Economic Evaluation of Grid-Connected Renewable Electricity Generation

Investments in Developing Countries

Sener SALCI – Department of Economics

Queen’s University, Canada 1

Outline

• Introduction

• Methodology

• Data

• Results

• Conclusions

Full Paper is available at:: https://ideas.repec.org/p/pra/mprapa/70578.html

2

Electricity Generation and Consumption in

Africa

• More than half of the African countries (excluding North

African countries) have an electrification coverage of

less than 40 percent of population (IEA, World Energy

Outlook, 2015).

• Expectations are that the demand for electricity in the

future will be growing substantially.

• Their electricity generation systems are small and

isolated, mainly consisting of open cycle and/or small

diesel plants that are relatively fuel inefficient.

• Most capacity was installed when fuel prices were much

lower than they are today. Hence generation mix is fuel

inefficient at todays prices for petroleum.

3

Average Daily Load Curve

4

0

150

300

450

600

750

900

1050

Dem

and

for

Ele

ctric

ity (

MW

)

0 2 4 6 8 10 12 14 16 18 20 22 24Hours of the Day

2001 Winter Day 2010 Winter Day

2001 Summer Day 2010 Summer Day

Annual Load Duration Curve

5

200

400

600

800

1000

1200

Dem

and

(MW

)

0 730 1460 2190 2920 3650 4380 5110 5840 6570 7300 8030 8760Number of Hours/Year

2000 2010

Electricity generation from most renewable

sources (e.g. wind and solar) are:

intermittent: power from wind and solar is variable

with time.

non - dispatchable: renewable power generator

cannot be turned on and off with changing demand for

energy/capacity

Therefore, adding generation from a wind farm does not

replace the “least efficient” plant, but alters the power

plant mix of capacities in long-run.

6

Economics of Renewables

The economic value of a renewable energy source heavily depend on:

•renewable power profiles (e.g. wind speeds, solar radiation levels) at different hours thatdetermines its capacity factor in these hours and total installed capacity in the system(energy = capacity factor x installed capacity)

•the correlation between renewable source and system load as well as forecast error

•characteristics of the electricity generation such as fuel matrix and system flexibility

•long-term impacts on optimal mix with renewable integration

•expected change in demand for energy (changes in the shape of load curve over-time),future changes in fuel prices (relative changes between prices of fuel, gas, and coal) thatare reflected in slopes of the thermal supply curves and ultimately affects the size ofmerit-order effect of renewable

7

Long-Run Impacts of Wind Capacity Integration on System Scheduling and Planning

8

(A) without wind integration (B) with wind integration

C

D

Impact of Wind Generation on Optimal Plant Mix

8760

Capacity (MW)

Hours

A

C

A

B

9

With Wind

Without Wind

B

Diesel

SCT

CCTHB HA

Hi is the minimum number of hours of planti

C

D

Annual Load Duration Curve at Year ‘t’

(with and without wind project)

8760

Capacity (MW)

Hours

A

C

A

B

10

With Wind

Without Wind

B

Diesel

C substitutes for B

SCT

B substitutes for A

CCT

HB HAHi is the minimum number of hours of planti

Applications

11

An Economic and Stakeholder Analysis for

the Design of IPP Contracts for Wind Farms

12

Introduction, cont.

Cape-Verde

Problems: absence of reliable and

cost-efficient energy supply,

financial deterioration in

government budget.

Objective: Supply of affordable,

reliable, clean energy, and reduce

fiscal burden coming from oil

imports

Proposed Solution (policy): as

part of rehabilitation of the energy

systems, utilization of local wind

and solar potential (RES-E targets).13

Evaluation of Electricity Generation with mix of

grid-connected onshore wind and thermal capacity

Main issues –in measuring net benefits.

Fuel Savings

1. Given intensity of wind speed, what is the value of the fuel saved if

system optimally dispatched?

Impact on Optimal Plant mix

2. How does the energy generated by wind change the optimal mix of

thermal generation over time?

Impact on Reliability

3. What are the additional system cost required to maintain reliability of

services?

