcriterions for realization mark of those conditions, Official Gazette of RS, No. 72/2009 from

Sep 3, 2009.[2] Mesarevic PhD Miodrag, Real potential of renewable energy sources in Serbia,ENERGIJA

ekonomija ekologija, No. 1-2, pp. 27-34, 2012.[3] Bela knjiga Elektroprivrede Srbije, JP Elektroprivrede Srbije, 2010.[4] Global Trends in Sustainable Energy Investment 2010, Analysis of Trend and Issues in the

Financing of Renewable Energy and Energy Efficiency, UNEP SEFI Bloomberg, 2010.[5] ukanovi S., Podsticanje primene obnovljivih izvora energije panija, Italija, Srbija, kola

biznisa, Broj 4, str. 41-50, 2010.[6] Jovanovi B., Pavlovi M., Stanje i razvoj malih hidroelektrana u Srbiji, Jefferson Insitute,

str. 11, 2009.[7] Decree about measures of incentives for the production of electricity using renewable energy

sources and combined production of electricity and heat, Official Gazette of RS, No. 99/2009from Dec 1, 2009.

[8] S. Quinoa, Present and future limits for the PV generation growth,Electrotechnical Review77 (2-3): 95-100, 2010, Ljubljana, Slovenia.

[9] A. Vuckovi, N. Despotovic, Impact of renewable energy sources on price of electricity, 30thconference of CIGRE, Zlatibor, Serbia, R C5 16, 2011.

[10] Kosti S., Analysis prices and production costs for electric energy from renewable energy

sources in Serbia, ENERGIJA ekonomija ekologija, No 3-4, pp. 19-24, 2012.

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Production Costs of Electric Energy From Renewable Energy Sources