Generation Expansion. Daniel Kirschen. Daniel Kirschen

Transcription

1 Generation Expansion Daniel Kirschen Daniel Kirschen

2 Perspectives The investor s perspective Will a new plant generate enogh profit from the sale of energy to jstify the investment? The consmer s perspective Will there be enogh generation capacity to meet the demand from all the consmers? Do investors need an extra incentive to bild enogh generation capacity? Daniel Kirschen

3 The investor s perspective Daniel Kirschen

4 Example: Investing in a new plant Data for a coal plant Investment cost 1021 $/kw Expected plant life 30 years Heat rate at rated otpt 9,419 Bt/kWh Expected fel cost 1.25 $/MBt Is it worth bilding a 500MW plant? Assme a tilization factor of 80% Assme average price of electrical energy is 32 $/MWh Daniel Kirschen

5 Example (contined) Investment cost: 1021 $/kw x 500 MW = $510,500,000 Estimated annal prodction: 0.8 x 500 MW x 8760 h/year = 3,504,000 MWh Estimated annal prodction cost: 3,504,000 MWh x 9419 Bt/kWh x 1.25 $/MBt = $41, 255, 220 Estimated annal revene: 3,504,000 MWh x 32 $/MWh = $112,128,000 Daniel Kirschen

6 Example (contined) Year Investment Prodction Prodction cost Revene Net Cash Flow 0 $ 510,500, $ 510,500, ,504,000 $ 41,255,220 $ 112,128,000 $ 70,872, ,504,000 $ 41,255,220 $ 112,128,000 $ 70,872, ,504,000 $ 41,255,220 $ 112,128,000 $ 70,872, ,504,000 $ 41,255,220 $ 112,128,000 $ 70,872,780 Total net cash flow over 30 years: - $510,500, x $70,872,780 = $1,615,683,400 Is this plant profitable enogh? Daniel Kirschen

7 Example (contined) Time vale of money A dollar now is worth more to me than a dollar next year or How mch interest shold I be paid to invest my dollar for one year rather than spend it now? This has nothing to do with inflation Apply this concept to investments Calclate Internal Rate of Retrn (IRR) of net cash flow stream Standard acconting formla (se a spreadsheet) Gives more weight to profit in the early years than in the later years Example: IRR = 13.58% Daniel Kirschen

8 Example (contined) Is an IRR of 13.58% good enogh? Compare it to the Minimm Acceptable Rate of Retrn (MARR) of the investor If IRR MARR Ë investment is OK If IRR < MARR Ë investment is not worth making How do firms set their MARR? Specializes in high risk investments Ë set MARR high Specializes in low risk investments Ë set MARR lower bt check careflly the risks associated with each investment Daniel Kirschen

9 Example (contined) What are the risks? Average price of electricity may be less than 32 $/MWh Utilization factor may be less than 80% Recalclate the IRR for varios conditions IRR [%] 30% 25% 20% 15% 10% MARR Utilization factor 5% 0% Price of Electrical Energy [$/MWh] Daniel Kirschen

10 Retiring generation capacity Once a plant has been bilt: Most of the investment cost becomes a snk cost Snk costs are irrelevant in frther decisions A plant will be retired if it no longer recovers its operating cost and is not likely to do so in the ftre Examples: Operating cost increases becase fel cost increases Plant tilization and/or energy price decrease becase cheaper plants become available Decision based only on prediction of ftre revenes and costs Technical fitness and lifetime are irrelevant Daniel Kirschen

11 Effect of a cyclical demand Basic microeconomics: If demand increases or spply decreases (becase plants are retired) prices will increase If prices increase, investment projects become more profitable New generating plants are bilt Difficlties Demand for electricity is cyclical Electrical energy cannot be stored economically Mst forecast tilization factor for each plant Daniel Kirschen

12 Load Dration Crve Nmber of hors per year dring which the demand exceeds a certain level PJM (Pennsylvania Jersey Maryland) system in 1999 Load (MW) Hors Daniel Kirschen

13 Effect of cyclical demand Peak load is mch higher than average load Total installed capacity mst be mch higher than average load Cheap generators operate most of the time More expensive generators operate dring only a fraction of the time Prices will be higher dring periods of high demand Competition will be limited dring periods of high demand becase most generators are already flly loaded Daniel Kirschen

14 Price dration crve PJM system, Percentage of Hors Actal peak price reached $1000/MWh for a few hors Daniel Kirschen

15 What abot the most expensive nit? In a competitive market Market price set by marginal cost of marginal generator Infra marginal generators collect an economic profit becase their marginal cost is less than the market price Economic profit pays the fixed costs Marginal generator does not collect any economic profit Marginal generator does not pay its fixed costs Price Inframarginal Marginal prodcer spply Economic profit demand Qantity Daniel Kirschen

16 What abot the most expensive nit? Becase of the cyclical demand, most nits will be inframarginal dring part of the year Most nit will therefore have an opportnity to recover their fixed costs The nit that only rns a few hors a year to meet the peak demand is never infra-marginal It mst recover its costs by incorporating them in its price Mst be recovered over a few hors only Prices are very high dring these periods (price spikes) Possible becase market is not competitive dring these periods What if the yearly peak demand is lower than expected? Daniel Kirschen

17 The consmer s perspective Daniel Kirschen

18 Meeting the peak demand In a competitive environment, there is no obligation on generating companies to bild enogh capacity to meet the peak demand Rely on price signals to encorage investments What if no generation company wants to own the most expensive nit that rns only a few hors a year? Owning that plant is not very profitable Will there be enogh generation capacity available to meet the reliability expectations? Daniel Kirschen

19 Conseqences of not meeting the peak demand Load mst be shed (i.e. cstomers temporarily disconnected) Cost of these interrptions: Vale of Lost Load (VOLL) VOLL is abot 100 times larger than the average cost of electricity Cstomers have a mch stronger interest in having enogh generation capacity than generators Cstomers may be willing to pay extra to garantee that there will be enogh capacity available Daniel Kirschen

20 Capacity incentives Advantages Capacity insrance policy: pay a little bit reglarly to avoid a major problem Disadvantages Less economically efficient behavior How mch shold generators be paid per MW? Or How mch capacity shold be available? Daniel Kirschen

21 Capacity incentives Capacity payments Pay generators a fixed rate per MW of capacity available Encorages them to keep available plants that don t generate many MWh Capacity market Reglator determines the generation capacity reqired to meet a reliability target Consmers mst all by their share of this capacity Generators bid to provide this capacity Price paid depends on how mch capacity is offered Daniel Kirschen