* In a system with a reserve deficit, wind or solar electricity generation do not eliminate the chronic blackouts and brownouts in a system

1414

Objective of Analysis

Objective and contribution of this study is:

• first to introduce mechanism to evaluate policy instruments to

promote renewable electricity generation.

• based on proposed mechanism, estimate and allocate the benefits

and costs from such electricity generation investments based on

PPA

• to test how does each critical PPA parameter (risk variable) affects

key players.

• Policy Recommendation: how [we] can secure successful and

sustainable IPP investments through PPAs – means of securing

private investment with PPAs that are affordable for utilities. 15

Model – Integrated Investment Appraisal

Mechanism

Application of an integrated investment appraisal for utility scale wind farm project*

Financial Analysis

Foreign IPP (InfraCo): Financial receipts in the form of sale of wind energy and

carbon credits net of all investment to install wind turbines and annual fixed costs

to maintain wind farm – all discounted at 10% to arrive its NPV.

Electric Utility (ELECTRA): Financial benefits in the form of fuel savings net of

reliability costs and financial payments in the form of wind energy payments paid to

IPP – all discounted at 10% to arrive its NPV.

16

Model – Integrated Investment Appraisal

Mechanism

Economic Analysis

Economy of Cape-Verde: Country-economy benefits are generated from fuel

savings and taxes net of economic costs in the form of reliability costs and wind

energy payments paid to IPP – all transactions are adjusted with the “FEP” and

corresponding conversion factor (e.g. oil) and discounted at 10% to arrive its NPV.

Global Economy: Global-economy benefits from fuel savings and taxes generated

net of economic costs in the form of reliability costs and wind farm investment

costs (as part of global resource) – all transactions are discounted at 10% to arrive

its NPV.

Tax Externality

Government Tax Externality: Taxes earned less taxes forgone due to wind farm

project – all discounted at 10% to arrive its NPV. It is therefore reflecting the

difference between resource flow of country minus cash flow of electric utility.

17

Model – Single Buyer / Non-Merchant Trade

18

Demand Data

19

05

1015

2025

3035

4045

Dem

and

for C

apac

ity (M

W)

0 1000 2000 3000 4000 5000 6000 7000 8000 8760

Hours

Annual Load Duration Curve (DEMAND) of Santiago Island as of 2010**

** We generated annual load duration curves from 2011 to 2030 based on Simonsen Associados (February

2008) demand study prepared for the electric utility (ELECTRA).

Source: Simonsen Associados (February 2008)

Supply Data

20

Source: Annual Report, 2012, Energy Regulatory Agency of Cape-Verde (www.are.cv)

Generator Capacity and Fuel Characteristics (SUPPLY), Santiago Island as of 2012

(***) fuel efficiency of installed generation capacity falling by half per cent every year whilst fuel

efficiency of new installations improving by half per cent every year and then falling by the same rate

starting from year when plant is installed.

DIESEL Generator Year Built

Capacity

(MW) Type of Fuel

Fuel

Consumption

(litre/kWh)***

Palmarejo III 2011/2012 22 Heavy Fuel Oil 0.206

Palmarejo II 2008 14.88 Heavy Fuel Oil 0.213

Palmarejo I 2002 11.16 Heavy Fuel Oil 0.220

Prai II 1992 5.064 Gasoil 0.207

Prai I 1987 2.36 Gasoil 0.206

Assomada 2006 3.9 Gasoil 0.230

Tarrafal 1995-2000 1.4 Gasoil 0.244

S.Cruz n.d 2.2 Gasoil 0.236

Total 62.9

Santiago Island Power Network, 2012

21

Cabeólica wind farm project data and other relevant

data

22Sources: Salci and Jenkins (2015)

Inputs/Parameters Value

1. Wind Capacity (MW) 9.35 MW

2. Capital Cost per (million €) 17.75 million €

3. Fixed Annual O&M Expenses (% of EPC Costs) 1%

4. Total Investment Costs 2.3 million € per MW

5. Construction of Wind Farm (Years) 2 years

6. Operating Life (years) 20 years

7. Wind Capacity Factor 40%

8. Fuel Consumption for Grid Reliability (equivalent to per MWh wind energy

supplied)

