policy issue paper 14-15 a study on economics of pv and wind power … · 2020. 6. 10. · a study...

Policy Issue Paper 14-15

A Study on Economics of PV and Wind

Power Generation with Emphasis on

Grid Stability

J. Y. Soh et al.

Ⅰ. Research Background / 1

Ⅱ. Research Results / 2

Ⅲ. Policy Implications / 15

<References> / 20

Contents

A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability

Korea Energy Economics Institute 1

Ⅰ. Research Background

□ One of the factors, which impede the extensive deployment of

renewable energy in the power generation sector in Korea, is the

concern that the variable renewable energy (VRE), such as solar

photovoltaics (PV) and wind power, can undermine the reliability of

the power system.

○ In fact, when the shares of the VRE increases, variability of total power

output increases and it can be more difficult in keeping the balance

between the demand for and supply of electricity in real time.

□ However, there are various alternative technologies that can aid the

grid to maintain the system reliability in the presence of the VRE.

○ For instance, the Energy Storage System (ESS) can improve the system

reliability by smoothing out supply and demand mismatch, storing

excess power and supplying it when necessary. Or it can help to reduce

the output variations caused by the VRE and maintain frequency and

voltage within a prescribed range.

○ However, it is still perceived that costs of the ESS are 'considerably'

higher than the costs of other flexible generation sources or operating

reserves such as gas turbines or coal fired power plants.

□ While technologies are rapidly advancing, researches linking system

reliability and economic feasibility of these technologies have been

2 Policy Issue Paper 14-15

rarely conducted.

○ Especially, it is imperative for the government to take into account the

system stability or reliability aspect of achieving the 2035 VRE

deployment target, as well as cost-effective options for aiding the

reliability in the presence of large shares of the VRE.

□ Focusing on the 'frequency and voltage variations' caused by the VRE,

this study aims at analyzing the effects of the ESS in the improvement

of system reliability using a simulation method and at estimating the

costs for these effects using the simple methodology, the levelized costs

of electricity (LCOE) framework.

○ Based on the results of the analysis, this study suggests policy

implications for achieving the national renewable energy deployment

targets, especially for the VRE, of Korea.

Ⅱ. Research Results

1. Technical Feasibility for the 7.5% VRE Deployment Target by 2035

□ Korea aims to generate 13.4% of its power with renewable energy by

2035, with 7.5%p of the production coming from the VRE.

○ The share of the VRE in the total renewable power generation is set up

to 55.7%.



- The share of the VRE has to increase dramatically as the shares of PV

and wind power are set to increase rapidly relative to other renewable

and conventional generation sources.

- According to the government's plans, the share of PV in total renewable

generation will increase from 5.7% in 2012 to 23.4% in 2035, while the

share of wind power will increase from 4.7% in 2012 to 30.2% in 2035.

□ Current international renewable energy deployment data show that

many countries already deployed the VRE, as of 2013, more than the

2035 Korean VRE target of 7.5% and are operating their power systems

without notable reliability problems.

○ As of 2013, shares of VRE generation in the total generation are more

than 7.5% in eight OECD countries.

- Denmark is top ranked with 33.6% among OECD countries, followed by

Portugal with 24.8% and Spain with 24.5%.


[Figure 1] Shares of renewable energy in total power generation of

the OECD countries in 2013

Reference: IEA (2014a)

□ According to the IEA’s technical flexibility assessment of power

systems (IEA, 2014b), some regions or countries are already able to host

high shares of the VRE.

○ The IEA (2014b) conducted assessments for 7 regions consisting of 15

countries and found that current power systems of all the regions were

flexible enough to host at least 25% of VRE generation in the total

power mix in optimistic scenario.

○ This study also found that flexibility of the power systems could handle

at least 5 to 10% of the VRE in total generation mix without any

technical problems even in the pessimistic environments.

□ However, as each country has an unique and complicated power



system, which is different from other countries’, the technically feasible

VRE deployment levels can be significantly varied across countries,

depending on the size or specification of the power systems.

