Modeling Electric Generation and Uncertain Future CO 2 Pricing

Transcription

1 Modeling Electric Generation and Uncertain Future CO 2 Pricing Joel Theis, Economist Peter Balash, PhD., Economist Charles Zelek, PhD., Economist Christopher Nichols, Sr. Analyst National Energy Technology Laboratory U.S. Department of Energy November 2017

2 Overview Uncertain Future CO 2 Pricing This study looks at modeling uncertain future CO 2 prices by applying a risk penalty to the cost of capital (CoC, debt and equity) for different generation types when modeling scenarios to identify future electric resources. We have found that applying a risk penalty to the CoC for CO 2 emitting technologies to address uncertainty can result in inaccurate price signals, and results that are misleading. For instance, if the CoC is 8%, a risk penalty of 3% would make the CoC 11%. Consequently, we show why it is important to select the CoC using an approach that can be replicated and is well accepted in industry. Viewpoint: it is best not to let the CoC be the deciding factor in developing future resource plans investor risk averseness in the future is hard to predict. 2

3 Impacts of higher costs of debt and equity Higher costs of debt and equity can increase annual revenue needs significantly when models calculate a levelized cost of electricity (LCOE) for resource comparisons. Change of 1% to 4% in debt and equity and resulting changes in LCOE: For combustion turbine (CT), combined cycle (NGCC), and supercritical coal generation (with and w/o carbon capture and storage) (SCPC, CCS), higher required returns increase revenue needs significantly. Differences in LCOE with 1% - 4% Increment Changes in Debt and Equity Debt Equity CT NGCC SCPC SCPC-CCS 6% 10% 7% 11% 4%-8% 3%-9% 4%-10% 4%-10% 8% 12% 8%-15% 6%-19% 8%-19% 8%-19% 9% 13% 12%-23% 9%-29% 13%-29% 13%-29% 10% 14% 17%-31% 13%-40% 18%-40% 18%-40% Note: 50/50 Debt/Equity, varying amounts for O&M and fuel, EIA High percentage levels are without O&M included. Natural gas is $3.50; coal is $2.50/mmBtu. Technology life, O&M, and fuel prices factor into percentage impact for CoC levels. 3

4 CoC Selection Methods The CoD can be selected as the most common investment grade bond for a utility sector. The capital asset pricing model (CAPM) is a widely used method for calculating the return on equity (ROE). CAPM can be used for a company, an industry, or a market sector. Other methods are available, such as discounted cash flow (DCF) and risk premium methods (RPM). Most financial investment text books and provide each method and pros and cons on using each method. 4

5 Example: Apply a risk penalty on CoC for CO 2 price uncertainty The fundamental characteristics for each technology were used in simple cash flow to calculate how $/Ton CO 2 translates to a risk penalty on CoC. Source: DAI Management Consultants, Inc.; EIA AEO 2015, Table 8.2 Pulv. Pulv. IGCC, IGCC, Pulv. Coal, Coal, Coal, 0% 90% NGCC CT 0% Capture 30% 90% Capture Capture Plant Characteristic Capture Capture Total Overnight Capital Cost for Plant (2013$/kw) $2,917 $3,460 $10,368 $3,727 $6,492 $912 $968 CO 2 Capture Rate (%) 0% 30% 90% 0% 90% 0% 0% Emission Factor (million metric tons/10^15 Btu) Heat Rate (btu/kwh) 8,740 8,740 8,740 7,450 8,307 6,800 10,450 Capacity Derating (%) 0% 10% 30% 0% 0% 0% 0% Efficiency Derating (%) 0% 14% 43% 0% 0% 0% 0% Emission Rate (metric tons of CO 2 /MWh) Capacity Factor (%) 85% 85% 85% 85% 85% 87% 30% Generation per kw of capacity (MWh/yr) CO2 Pricing Using Pulv. Coal, 0% Capture $20/Ton CO2 converted to % Risk Penalty 3.0% 1.8% 0.0% 2.0% 0.0% 4.0% 2.1% 3% Risk Penalty converted to $/Ton CO2 $20 $34 $321 $31 $481 $15 $29 5

6 Demonstrating CO 2 Price Uncertainty in NEMS Scenario Modeling The National Energy Modeling System (NEMS), is an integrated engineering and economic model that captures various interactions of economic changes that drive energy demand, supply, and influence prices. Three cases modeled to demonstrate addressing uncertainty in CO 2 price through a penalty adder to the CoC: S1: No Risk Penalties on any technology for Base Case. S2: Variable Risk Penalties: Risk penalties applied to all fossil technologies based on using a price of $20/metric ton CO 2 (in 2020$) converted to a risk penalty, determined on a NPV basis: Risk Penalty Risk Penalty S3: 3% Risk Penalties applied to all coal technologies: SCPC, IGCC, with CCS. 6

7 GWh S2: Penalty on All Fossil Generation: Impact on Coal Built The $20/Ton-CO 2 based risk penalties for all fossil generation compared to no penalty results in 6,000 GWh less coal built. 2,000 1,000 Risk Penalty for All Generation Coal Generation Not Built - (1,000) (2,000) (3,000) (4,000) (5,000) (6,000) (7,000) (8,000) Source: NEMS Scenario Analysis, by On Location, Inc. 7

8 S2: Renewable Generation Gained with Penalty on All Fossil Generation Risk penalty applied to all fossil generation results in about 60,000 GWh more of renewable generation projected to be built by Recall implied CO 2 price if a 3% penalty is added to each fossil plant: $/Ton CO2 PC Coal $20 NGCC $15 IGCC Coal $31 IGCC w/ccs $0 $/Ton CO2 Coal w/ccs $0 CT $29 Source: NEMS Scenario Analysis, by On Location, Inc. 8

9 Risk Penalty on Coal Only: Coal Not Built NEMS projects 2,500 GWh less coal generation to be built by 2020 when 3% risk penalty is applied. Coal Generation Not Built due to risk penalty increases to over 30,000 GWh by Source: NEMS Scenario Analysis, by On Location, Inc. 9

10 Summary This study demonstrates how modeling uncertainty about CO 2 pricing by applying a risk penalty to the CoC can result in inaccurate and misleading price signals. Selecting the appropriate CoC (debt and equity) should be done using an approach that can be replicated and is well accepted in industry e.g. the CAPM, RPM, DCF methods. Avoid having the CoC be the deciding factor in resource comparisons by using the same CoC for major technologies. (See report for full justification.) Addressing uncertainty in CO 2 prices can be done through sensitivity analyses, which was not demonstrated, but could involve factors with more direct relationships (e.g. CO 2 prices, fuel prices, capital costs, etc.). 10

11 For More Information contact: Joel R. Theis Economist, Energy Markets Analysis Peter C. Balash, PhD. Economist, Energy Systems Analysis Charles A. Zelek, PhD. Economist, Energy Markets Analysis Christopher J. Nichols Senior Analyst, Energy Markets Analysis

12 Other CoC Methods A review of CoC methods used by FERC and PUCs will find several different methods. FERC historically has employed the Single-Step discounted cash flow (DCF) method for electric transmission owners, but recently switched to a Double-Step DCF method. The Risk Premium Method (RPM) is another option. The CAPM method and the RPM are easiest to apply, next to using industry average allowed rates of return. Methods are chosen based on available data, past use, situation. Main message is to use a supportable method. 12