0.25%

8. PPA Wind Energy Price 120 €/MWH

9. Annual Wind Energy Price Escalation 0%

10.Carbon Credits from Emission Reductions 0.9049 tCO2 per MWh

11. Tax on Carbon Credits 7.5%

12. Taxes on Operations 10%

13. World Prices of HFO 180 (HFO 380), $ per barrel 80 (60)

14. Cape-Verde Prices of HFO for Electricity Generation (includes additives

such as taxes and transportation costs)

150% x item #13

15. Conversion Factor of HFO 0.94

16. Foreign Exchange Premium 10%

17. Real Discount Rate, % 10%

18. Real Exchange Rate, €/$ 0.78

Fuel Savings and Carbon Credits from Wind Generation

23

Fuel Savings and Carbon Credits 2010 2011 2012 2013 2014 2015 2016 … 2030

Total Energy Displaced from Wind

Integration, in kWh 31,789,317 31,789,118 31,788,025 31,788,442 31,788,720 31,788,522… 31,788,005

Total Fuel Savings in Liter 7,052,352 6,903,503 7,031,113 7,133,445 7,230,157 7,088,949 … 7,917,657

Fuel Consumption for System Reliability

"with" integration 16,379 16,543 16,708 16,875 17,044 17,215 … 19,787

Carbon Credits €/kWh, until 2014 0.0136 0.0136 0.0136

Carbon Credits €/kWh, 2014 onward 0.0090 0.0090 0.0090 … 0.0090

2010 2011 2012 2013 2014 2015 2016 … 2030

Total Annual Fuel Savings

(in real terms, 000 €)

Total Annual HFO 180 Savings 4,129 4,041 4,116 4,176

Total Annual HFO 380 Savings 3,175 3,113 … 3,476

Total Annual HFO 180 + HFO 380

Savings 4,129 4,041 4,116 4,176 3,175 3,113 … 3,476

Reliability Costs incurred by the Electric

Utility 16.94 17.10 17.28 17.45 17.62 17.80 … 20.46

Investment Costs and PPA Wind Energy Payments

(in real values, 000€)

* Similarly, these financial costs (for electric utility - ELECTRA) paid to foreign IPP in FX are

multiplied by the FEP to estimate their true economic costs. FEP for Cape-Verde is estimated at

10.75% (Kuo, Salci and Jenkins, 2015).

24

Investment Costs and Payments 2010 2011 2012 2013 2014 2015 2016 … 2030

Capital Costs of 9.35 MW Capacity 8,875 8,875

Real Annual Fixed O&M Costs of Wind Turbines 177.5 177.5 177.5 177.5 177.5 177.5 … 177.5

Payments for Energy, Carbon and Carbon Tax

Total Annual Payment for Wind Electricity

Generation 3,815 3,815 3,815 3,815 3,815 3,815 … 3,815

Total Payments for Carbon Credits 431 431 431 288 288 288 … 288

Total Excise Tax Paid to Local Gov't 32 32 32 22 22 22 … 22

Electric Utility's (ELECTRA) Point of View

2525

Net Present Value of the Electric Utility @ 10% = - 2,276

ELECTRIC UTILITY'S POINT OF VIEW,

ELECTRA (real values in 000 €)

2010 2011 2012 2013 2014 2015 2016 … 2030

Electric Utility Financial Benefits

Financial Value of Fuel Savings 4,129 4,041 4,116 4,176 3,175 3,113 … 3,476

Electric Utility Financial Costs

Real Annual Payments to IPP for Wind

Generation 3,815 3,815 3,815 3,815 3,815 3,815 … 3,815

Reliability Costs 17 17 17 17 18 18 … 20

Total Financial Outflows 3,832 3,832 3,832 3,832 3,832 3,832 … 3,835

Net Real Annual Cash Flow 0 297 210 284 344 -658 -720 … -359

Private Foreign IPP Point of View – InfraCo

2626

Net Present Value of the Foreign IPP @ 10% = - 14,764

B. FOREIGN IPP'S POINT OF VIEW

InfraCO (real values in 000 €)

