The Economic Benefits of a Fully Integrated Middle East Power Grid

Transcription

1 January 29, 2007 The Economic Benefits of a Fully Integrated Middle East Power Grid Middle East Economic Association MEEA 6 International Conference, Zayed University, Dubai, UAE March, 2007 Brian H. Bowen (contacting auor) Energy Center at Discovery Park, Purdue University, USA Ph: , Fax: , bhbowen@purdue.edu F.T. Sparrow, Marty W. Irwin Energy Center at Discovery Park, Purdue University, USA Alimorad Sharifi Department of Economics, Isfahan University, Iran Ahmed F. Zobaa Electrical Power and Machines Department, Cairo University, Egypt Abstract This paper outlines a quantitative approach to assess e economic benefits from an extensive Middle East regional grid, using a mixed integer model (using GAMS and Cplex software) which includes a flexible trade agreement among regional utilities. The model combines generation wi transmission expansions making it a unique feature, not available in commercial power grid software. The enormous regional natural gas reserves are vitally significant in planning for new generation capacity and e interconnection of regional electric utilities will improve its utilization in e power pool context rough increased regional electricity trading (gas by wire via an expanded integrated regional grid). The 5% to 7% economic grow and 6% to 10% electricity demand grow rates across e region are very high. Employing a 10 year model will demand an increased generation capacity of more an 80% by 2017 for ensuring no power shortages. This paper provides a 10 year demonstration model using e Purdue meodology for assessing e benefits from a Middle East Regional Power Pool structure, Norern Sub-Pool region (Iran Iraq, Jordan, Syria, and Turkey). The model which minimizes costs (capital and operational) and calculates e gains from trade and collective expansion plans was developed wi USAID funds for e Souern African Power Pool (SAPP). Keywords Power pool, cost minimization, electricity trading gains, capacity expansion

2 2 1 Introduction Over e past decade ere have been significant Middle East transmission line construction projects, wi e most notable development being e EIJLST interconnection. The electric grids of Egypt, Iraq, Jordan, Lebanon, Syria and Turkey (EIJLST) have been interconnected rough a 500/400 kv line and a submarine cable crossing e Red Sea at e Gulf of Suez. The total cost of e project amounted to US $663 Million and was financed by e Arab Fund. This project provides better stability and economic operation for all six grids, while for e first time in history linking an electric grid in Africa wi one in Asia. The interconnection project took advantage of several features of e electric systems in e various countries, namely; availability of power to export in most countries except for Lebanon and Iraq. The marginal generation costs in e various countries (at peak load) are around $19.76/MWh in Egypt, $40.13 in Jordan, $52.3 in Lebanon, $24.08 in Syria, and $38.11 in Turkey [1]. Figure 1 The EIJLST Electrical Interconnection Project Source: [2] The EIJLST interconnections (Figure 1) provide a backbone for significant regional cooperation in electricity trading at was not previously possible. Significant economic developments rough regional cooperation can be achieved wi a power pooling framework. This paper outlines a modeling technique at quantifies e economic gains from power pooling and a demonstration model is provided wi six nodes (six countries, Iran, Iraq, Syria, Jordan, Turkey, and Egypt). The model can be considered part of a Middle East Power Pool (MEPP) infrastructure and named in is paper as e Norern Sub-Pool Demonstration Model, (NSPDM). Egypt is considered part of e NSPDM as it is an important energy trading partner. This six node model is good for demonstration

3 3 purposes. In future work it is hoped a complete MEPP can be created at will include e Gulf Cooperation Council (GCC). Figure 2 Top World Proven Natural Gas Reserves & Annual Production, 2006 Source: [3] The Middle East is experiencing and expecting large electricity demand grow rates at will require major generation capacity expansions. A 7% demand grow rate over a ten year planning horizon will mean just about doubling existing generation capacity and is amount can be expected in e NSPDM. The enormous natural gas reserves of e region are integrated in e NSPDM. These reserves will fuel new regional generation capacity (combined cycle technology). Iran has e second largest proven natural gas reserves in e world (Figure 2) and is suggests at it could become a major exporter of electricity to e region. The NSPDM base year is 2007 and data for new generation is generic in nature using typical international capital costs. In e NSPDM each country is represented by one large existing ermal power plant, one existing hydropower plant (if ere is hydropower in e country), one new ermal power plant (combined cycle, CC), and one new hydropower plant where relevant (Iran and Turkey). In a comprehensive MEPP model each major power station will be represented at each node togeer wi all e parameter values associated wi each power station (heat rate, planned and emergency outage rates, fuel costs, capital expansion costs etc). The simplified NSPDM aggregates ermal and hydropower stations. 2 Benefits and Analysis wi e Purdue Power Pool Models Several benefits are known to accrue from regional electricity trading which include lower reserve capacity, greater load diversity, economies of scale, and improved cooperative joint planning. If ere are regional links en e reserve capacity can be shared among nodes and so reduce total investments in reserve power construction. The nodes/utilities/countries experience peak load at different times of day and have different load characteristics due to e customers ey each serve. The chronological sum erefore of e individual utility loads provides a peak at is lower an e sum of e individual peak demands. Generally economies of scale require less capital to construct one large facility an is required to build an equivalent capacity wi several smaller plants. Similarly, multiple units at a single site are cheaper to build an e same units at numerous different sites. There are substantial scale economies in hydro production, and substantial economic