○ In particular, in the case of Europe where national power systems are

interconnected each other, the shares of the VRE in total system are

more relevant than the shares in each country in terms of system

reliability.

○ Therefore, even though some of the countries in Europe show technical

feasibility for high levels of the VRE, it may not have direct implications

for the technically feasible VRE deployment level of Korea.

○ Unlike the European countries, the Korean power grid is isolated from

neighbor countries. As a result, Korea has no access to flexible power

resources of neighbor countries, and it may limit the technically feasible

VRE deployment level.

□ In the Korean case study, Jeon (2014) showed that reliability of the

whole grid can be undermined when the targeted 17 GW of wind

power is constructed and connected to it without improvement of

current power grid conditions.

○ It is because the variability of wind generation, especially the maximum

output reduction, can exceed the capacity provided by operating reserves

defined by the Korean regulation.

○ His study does not even include PV, and, if we take into account the

planned PV construction into his analysis, the issue can be more serious.


Hence, he argues that countermeasures to secure the system reliability

should be prepared to achieve the wind power deployment target.

2. Effects of ESS Technologies on System Reliability

□ The simulation result of this study shows that a battery energy storage

system (BESS) has an effect to stabilize the frequency and voltage of a

power system through the operation of output compensation in

response to output variations caused by the VRE.

○ When an 1 MW PV system was configured to have 5% (10% and 15%)

output variations and a 50 kW (100 kW and 150 kW) BESS to

compensate the output variations, the final output variations of the

PV+BESS system was reduced to 0.2% (1% and 2%).

- In addition, approximately 70% (65% and 65%) of the voltage variations

caused by the PV output variations was reduced by the output

compensation of the 50 kW (100 kW and 150 kW) BESS.

○ When a 2 MW wind power was configured to have 5% (10% and 15%)

output variations and a 100 kW (200 kW and 300 kW) BESS to

compensate the output variations, the final output variations of the wind

power+BESS system was reduced to 0.25% (0.5% and 0.75%).

- In addition, approximately 70% (63% and 66%) of the voltage variations

caused by the wind power output variations was reduced by the output

compensation of the 100 kW (200 kW and 300 kW) BESS.

○ The results above imply that, when a PV or a wind power is equipped



with the BESS, the system reliability can be improved by stabilizing

frequencies and voltages through reduction of the output variations.

Output variation= BESS

capacity

Output variation before

compensation

Output variation after

compensation

Output variation reduction effects

5% 950kW±50kW 947kW±2kW4.8%

(96% of BESS capacity)

10% 900kW±100kW 890kW±10kW9.0%


15% 850kW±150kW 850kW±20kW13%



capacity

Voltage variation before

compensation

Voltage variation after

compensation

Voltage variation reduction effects

5% ±0.01% ±0.003% 70%

10% ±0.02% ±0.007% 65%

15% ±0.035%. ±0.012% 65%

Note: BESS capacity means the size of the BESS with respect to the

installed capacity of the PV to which it is attached.

<Table 1> Effects of the BESS in output stabilization against the output

variation of the PV


Output variation

=BESS capacity

Output variation before

compensation

Output variation after

compensation

Output variation reduction effects

5% 1900kW±100kW 1851kW±5kW4.75%


10% 1800kW±200kW 1765kW±10kW9.5%


15% 1700kW±300kW 1660kW±15kW14.25%



capacity

Voltage variation before

compensation

Voltage variation after

compensation

Voltage variation reduction effects

5% ±0.02% ±0.006% 70%

10% ±0.04% ±0.015% 63%

15% ±0.06% ±0.02% 66%

Note: BESS capacity means the size of the BESS with respect to the

installed capacity of the wind power to which it is attached.

<Table 2> Effects of the BESS in output stabilization against the output

variation of the wind power



3. Analysis on the Economic Feasibility of the BESS

A. Utility Level

□ According to the analysis of economic feasibility, the PV and the wind

power are still expensive power generation sources compared to the

conventional generation sources, such as coal fired power plants and

gas turbines in Korea.