2010 2011 2012 2013 2014 2015 2,016 … 2030

Foreign IPP Financial Benefits

Real Annual Payments to IPP for Wind

Generation 3,815 3,815 3,815 3,815 3,815 3,815 … 3,815

Financial Revenues from Carbon Credits 431 431 431 288 288 288 … 288

Total Financial Benefits 4,246 4,246 4,246 4,102 4,102 4,102 … 4,102

Foreign IPP Financial Costs

Real Investment Costs of Wind Turbines 8,875 8,875

Real Annual Fixed O&M Costs of Wind

Turbines 178 178 178 178 178 178 … 178

Excise Tax on Carbon Credits paid local

Gov't 32 32 32 22 22 22 … 22

Taxes Paid to local Gov't 392 … 392

Total Financial Outflows 8,875 9,085 210 210 199 199 592 … 592

Net Real Annual Financial Cash Flow -8,875-4,839 4,036 4,036 3,903 3,903 3,511 … 3,511

Country Economy’s Point of View – Cape-Verde

27

Net Present Value of the Country-Economy @ 10% = - 5,465

C. COUNTRY ECONOMY POINT OF VIEW

CAPE-VERDE (real values in 000 €)

Country-Economy Benefits 2010 2011 2012 2013 2014 2015 2016 … 2030

Economic Benefits Received from Fuel

Savings, FEP adjusted 0.94 3,884 3,802 3,873 3,929 2,987 2,928 … 3,271

Excise Taxes Received from Carbon Credits 32 32 32 22 22 22 … 22

Taxes Paid to local Gov't from 392 … 392

Total Economic Benefits 3,917 3,835 3,905 3,951 3,008 3,342 … 3,685

Country Economy CostsCost of Energy Payments to the Foreign IPP 4,225 4,225 4,225 4,225 4,225 4,225 … 4,225

Economic Cost of Accommodating Wind -

Econ. Reliability Costs 0.78 13 13 13 14 14 14 … 16

Total Economic Outflow 4,238 4,238 4,238 4,238 4,238 4,239 … 4,241

Net Real Economic Resource Flow -321 -403 -333 -288 -1,230 -896 … -556

Global Economy’s Point of View

28

Net Present Value of the Global Economy @ 10% = 9,299

D. ECONOMY POINT OF VIEW

GLOBAL ECON(real values in 000 €)

Global Economic Benefits 2010 2011 2012 2013 2014 2015 2016 … 2030

Global Economic Benefits of Fuel

Savings 3,884 3,802 3,873 3,929 2,987 2,928 … 3,271

Global Economic Benefits of Carbon

Credits 431 431 431 288 288 288 … 288

Total Global Economic Benefits 4,316 4,234 4,304 4,217 3,274 3,216 … 3,558

Global Economic Costs

Real Investment Costs of Wind Turbines 8,875 8,875

Real Annual O&M Costs of Wind

Turbines 178 178 178 178 178 178 … 178

Total Capital, Fixed O & M Costs 8,875 9,053 178 178 178 178 178 … 178

Externality on Foreign Exchange

Payment to PPA 410 410 410 410 410 410 … 410

Reliability Costs 13 13 13 14 14 14 … 16

Total Global Economic Costs 8,875 9,476 601 601 601 601 601 … 604

Net Real Global Resource Flow -8,875 -5,160 3,633 3,703 3,615 2,673 2,615 … 2,955

At the stated costs and prices, using the following

relationship:

29

Net Present Value, 000€, @ 10%

Cape-Verde - Economy -5,465

Utility - Financial -2,276

Government Fiscal Impacts* -3,189

NPVCOUNTRYeco.dr= NPVUTILITY

eco.dr+ PVGOVERNMENT FISCALeco.dr

(*) the gov’t fiscal impacts are equal to the sum of the loss in tax revenues from

reduced oil imports (−), the gain in the value of the FEP on fuel savings (+) and the loss

in FEP due to the payments now made to the IPP (−), and the gain in excise taxeslevied on the carbon credits received by the private operators of the project (+).