4 4 benefits in coordinating e operation of a combined hydro/fossil fuel generation system, where hydro is used during peak hours. Joint planning for utilities will lower e total reserve requirements capacity while maintaining reliability. An integrated grid is normally e most cost effective investment for maximizing e gains in regional electricity trading and joint planning. Economic assessment of alternative forms of regional power markets (loose or tight MEPP) can be analytically assessed rough e maematical programming techniques used in e Purdue models. These models consider existing and proposed generation and transmission facilities across e region and trade in bo reserves and energy (MW and MWh). Work started on e Purdue power pool modeling in 1996 wi a short-term hydroermal power system optimization for e Souern African Power Pool (SAPP). The first phase of e project was a short-term optimal dispatch model at minimized operational costs for e whole system of e next several days on an hourly basis. Nodal marginal costs were calculated while respecting all necessary constraints such as transmission capacity and losses, power plant restrictions, hydro system restrictions, etc. The second phase of e SAPP project was long-term hydro-ermal expansion wi regional electricity trading. Mixed integers were used for capacity expansions (generation and transmission). Representative hours including peak hours were used for e optimal dispatch similar to e shortterm model. The objective function is e present value (PV) of e cost stream (or cash flow), including capital, fuel and O&M costs. The formulation for e long-term model is e one used in e NSPDM. The general structure of e model is shown below: Minimize e Present Value (discounted costs of all kinds over T years) Subject to: Power plant (old & new) production to meet bo nodal electricity & peak demands Hydro and ermal power plant capacity and oer physical limits Transmission constraints and limits Water inflow and river system connections Pumped hydro constraints Pipeline construction constraints Autonomy factors for trading reserves and energy (MW and MWh) Each equation for e above includes many constraints. The model is very large and requires considerable computation power. The model has been extensively tested and used over e past several years and various reports have been produced which are now available. These reports and full technical details of e model are available on e Purdue Energy Center website and in e User Manual which is also on e website:- The Purdue power pool planning models use bo integer and linear maematical programming techniques. GAMS (General Algebraic Modeling System) and CPLEX solvers are employed to write and execute e maematical code [3]. All of e formulation at structures e modeling code is found in detail in e User Manual. When e model is run wi e integer mode it means at e optimization and project selection process will require e consideration of complete

5 5 generation units to be constructed. This mode of operation is required in a final planning analysis. The linear mode permits portions of a generating unit to be built and is is very helpful since it shows e optimal tendencies in e selection of e generation technology and preferred unit sizes. The linear mode of e model requires much less time for its execution and is is used for e NSPDM. The technicalities and hundreds of parameters and variables (capital recovery factors, outage rates, line loss factors, generation heat rates, reserve margins, fixed costs etc) in e Purdue power pool model are oroughly documented at e above websites. As so many reports and publications on e Purdue model usage are available at e Purdue websites is paper only outlines e meodology while illustrating e type of results to be expected for a NSPDM. Section 3: Demonstration Middle East Power Pool (MEPP) Model & Data Inputs The demonstration model in is paper highlights e main functionalities of e Purdue power pool analysis software. Generic data for e MEPP Norern Sub-Pool is used in is demonstration. Figure 3 The Middle East Power Pool Model (MEPP) The five nodes in e NSPDM are illustrated in Figure 3 (nodes 1, 2, 3, 4 and 5). Anoer node at is an important trading partner wi e Norern Sub-Pool is at which represents Egypt (Node 7). The NSPDM erefore includes Egypt making it a six node model. We could quite easily justify e inclusion of oer regional nodes but is is unnecessary for demonstration purposes. The outputs from e NSPDM do not provide a pool plan or detailed analysis because e data is so generic and individual power stations (existing and proposed) are not represented. Power stations in each country are aggregated and represented by a simplified single power source (ermal or hydropower) at each national node.

