How Risky is Electricity Generation?

Transcription

1 How Risky is Elecriciy Generaion? Tom Parkinson The NorhBridge Group Inernaional Associaion for Energy Economics New England Chaper 19 January January 2005 The NorhBridge Group

2 Agenda Generaion economics Analyical framework Saic equilibrium Dynamic equilibrium Resuls and conclusions. 19 January The NorhBridge Group

3 For a merchan generaion plan, he uncerainy in ne revenues is he key unknown o deermining boh deb coverage and equiy reurn: Deb Coverage = Equiy Reurn = ( R f ) (1 τ ) + C dτ + I τ I + P ( R f ) (1 τ ) + C dτ I (1 τ ) E P R = Ne revenues d = Tax depreciaion rae f = Fixed O&M cos I = Ineres on deb τ = Marginal ax rae P = Principal repaymen C = Capial cos E = Equiy invesmen 19 January The NorhBridge Group

4 Ne revenues represen he margin beween he elecriciy price and he variable cos when he uni is dispached! Spo Price ($/MWh) Elecriciy Gas Dispach 0 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oc-02 Nov-02 Dec January The NorhBridge Group

5 The resuling ne revenues sream is quie volaile: Monhly Ne Revenues ($/kw) Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Over his eigh-year period, almos half of he ne revenues occurred in jus hree monhs. 19 January The NorhBridge Group

6 The price duraion curve is a useful way o concepualize he annual ne revenues sream probabilisically: 100 Spo Price ($/MWh) Ne Ne Revenues Dispach Cos Dispach Cos Fracion Fracion of of Annual Hours Figure 1: Ne Revenues and Price Duraion Curve 19 January The NorhBridge Group

7 Agenda Generaion economics Analyical framework Saic equilibrium Dynamic equilibrium Resuls and conclusions. 19 January The NorhBridge Group

8 The ne revenues sream is subjec o differen forces a differen ime scales: Time Scale Capial Sock Key Uncerainies Characerizaion Shor Fixed in boh quaniy and ype Weaher, fuel sorage Shor-erm uncerainy Medium Fixed in ype, bu no quaniy Economic growh, new capaciy Invesmen dynamics Long Fixed neiher in quaniy nor ype Fuel finding coss, echnology characerisics Technology compeiion 19 January The NorhBridge Group

9 The fundamenal decomposiion expresses ne revenues for a merchan plan in any given year as he produc of four erms: R = S * S S * R S R R Saic Enry Obsolescence Invesmen Dynamics Shor-Term Uncerainy * S = Saic equilibrium enry hreshold for new uni in year S = Ne revenues in year based on saic equilibrium R = Acual ne revenues in year of operaion R = Expecaion of ne revenues as of beginning of year 19 January The NorhBridge Group

10 The assumpion of independence also allows us o approximae he variance of ne revenues as he sum of hree erms: var R [ ] [ ( )] R ln( R ) var ln S + var ln + var ln S * * R Saic Enry/ Obsolescence Uncerainy Invesmen Dynamics Uncerainy Shor-Term Uncerainy 19 January The NorhBridge Group

11 We used a scenario-based framework o evaluae each source of uncerainy: Invesmen Dynamics Annual load Saic Enry Thresholds Iniial Saic Equilibrium Forward ne revenues (new unis) Scenario Generaor Saic Equilibrium Tech. adv. Inflaion Risk-free rae Annual fuel prices Iniial Saic Equilibrium Uni ouages Load Fuel prices Saic enry hresholds Saic ne revenues Shor-Term Marke Model Acual ne revenues Forward ne revenues (exising unis) 19 January The NorhBridge Group

12 Agenda Generaion economics Analyical framework Saic equilibrium Dynamic equilibrium Resuls and conclusions. 19 January The NorhBridge Group

13 Long-erm forecass regardless of iniial condiions converge o a paricular rajecory, which we can find by: Posiing compeiion among a number of alernaive fuure echnologies Accouning for echnological advancemen and obsolescence Opimizing dispach, reiremen, and invesmen o deermine he leas-cos soluion o meeing load Solving for he opimal capaciy mix and associaed saic ne revenues hresholds. 19 January The NorhBridge Group

14 Given cerain assumpions, he resuling saic equilibrium soluion is saionary ha is, a single soluion describes he oucome for all ime: The capaciy sock increases in size wih load growh, bu he capaciy mix says consan Elecriciy prices increase wih inflaion less he rae of echnological advancemen, bu real prices say consan. This allows us o ranslae he economics of unis of differen vinages a a single poin in ime ino he economics of a new uni over is enire life. 19 January The NorhBridge Group

15 Alhough individual unis come and go, he composiion of he capaciy sock iself is consan: 2010 Analysis across uni life Year of Operaion Analysis across flee Year of Insallaion 19 January The NorhBridge Group

16 Given a se capaciy sock, we can develop he associaed supply curve: Dispach Cos ($/MWh) Coal CC CT Insalled Capaciy (deraed MW/MW of average load) 19 January The NorhBridge Group

17 The supply curve maps ino a price duraion curve, ne revenues, and operaing cash flows: 160 Operaing Cash Flow ($/kw-yr) Coal CC CT Delivery Year 19 January The NorhBridge Group