○ The levelized costs of electricity (LCOE) of a 20 MW PV system and a

20 MW wind power were 242.3 won/kWh and 153.9 won/kWh,

respectively, while LCOEs of coal fired power plants, gas turbines and

nuclear power plants were 62.3 won/kWh, 119.6 won/kWh and 46.9

won/kWh, respectively.

○ The LCOE of PV was also higher than the average system margin

prices (SMP), 152.1 won/kWh, for the year 2013. However, the LCOE of

wind power was almost equal to the same to the SMP, meaning that it

almost reached to the grid parity..

□ When the PV system and the wind power were equiped with the

BESS, economic feasibility became worse further compared to the

conventional power plants.

○ When 2 MW BESSs, which were 10% of total installed capacity of the

generation systems, were equipped to the PV and the wind power,

LCOEs of the systems became 261.7 won/kWh for the PV system and


167.4 won/kWh for the wind power system.

○ These costs were considerably higher than LCOEs of conventional power

sources.

[Figure 2] Comparison of LCOEs of various generation sources

□ When only costs for the frequency control against output variations of

the VRE were considered, LCOEs of systems increased with increasing

rates as the installed capacities of the BESS increased.

○ When a 2 MW BESS was equipped to the 20 MW PV to respond to the

10 % output variations, the LCOE increased by 7.99% (19.4 won/kWh)

compared to the PV alone system, while the total investment costs

increased by 5.23%.



- The rate of increases in the LCOE was greater than the rate of increases

in the total investment costs. It is because adding the BESS does not

increase generation capacities and, rather, the final output decrease due

to input/output/stand-by losses from the BESS.

- When a 1 MW BESS and a 3 MW BESS were equipped to respond to

the 5% and 15% output variations, respectively, the LCOEs increased by

3.96% and 12.09%, respectively. That is, as installed capacities of the

BESS increased, the LCOEs increased with increasing rates.

○ When a 2 MW BESS was equipped to the 20 MW wind power to

respond to the 10 % output variations, the LCOE increased by 8.76%

(13.5 won/kWh) compared to the wind power alone system, while the

total investment costs increased by 6.01%.

- Similar to the PV case, the rate of increases in the LCOE was greater

than the rate of increases in the total investment costs.

- When a 1 MW BESS and a 3 MW BESS were equipped to respond to

the 5% and 15% output variations, respectively, the LCOEs increased by

4.34% and 13.26% respectively. Like the PV case, as installed capacities

of the BESS increased, the LCOEs increased with increasing rates.

○ When the same installed capacities of the BESSs were equipped to the

PV and the wind power, the levels and proportions of increases in

LCOEs were different between systems. The costs increases were greater

for the PV system than for the wind power system, while the rates of

increases were higher for the wind power system than for the PV

system.


- For Example, when 2 MW BESSs were equipped to a 20 MW PV and a

20 MW wind power, the LCOEs of the systems increased by 19.4

won/kWh and 13.5 won/kWh, respectively. The rates of increases were

7.99% for the PV system and 8.76% for the wind power system.

Installed capacity of

BESS

LCOE(won/kWh)

Total investment costs

(1 billion won)

Investment costs of BESS

(1 billion won)

Cost changes(won/kWh)

0% 242.3 57.3 - 0

5% 251.958.8

(2.62%)1.5

9.6(3.96%)

10% 261.760.3

(5.23%)3.0

19.4(7.99%)

15% 271.661.8

(7.85%)4.5

29.3(12.09%)

Note: The number in ( ) implies the increase rate from the 0% of BESS case.

<Table 3> Comparison of LCOEs by sizes of the BESS for the PV

Installed capacity of

BESS

LCOE(won/kWh)

Total investment costs

(1 billion won)

Investment costs of BESS

(1 billion won)

Cost changes(won/kWh)

0% 153.9 49.9 - 0

5% 160.651.4

(3.01%)1.5

6.7(4.34%)

10% 167.452.9

(6.01%)3.0

13.5(8.76%)

15% 174.354.4

(9.02%)4.5

20.4(13.26%)

Note: The number in ( ) implies the increase rate from the 0% of BESS case.