6 6 The model has two autonomy trading factors at limit e amount of electrical energy (MWh) and power reserves (MW) at can be transmitted between nodes. Using ese autonomy factors is paper illustrates e benefits and costs from two modeling scenarios: NSPDM Scenario #1: Free trade is permitted NSPDM Scenario #2: Limited trade is permitted In scenario 1 e benefits of electricity trading are maximized while in scenario 2 ere is no trading of MWh and very limited MW reserves. These two extreme scenarios illustrate e capability of e model for quantifying e magnitude of e impact of alternative trading options. In practice ese extreme trading conditions are unlikely and autonomy factors will have values between ese two extremes. Each node can have a predetermined amount of autonomy at constrains e trading quantities and permits an agreed share of e national demand. Table 1. Existing International Transmission Line Load Carrying Capabilities in e NSPDM (MW) Line Name (Node numbers) Existing Load Carrying Capability Sources: A. Sharifi s Dec 15, 2006, January 5, 2007; A.Zobaa Dec27, Table 2 NSPDM Generation, Existing and Proposed Country Energy Trading Partners Existing Electricity Generation 2004 (MW) Iran Iraq Jordan Syria Turkey Afghanistan, Armenia, Azerbaijan, Pakistan, Russia, Turkey, Turkmenistan Iran, Syria, Turkey Crossroads of regional grid Jordan & Lebanon. Plans for improving linkages wi Iraq & Turkey Iran 37,300MW, BkWh N.Gas 68%, Hydro 14% Oil 18% 5,000 MW, 29.3 BkWh Oil 100% 1,900 MW, 8.4 BkWh N.Gas 60%, Oil 40% 7,500 MW, 29.6 BkWh N.Gas 38%, Hydro 25% Oil 37% 35,600 MW, 143 BkWh N.Gas 35%, Hydro 32% Coal 33% 17,700 MW, 84.3 BkWh N.Gas 84%, Hydro 16% Proposed & Potential New Generation (MW) 11,600MW N.Gas/CC 6,4000MW Hydro (75,000 MW - CC)* 10,000 MW- Gas/CC Electricity Demand Grow Rate Proven Natural Gas Reserves (Tcf) 8% 1, (10,000 MW - CC)* 10% MW Gas/CC (5,000 MW CC)* 6.1% ,000 MW Gas/CC (10,000 MW CC)* 7.1% ,500 MW Hydro (25,000 MW CC)* 8.0% ,380MW Gas/CC Egypt + Jordan, Libya (25,000 MW CC)* 6.2% Note: + Not located in Norern Sub-Pool, * Potential Combined Cycle MW expansion in NSPDM, Sources: [4] & s In time period 1 (base year 2007) of e NSPDM 10 year planning horizon approximate transmission line carrying load capabilities represent e existing EIJLST interconnections. Some of e line MW capability values (Table 1) are at e high range of e existing capabilities but for demonstration purposes is poses no problem. If discussions about strengening e analytical

7 7 capability in regional electricity expansion planning can take place at e MEEA conference en a timely contribution is being made. This type of sophisticated planning tool can be a significant aid to regional executives following a detailed and extensive data collection. The expansion of an interconnected transmission infrastructure is crucial for regional power pool development. This enables e essential means of transmitting more energy and electrical reserves. The stronger e interconnected infrastructure en e greater is e possibility of improved electricity trading wi improved economic benefits. The load carrying capability of each line, its total leng, permitting expenses, and construction costs need to be recorded. The current total national MW ermal capacity of each country is allotted to each node s existing ermal station, (see Table 2, and 3 rd column). The proposed total national ermal capacity expansion is represented at each node by a large new combined cycle plant (see Table 2, and 4 column, new Combined Cycle [CC] is fueled by natural gas). The potential maximum CC expansions provided in e NSPDM are listed in column 4 of Table 2. Each node has e same natural gas price ($2.00 per MBtu). For demonstration purposes e natural gas price in Iran is $1.00 lower an at oer nodes. This introduces market differences into e NSPDM. Natural gas pricing is an important issue in future compilation of a comprehensive MEPP data set. The lower gas price at one node makes it more attractive as an electricity exporter as can be seen from e optimization results. Four of e NSPDM nodes in 2007 have hydropower capacity. Only two of ese nodes have significant hydropower capacity expansion options (Iran and Turkey, Table 2). Generic hydropower capital costs are given to e proposed hydropower expansion stations ($2 Million/MW). The lower e capital costs en chances are improved for construction being recommended by e optimization. Construction and future operational costs of any major project (new lines or new ermal and hydro stations) are decisive and sensitive data in compiling a future MEPP data set. Sensitivity analysis wi different capital and operational costs will be very valuable analytical exercises in attracting investors to particular projects. This model was initially used in e Souern African Power Pool to evaluate e long-term cost savings from importing cheaper hydropower from Central Africa across e continent (wheeling rough Zambia, Zimbabwe and Botswana) to Sou Africa. In West Africa e model was used by ECOWAS (Economic Community of West African States) and e World Bank to show where e best investments could be made for new international transmission capacity. Purdue has provided training and assisted ECOWAS planners in power pool data collection and is can also be provided to e ESCWA (United Nations Economic and Social Commission for Western Asia). 4 Middle East Power Pool Modeling and Discussion of NSPDM Results The results from e free trade scenario and e limited trade scenario for e NSPDM show at significant regional savings can be made from an increased flexibility in trade. Table 3 Total Capital and Operational Costs 2007 to 2017 NSPDM Demonstration Results Total Cost Total Cost Wi Limited Trade Wi Free Trade $ Billion $ Billion MEPP Norern Sub-Pool Cost Saving $ Billion Percentage Saving %