18 Given he opimal mix, he ne revenues rajecories define expeced obsolescence: Ne Revenues es ($/kw-yr) Saic Enry Threshold Exising Uni Expeced OObsolescence Delivery Year 19 January The NorhBridge Group

19 Acual obsolescence will depend on he naure of he scenario rajecories: Ne Revenues ($/kw-yr) Ne Revenu es ($/ kw -yr) Acual Saic Enry Threshold Acual Saic Enry Threshold Acual Exising Uni Exising Uni Acual Obsolescence Acual Obsolescence Delivery Year 19 January The NorhBridge Group

20 Agenda Generaion economics Analyical framework Saic equilibrium Dynamic equilibrium Resuls and conclusions. 19 January The NorhBridge Group

21 Invesmen dynamics are complicaed by he fac ha he annual ne revenues and saic enry hresholds are uncerain. Consider hree cases: Insananeous invesmen, known saic enry hreshold Finie lead ime, known saic enry hreshold Finie lead ime, uncerain saic enry hreshold. The underlying heory is an exension of he Dixi and Pindyck Invesmen Under Uncerainy framework. 19 January The NorhBridge Group

22 Load uncerainy causes he capaciy price o evolve randomly bu insananeous enry caps he price: Iniial Enry Capaciy P rice ($/kw-year) Enry Price (reflecing barrier) Equilibrium Price Delivery Year Noe ha he enry price exceeds he equilibrium price. 19 January The NorhBridge Group

23 Wih finie lead ime, he expeced capaciy price is capped, bu he acual price may exceed he cap: Capaciy P rice ($/kw-year) On-Line Dae Expeced Price Enry Barrier Acual Price Condiional Expecaion Delivery Year Hence we mus rack boh he acual and expeced price. 19 January The NorhBridge Group

24 The volailiy erm srucure reflecs wo separae sources of uncerainy in he expeced price and in he acual price during consrucion: 50 On-Line Dae Average Volailiy (percen) Acual Price Condiional Expecaion Delivery Dae 19 January The NorhBridge Group

25 A known saic enry hreshold ranslaes ino a known dynamic enry hreshold: Ne Revenues es ($/kw-yr) ) Online Dae Acual Ne Revenues Expeced Ne Revenues Dynamic Threshold Saic Threshold Year of Delivery 19 January The NorhBridge Group

26 Uncerainy in he saic hreshold has a proporional effec on he dynamic hreshold: Ne Revenues ($/kw-yr) Online Dae Online Dae Expeced Ne Revenues Expeced Ne Revenues Expeced Dynamic Threshold Expeced Dynamic Threshold Expeced Expeced Saic Threshold Threshold Year of Delivery Wha maers is he relaionship beween he expeced ne revenues and he expeced dynamic hreshold. 19 January The NorhBridge Group

27 Agenda Generaion economics Analyical framework Saic equilibrium Dynamic equilibrium Resuls and conclusions. 19 January The NorhBridge Group

28 Peaking unis have he greaes ne revenues uncerainy: Log-Variance of Ne Revenues Technology Risk Technology Risk Invesmen Dynamics Invesmen Dynamics Shor-Term Uncerainy Shor-Term Uncerainy Year of of Delivery This uncerainy is relaively consan across ime. 19 January The NorhBridge Group

29 By conras, he risks for combined cycle unis climb seadily as he unis age and move up he meri order: 1.6 Log-Variance of Ne Revenues Technology Risk Technology Risk Invesmen Dynamics Invesmen Dynamics Shor-Term Uncerainy Shor-Term Uncerainy Year of Delivery 19 January The NorhBridge Group

30 Coal unis are subjec o compeiive pressures from CCs and herefore face considerable echnology risk: 0.7 Log-Variance Log-Variance of of Ne Ne Revenues Revenues Technology Risk Invesmen Dynamics s Shor-Term Uncerainy Year of Delivery Year of Delivery 19 January The NorhBridge Group

31 While coal unis have he lowes proporional variance in value, his echnology risk is mos difficul o hedge: Technology Risk Risk Invesmen en Dynamics Shor-Term Uncerainy am ics Sh or-te rm Unce rain y R Relaive Variance CCoal l CC CT 19 January The NorhBridge Group

32 Conclusions The separaion ino shor-erm uncerainy, invesmen dynamics, and echnology compeiion enables analysis and sheds insighs Baseload plans like coal have less risky ne revenues sreams Bu baseload plans are subjec o considerable echnology risk, which has a disproporionae effec on value risk and is less readily hedged Iniiaives o creae forward capaciy markes such as conemplaed by PJM will advanage CCs and CTs by hedging invesmen dynamics risks. 19 January The NorhBridge Group

33 Conac Informaion Thomas W. Parkinson Direcor The NorhBridge Group Lincoln, MA Dr. Parkinson has over 25 years experience in capial-inensive, risky, commodiy-based naural resource indusries. For he las 15 years, Dr. Parkinson has focused almos exclusively on he elecriciy indusry, where he applies he financial heory of commodiy and derivaives markes o pracical problems facing managers. He has worked wih EPRI and many elecriciy companies on applicaions ha chiefly include probabilisic price forecasing, asse and conrac valuaion, and risk assessmen. Dr. Parkinson holds a B.S. in managemen from M.I.T. and a Ph.D. in engineering-economic sysems from Sanford Universiy. 19 January The NorhBridge Group