The Economics of Marine Renewable Energy

Peter McGregorFraser of Allander Institute, Department of Economics,

University of Strathclyde

Second Forum on Economics of Marine Renewable EnergyHMRC, UCC,Cork, 13th June 2011

Our research

• Macroeconomic impact analysis– Contributing to our understanding of the relationship between

developments in the marine industry and the wider economy

• Calculating the costs and benefits of marine energy provision – Identifying the ‘cost competitiveness’ of marine energy– Calculating the cost & benefits of marine energy to society

• Portfolio theory applications for marine energy– What contributions can wave and tidal energy make to the

broader portfolio of electricity generation in the UK?

I. Macroeconomic Impact Analysis of Developments in the Marine Energy

Industry

I. Macroeconomic impact analysis

• Marine energy is attracting significant investment in the UK (and worldwide)

- Increasing number of commercial installations now operating/due to be operationalised in UK waters

• Associated domestic expenditures could provide an important demand stimulus for the local, regional and national economies:– R&D, manufacturing, installation, O&M

• UK has a ‘first mover’ advantage in the world tidal energy industry.– Potential for the development of an export market for UK tidal

devices and technologies?

Estimating the economic impact of expenditures on tidal energy installations

• Many uncertainties involved in estimating economic (esp economy-wide) benefits– Unknowns: cost of devices; deployment timepath; subsidies

• But important for appropriate policy-making

– Important as national and regional governments look to justify assistance for renewable energy projects

• We estimate the UK economy-wide benefit from a demand stimulus to the tidal energy industry– 25-sector CGE model of the UK, UKENVI– Simulate expenditure over 2008-2025 across sectors– Incorporate estimates of both domestic and export demand

CGE models

• Initially tightly based on Walrasian GE theory: complete specification of demand, supply and equilibrium– But now often accommodate market imperfections

• Widely employed to analyse energy-economy-environment issues– Link to micro theory – optimising households and firms– Multisectoral – so capture the wide variation in sectoral

impacts– System-wide: accommodate economic interdependencies– Can explore a huge number of actual and hypothetical

policy instruments/packages and other ‘disturbances’

Results: GDP

We find that the demand stimulus could potentially deliver a significant UK economic benefit…

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

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Absolute GDP impact

Total demand stimulus

…but the increase in GDP relative to base falls short of the annual aggregate stimulus

Results: employment

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II. The Costs and Benefits of Wave and Tidal Energy Provision

(i) The levelised cost of wave and tidal energy

• The present value of the total cost of building & operating an energy plant over its economic life

• Conventional approach to comparing the cost of energy technologies; widely used in discussions of energy policy

• Include ‘private’ costs, i.e. costs to the developer (construction, fuel, O&M, decommissioning)

• Calculations exclude revenues; social costs and benefits; system factors

Point estimates of levelised costs of electricity

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Electricity generation technology

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(£

/MW

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Carbon Capture and Storage

Waste fund and decommissiong

Fuel delivery

Pre-development costs

Variable O&M

Fixed O&M

Fuel

Construction

The impact of policy support mechanisms on cost competitiveness

• In the UK, “banded” ROCs to provide technology-differentiated support.

- Renewables Obligation Certificates (ROCs) – intended to act as a subsidy to renewables

- Onshore wind receives 1 ROC/MWh; wave, tidal, offshore wind receive 2 Rocs/MWh

- In Scotland, proposed additional ROCs proposed for wave (to 5 Rocs in total) and tidal (3 ROCs in total)

• We include these in levelised cost calculations as negative private costs

Levelised costs with ‘banded’ ROCs

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Electricity Generation Technology

DTI - Low ROC price

DTI - High ROC price

SG - Low ROC price

SG - High ROC price

Levelised cost

(ii) The social costs and benefits of wave and tidal energy provision

• Social optimality drives public policy - government is concerned with social costs and benefits (not just levelised costs)

• Different technologies have different ‘externalities’ attached to them (the social cost of carbon emissions; visual disamenity)

• Cost benefit analysis – measure whether the benefits of the technology exceeds the costs, from the viewpoint of society

• Use WTP & WTA theory: Are those who would gain from the project willing to pay more, in aggregate, than those who would be worse off than the project?

CBA in practice...

Assume marine energy project of 50MW

Output displaces either gas or coal or onshore wind energy (i.e. gas/coal/onshore wind counterfactuals)

20 year lifetime, after 2 year construction phase (22 year project lifetime)

Future costs and benefits discounted at HM Treasury discount rate for project (3.5%) in central case

For net benefit to society, “disamenity” values matter

Provisional results (1)

£ MILLIONSTIDAL

DISPLACES GAS

TIDAL DISPLACES

COAL

TIDAL DISPLACES

WINDCONSTRUCTION 67.61 53.04 35.38O&M 13.38 10.96 -9.95EXTRA BALANCING COSTS TO GRID - - -CO2 RELEASED DURING MANUFACTURE 0.85 1.93 -VISUAL DISAMENITY - - -74.08NON-USE DISAMENITY -203.71 -203.71 -TOTAL COSTS -121.87 -137.78 -48.65AVOIDED FUEL COSTS 45.47 15.17 -AVOIDED GDP LOSSES 6.06 6.06 -AVOIDED CO2 DURING OPERATION 19.40 43.91 -TOTAL BENEFITS 70.93 65.14 -

192.80 202.92 48.65 NET PROJECT BENEFIT

COST

SBE

NEF

ITS

III. Portfolio Theory Applications to Wave and Tidal Energy

Analysis of alternative electricity portfolios

• Use of standalone measures of levelised costs of technologies can be misleading- Ignores financial risk- Can understate the value of renewables projects relative to

fossil alternatives

• Each generating technology is one component within a wider electricity portfolio

• What contribution can each technology make to the portfolio?

• Compare technologies not on basis of standalone levelised cost, but on cost contribution relative to risk contribution to a portfolio of generating technologies - Where risk is a measure of cost variability

• “Portfolio effect”: (typically) renewable technologies can help to decrease portfolio risk for a given level of portfolio cost- Largely due to their zero correlation with fuel prices

Sensitivity: greater marine share

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Risk: standard deviation

Co

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p/k

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Double Wave and Tidal limits Central

www.strath.ac.uk/fraser

www.supergen-marine.org.uk