8 8 Over e ten year planning horizon ere is a total cost saving of over eight billion US dollars (Table 3). Wi limited trade (only a small amount of reserves trading can take place) e total cost is $ Billion but wi free trade is total cost is reduced to $ Billion, amounting to a 10% total cost saving. The NSPDM has a penalty cost at each node for when ere is short-fall in meeting MW and reserve capacity ($2 Million/MW). This unmet MW charge represents e capital cost of installing standalone diesel generators for meeting peak demand wi a 15% reserve requirement. An unserved energy cost is also included for when ere is a shortage in supply ($140/MWh). These $2Million/MW and $140/MWh values need furer consideration when applying analysis to an MEPP. To avoid enormous high penalty costs of unmet MW in e early years of e planning horizon, which arise from high demand grow rates (Table 2, fif column), en e construction lead times for new combined cycle power plants are minimized. In e case of new hydropower stations only a five-year lead time is allocated. Table 4 NSPDM Capacity Expansion & Operational Costs 2007 to 2017 Free Trade and Limited Trade Scenarios (All costs given in USD) Free Trade Scenario #1 Limited Trade Scenario #2 Note: T.C. w/o G. Total Cost wiout gains O&M Operations & Maintenance U.E. Unserved Energy T.C. w G Total Cost wi gains T.C. Transmission Capital Costs U. MW Unmet MW VO&M Variable O&M G.C. Generation Capital Costs W. Costs Water Costs A summary of e total costs incurred from 2007 to 2017 for e NSPDM two demonstration scenarios (limited trade to totally free trade) is listed in Table 4. Near e end of e planning horizon a strain occurs on resources and a shortage in MW occurs in Turkey making a significant unmet MW cost of over $6 Billion. The high demand grow rates are major influences and drivers for e model. Wi e free-trade (FT) scenario ere is a 6.6% reduction in fuel costs ($ Billion to $ ) compared wi e limited trade (LT) scenario and a six-fold increase in transmission expansion costs ($ Million to $ Million). The increased investment in transmission is easily justifiable when substantial benefits result from e increased trade. The main

9 9 cost saving wi free trade is from e regional ability to share reserves and avoid e high unmet MW penalty costs in Turkey ($ Billion). Table 5 Generation Capacity Expansions wi Limited and Free Trade (MW) NSPDM Demonstration Results Wi Limited Trade Combined Cycle MW Wi Free Trade Combined Cycle MW Iran 41,863 51,081 Iraq 9,641 7,857 Jordan 2,052 2,299 Syria 7,371 8,439 Turkey 25,600 7,500 New Hydro 25,600 5,741 New Hydro Egypt 17,801 17,780 TOTAL 111, ,797 The FT scenario increases trade from Iran wi its attractive lower cost of natural gas. Resulting from exports e optimization increases e generation capacity expansions in Iran by more an 10,000 MW (from 41,863 MW to 51,081 MW). Wi FT ere is a reduction in e hydropower capacity expansion in Turkey by over 1700 MW (from 7500 MW to 5741 MW). The comparisons of FT and LT for generation expansions at each node are listed in Table 5. Table 6 Transmission Capacity Expansions wi Limited and Free Trade (MW) NSPDM Demonstration Results (From node To node) LT & FT are Limited & Free Trade Iran Iraq Jordan Syria Turkey Egypt Iran LT FT Iraq LT FT Jordan LT FT Syria LT FT Turkey LT FT Egypt LT FT TOTAL LT 5,052 MW TOTAL FT 18,263 MW There is more an a ree-fold total increase in transmission capacity wi FT (from 5,052 MW load carrying capability up to 18,263 MW). The maximum transmission expansions permitted (5,000MW) in e NSPDM were reached on several lines (see Iran to Iraq, Iran to Turkey and Iraq to Turkey in Table 6).