Results

At the stated costs and prices, then using the

equation:

30

NPVGLOBAL ECONOMYeco.dr= NPVIPP

eco.dr+ NPVCOUNTRYeco.dr

Results

Net Present Value, 000€, @ 10%

Economy-Global 9,299

Financial – Foreign IPP 14,764

Economy – Country (Cape-Verde) -5,465

Sensitivity Analysis

Impacts of PPA wind energy tariff (NPV values in million €)*

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Perspective /

PPA tariff (€/MWh)

Foreign

IPP

Electric

Utility

Government

Budget

Cape Verde

Economy

Global

Economy

60 0.00 13,356 −2,376 10,980 10,980

80 4,539 8,550 −2,626 5,924 10,463

100 9,858 2,919 −2,919 0.00 9,858

110 12,615 0.00 −3,071 −3,071 9,544

120 14,764 −2,276 −3,189 −5,465 9,299

(*) NPVs are evaluated at 10% real discount rate, heavy fuel oil price at $60/barrel and wind capacity factor at 40%.

Sensitivity Analysis

Impacts of World Price of HFO (NPV values in millions €)

32

Perspective /

Fuel Price ($/barrel) *

Foreign

IPP

Electric

Utility

Government

Budget

Cape Verde

Economy

Global

Economy

60 (90) 14,764 −2,276 −3,189 −5,465 9,299

68 (102) 14,764 0.00 −3,324 −3,324 11,441

70 (105) 14,764 610 −3,360 −2,750 12,015

80 (120) 14,764 3,533 −3,533 0.00 14,764

90 (135) 14,764 6,382 −3,701 2,681 17,445(*) In column 1 the first price is the world price per barrel of HFO380 and the values in parenthesis are approximate prices for the fuel delivered to generation sites in Cape Verde. NPVs are evaluated using a 10% discount rate, the PPA energy tariff is held at 120 €/MWh and wind capacity factor is assigned to be 40%.

Impacts of Wind Capacity Factor, NPV values in millions €)

Sensitivity Analysis

33

Perspective /

Wind Capacity Factor

Foreign

IPP

Electric

Utility

Government

Budget

Cape Verde

Economy

Global

Economy

30% 6,481 −1,707 −2,413 −4,120 2,361

35% 10,622 −1,991 −2,801 −4,792 5,830

40% 14,764 −2,276 −3,189 −5,465 9,299

45% 18,906 −2,560 −3,577 −6,138 12,769

50% 23,048 −2,845 −3,966 −6,810 16,238

(*) NPVs are evaluated at a 10% discount rate, a PPA Tariff of 120 €/MWh and a heavy fuel price of $60/barrel.

Conclusions

• Renewable energy technology should be chosen based on cost-efficiency

concerns rather than considering only the availability of renewable

resources.

• In this example with the costs as stated, wind turbine electricity generation

is both financially (utility’ point of view only) economically viable only at

relatively high cost of fuel price for electricity generation caused by high

caused by high crude oil prices, high transportation charges.

• Based on long-term energy policy of the national gov’t regarding fuel oil

switching (from HFO180 to HFO 380), we can also conclude that the risk of

wind turbine generation for the utility and economy depends on one’s view

of future oil price as well as expected (or planned) long-term fuel oil matrix.

3434

Conclusions, cont.

• negotiations of the PPA price – equivalent to ask one: is it risky to

sign 20 year fuel purchase contract? Yes, at the present time 20

year fixed price contracts for oil are too risky to exist!.

• problem of wind capacity factor and price of heavy fuel oil so

possibility of integrating operating efficiencies (if any) into power

purchase contracts (e.g. high capacity factor at low fuel prices)

• In the future, wind can be a cheap option for electricity generation

for Cape-Verde at high wind capacity factor based upon reduction in

capital costs for wind installations so reflected in wind energy prices.

3535