<Table 4> Comparison of LCOEs by sizes of the BESS for the wind power



○ When the installed capacity of the BESS was about 56% of the total

installed capacity of PV, the increment of the LCOE of the system

became the same as the LCOE of the gas turbine. In terms of the wind

power, when the installed capacity of the BESS was about 78%, the

increment of the LCOE became the same as the LCOE of the gas

turbine.

○ When the installed capacity of the BESS was about 31% of the total

installed capacity of PV, the increment of the LCOE of the system

became the same as the LCOE of the coal fired power plants. In terms

of the wind power, when the installed capacity of the BESS was about

43%, the increment of the LCOE became equal to the LCOE of the coal

fired power stations.

B. Household Level

□ In case of the household installation, the PV+BESS system was still

expensive in general but reached to the grid parity for the households

that consume electricity over certain thresholds. Also, the LCOE of the

PV+BESS system was already less than the power supply costs in

many islands as of 2014, and was expected to be lower than those in

most of islands in 2017.

○ In 2014, the LCOE of the PV+BESS system for households was 267.3

won/kWh, which was about 35% more than the LCOE of the PV

system without the BESS, 198 won/kWh.


- The LCOE of the PV+BESS system was equal to the consumer tariff

(per kWh) for households consuming 501 kWh/month. As of 2013,

335,000 households were consuming more than 501 kWh/month and

were in the grid parity.

- In case of regional consideration, the PV+BESS system for the household

scale was in grid parity in most of remote islands, whose grids are

isolated from the main grid in Korea, as of 2014. For example, power

supply costs for islands, such as Ulleung-do, Deokjeok-do, Wi-do, and

Chuja-do, were much higher than the LCOE of the PV+BESS system.

□ When we assume that the installation costs of the PV and the battery

for households decrease by 20% and 30%, respectively, by 2017, the

LCOE of the PV+BESS system will be reduced to 206.9 won/kWh.

○ In this case, households consuming 401 kWh/month or more will have

grid parity. Using 2013 electricity consumption information, we found

that 1,182,000 households would fall in this category. The share of this

category is about 7% of the total 16,782,000 households in Korea.

○ Furthermore, the Jeju Island, the largest island in Korea, whose power

supply costs were 249 won/kWh as of 2014, would be able to offer the

household PV+BESS system without any government supports scheme,

such as subsidies or tax incentives.



[Figure 3] Economic feasibility of PV+BESS system for households

Ⅲ. Policy Implications

□ The literature review shows that high shares of the VRE in the entire

power mix may undermine the reliability of the power grid in Korea.

○ If Korea is to achieve the 7.5% target for the VRE by 2035 as planned,

the government should explore various means and measures to ensure

the reliability of the national power grid and set up a comprehensive

plan to thoroughly implement them.

○ This study found that the BESS is one of the effective means to aid

system reliability in the presence of the VRE. A set of implications were


suggested below, which need to be considered for the expansion of

BESS deployment along with the dissemination of the VRE.

□ First, deployment of renewable energy is mainly aimed at

decarbonizing energy supply to mitigate the climate change, and the

deployment of the BESS can be one of means to lift barriers that

hinder further deployment of the renewable energy.

○ In general, as the shares of the VRE increase, the maximum load of the

net load1) does not decrease much, while the minimum load of the net

load decreases rapidly (IEA, 2014b). That is, although the deployment

level of renewable energy is increased, large installed capacities of

conventional generation sources are still required as flexible resources to

deal with the variability of the VRE.

○ For true and effective decarbonization, conventional generation sources

as flexible resources should be replaced by carbon-neutral technologies,

and this study shows that the BESS is one of the alternatives.

□ Second, this study found that the BESS is still an expensive

technology that requires some sorts of supports from the government.

Without any intervention from the government, VRE developers would

have little incentive for installation of the BESS, because they cannot

internalize the benefits induced by installation of the BESS, while it

bears significant costs2).