10 10 Figure 4A Demonstration of Electricity Exports from Iran in 2011 Figure 4B Demonstration of Jordan Wheeling Electricity in 2011 Figure 4C Demonstration of Egypt Importing Electricity in 2011 Output screens from e NSPDM user-friendly interface show revenues and costs from electricity trading scenarios and samples of ese are shown in Figure 4. Figure 4A shows e export revenues to Iran from Iraq and Turkey; Figure 4B shows e importance of Jordan as a wheeling node, and Figure 4C e level of payments at Egypt pays to Jordan in 2011 (ie Period 4, NSPDM 2011).

11 11 Table 7 Net Gains from Trade for Exporting and Importing NSPDM Nodes (USD Billions) Exporter/ Importer FT costs wi gains LT costs wi gains Net Revenues & Cost Savings Iran Net Exporter * Iraq Net Importer ** Jordan Net Importer ** Syria Net Exporter * Turkey Net Importer ** Egypt Net Importer ** TOTAL * Net Revenues, ** Net Cost Savings For each node ere is a win-win situation (Table 7). The net exporting nodes (Iran and Syria) make net revenues and e oer four importing nodes make cost savings from e cheaper imported electricity. The net revenues for Iran are $148 Million and e cost savings in Turkey exceed $7 Billion because wi FT it avoids e high costs of installing stand-alone generators. The shortage of capacity in Iraq means at trading allows it to save over $1 Billion in avoided generation capacity expansion costs (Table 5). 5 Conclusion and What Next The Middle East Norern Sub-Pool Demonstration Model illustrates how greater regional cooperation in long-term electricity planning, including improved trading flexibility, can produce significant cost savings. The NSPDM for 2007 to 2017 gave a total cost saving (for capital and operational costs) of 10%. The model described in is paper has huge planning potential in e future management activities of a dynamically growing Middle East region. The region s energy resources are so critically important wi its nations having high electricity demand grow rates of 6.2% to 10% as well as to e international community. Massive investments are being made for various energy projects in e Middle East region as well as significant proposals being considered for restructuring many of its utilities. Amidst ese major developments ere are no regional analytical tools yet being used for assessing e benefits from improved regional trading partnerships. The model outlined in is paper, which integrates bo generation and transmission capacity expansion long-term options, is a uniquely specialized tool not yet commercially available because of its highly specialized regional application. It could meet e in-dep analytical needs of e emerging and dynamic MEPP. This paper shows how planning models can help regional leaders in government and e utilities in assessing potential strategies rough providing in-dep analytical tools for critical infrastructure development. A comprehensive regional data set could now be prepared at would allow a full MEPP analysis to take place. This will require a considerable collaborative effort among e government energy departments, utilities and researchers in e region. Enhancements to e existing functionalities of e model could include contracting arrangements for electricity and natural gas as well as e impact of power for desalination. A modeling team of economists and engineers could be formed to start is valuable analysis for long-term MEPP planning rough increased regional cooperative initiatives.

12 12 Acknowledgements The majority of e funding for e development of e Purdue regional energy trading models has been supplied by e United States Agency for International Development (USAID). Their interest and support for e Purdue work is gratefully acknowledged. The Purdue models are freely available and can be downloaded from e Purdue website. References [1] Mervat Badawi, Electricity Landscape and Market Globalization; Options and Challenges for e Arab World, Arab Fund for Social and Economic Development Kuwait, World Energy Council, 18 Congress, Buenos Aires, October JST+interconnections&hl=en&gl=us&ct=clnk&cd=3 [2] Technical & Economic Aspects of e Establishment of a Regional Electricity Network. Economic & Social Commission for Western Asia (ESCWA), E/ESCWA/ENR/1997/3, United Nations, New York, 1997 [3] Purdue Long-Term Planning Model, USER MANUAL, Edition 7, February [4] Energy Information Administration, EIA Country Briefs