1) Net load means all loads but renewable energy.2) For example, BESSs will replace operating reserves currently provided by conventional generation sources,

and the grid operator may save the costs, while the developers pay for BESS installations.



○ This phenomenon is what is called a market failure caused by external

effects and therefore the government's intervention may be needed in

order to let VRE developers internalize the external benefits.

○ The external benefits should be directed to developers as forms of direct

government supports, such as subsidies, or as indirect forms, such as

the promotion of R&D, which can contribute to reducing costs of

adapting BESS technologies.

- Thus far, the policy-led costs reduction and market creation have been

successful in creating massive demands for renewable energy

technologies and it has led further costs reduction and demand creation,

which contributed massive deployment of renewable energy technologies.

- These supports should be extended to the BESS to lift the barrier which

hinders further deployments of renewable energy, especially the VRE.

□ Third, the study shows that the value of the BESS is derived from

and depend on the generation systems to which it is attached. That is,

the characteristics of the generation systems, such as their unit costs

and capacity factors, alter the values of the BESS.

○ For example, technologies with higher capacity factors would utilize the

BESS more than technologies with the low capacity factors do.

○ For the BESS support policies to be fairly applied across different

technologies of renewable generation, the differences of the derived

values should be considered and the levels of supports should be

differentiated according to the economics of integrated systems of


different technologies.

○ Or for the cost effective deployment of the BESS, the selection and

concentration strategy may be applied at the initial stage and then

extended to the BESS equipped in other technologies. For example,

increment of the LCOE of the wind power+BESS system was

significantly lower than that of the PV+BESS system, so the wind power

can be the first choice.

□ Fourth, the study shows that the PV+BESS system for households have

already reached to the grid parity for some classes of consumers and

some regions in Korea, and the classes and the regions will be

expanded in the future as the costs of the system decrease. Lifting

economic and non-economic barriers can create an environment where

the households have incentives to install the system even without

supports from the government.

○ Nevertheless, high upfront costs of investment is still an obstacle to the

further dissemination of the system. Also, government's support scheme

that does not discriminate certain classes of consumers makes potential

installers with the grid parity reluctant to install the system on their

own. The ceiling on the electricity retailer tariff makes the system

economically unattractive even in islands, where the grid parity is

already reached. Removing these kinds of barriers can trigger fast

dissemination of the technologies.

□ Finally, this study tried to bring the engineering aspect and economic



aspect of the BESS together in terms of improving grid reliability in

the presence of high share of the VRE. The methodology was simple

but helpful in analysing technical and economic feasibilities of some

technologies and in drawing some implications and future policy

directions.

○ This methodology can be extended to answer certain pending questions

regarding VRE related technologies with respect to grid reliability and

economic feasibility.

○ Also, necessity for developing a more comprehensive analysis model is

recognized. Grid or system reliability includes many more elements than

elements that this study covers. So, this study can be utilized as a basic

framework to make an extensive analysis model, which can incorporate

comprehensive national power systems including power generation

facilities, transmission and distribution facilities, power demands, and the

operational issues and stability of power systems.


< References >

IEA, Renewables Information, IEA, 2014a

IEA, The Power of Transformation-Wind, Sun and the Economics of

Flexible Power Systems, IEA, 2014b.

Yeong-hwan Jeon et al., Study for Establishment of Electricity Supply and

Demand Plan with Regard to Deployment of Large Scale Renewable

Facilities, Korea Power Exchange, 2014 (Korean)

Policy Issue Paper 14-15

A Study on Economics of PV and Wind Power Generation with Emphasis on Grid

StabilityPrinted on February 23, 2015

Issued on February 23, 2015

Author：Jin-Young SohPublisher：Joo-Heon Park

Published by Korea Energy Economics Institute, (Address) 405-11, Jongga-ro, Jung-gu, Ulsan, 44543, Korea, (Phone) +82-52-714-2114, (Fax) +82-52-714-2028

Registered on December 7, 1992ⓒ Korea Energy Economics Institute, 2015

policy issue paper 14-15 a study on economics of pv and wind power … · 2020. 6. 10. · a study...

Documents