Lecture 4 Economics and Costs Learning curve model to understand how costs of new (energy) technology drops Applications of the learning curve Estimating costs and economics of new energy
Empirical observations on cost development of new technologies
History of costs of new technologies See IEA material in under Lect#4
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Price, $/W Cumulative volume, MW Observations on costs: - cost decrease increase volume, 100 10 and vice versa Progress in solar PV and wind power price (PV) price (wind) volume (PV) volume (wind) 1000000 100000 10000 1000 100 10 1 1 0,1 2013 $0.7/Wp 2020 < $0.5/Wp?
What type of measures bring costs down? Technology Development: Improves the characteristics and performance of a technology lowers unit cost increases sales volume/capacity increases Market Incentives: increasing subsidies for a new technology competitiveness increases volume increases, or, increasing volumes lead to economies of scale effects lower unit cost Volume Increase: Learning-by-doing, learning-by-using, or more experience, reduces the costs Two approaches to bring costs down: technology push and market pull
Probability of energy preference Price difference influences adoption of a new technology Binary choice model between A and B (from Lect #3) If e.g. price were the only influencing factor for choice: Probability to purchase the new product A is P (logit probability) B cheaper than A 1 P = 1+ exp(c A -C B ) /s 100 % A cheaper than B 80 % 60 % 40 % Technology A Technology B 20 % 0 % -50-30 -10 10 30 50 Price difference ( /MWh)
Historical evidence: unit price of a product drops when the volume increases On average a 15% cost drop for each doubling of the cumulative production
Learning or experience curve for predicting future costs of a technology Cost reduction versus volume can be mathematically described through the so-called learning or experience curve If a known point available (0) : Universal value p=85%
Observation on progress ratios for energy technologies
Why different progress ratios? Cost of technology (c) drops with increasing volume (x), steepness of cost reduction (α) depends on design complexity (d) Energy technology with no or less moving parts should basically have good chance for rapid cost reduction (cf transitor or solar cell) Unit cost drops by (1-PR)% when cumulative production doubles Role of design complexity in technology improvement, James McNerney, J. Doyne Farmer, Sidney Redner, Jessika E. Trancik, PNAS, www.pnas.org/cgi/doi/10.1073/pnas.1017298108
Applications of the learning curve MWs, or volume needed for reaching costbreakeven uros, or (learning) investments needed for cost breakthrough (e.g. grid parity) Years, or time needed for breakthrough Policies and strategies to commercialize new technologies
Cost breakeven point c V c V 0 V 0
Solving the cumulative capacity needed for cost breakeven Cost of new technology c(v)=c V : Cost of new technology < cost of old technology Set target cost c=c br solve V br
Learning investment
Solving the learning investment Learning investment = support needed before cost-breakeven reached Area under the learning curve from the starting point (V 0 ) to cost-breakeven point (V br )
Breakthrough time (t br )
Solving the time needed for a cost breakthrough Assume that volume grows as Subsitute V in c V with V(t) and solve c(t) Solve t at point c t =c br
Strategic application: effect of early cost-drop e.g. through large R&D effort Reference case (0.2): +40%/yr growth 36 years to breakeven R&D effort to drop initial cost (affects the C br /C 0 ratio:) 50% early cost drop 10 years; 30% 20 years ; 20% market growth and 30% cost drop 20 years Years to cost breakthrough 100 10 1 1 % C6370 10 Peter % Lund 2015 100 % target to initial cost 0.1 0.2 0.4 0.5 0.6 0.8
Linear versus nonlinear learning curves (speeding-up the penetration) Technology jump
Linking policies and strategies to the learning curves Policy measures improve the economic competitiveness of the new technologies (C) and influence the penetration rate ( ) which leads to increased volume (V) Examples on how policies (both RTD and market deployment) may influence the costs of the new technology (a-f) a: classical learning curve b: strong R&D effort c: too high subsidies, low competition, bottlenecks d: c+ measures e: demand>>supply, oversidized f: e+ measures
Economics of new energy technologies Different methods to estimate the economics, e.g. Payback (time) Internal Rate of Return (IRR) Net Present Value (NPV) Levelized cost of energy (LCOE) Each indicator reflect on different aspects of the investment
History of costs of new technologies
Status of costs of new technologies 2014
LCOE LCOE (levelized cost of energy) gives the cost of electricity produced. Accounts for all expected lifetime costs (including construction, financing, fuel, maintenance, taxes, insurance and incentives), which are then divided by the system s lifetime expected power output (MWh). All cost and benefit estimates are adjusted for inflation and discounted to account for the time-value of money. d=discount factor r= real interest rate E=yearly energy produced t life =economic life-time of the investment
Compare LCOE two technologies; sensitivity analysis against economic parameters LCOE calculator: http://www.nrel.gov/analysis/tech_lcoe.html Capacity factor 85% Investment 6000/kW Fixed O&M 30/kW Variable O&M 1.1-1.5 c/kwh Capacity factor 15-30% Investment 1700/kW Fixed O&M 10/kW Variable O&M 0.1 c/kwh
Introduction to Clean Energy Project Analysis Clean Energy Project Analysis Course Clean Energy Project Analysis is a case-study based course for professionals & university students who want to learn how to better analyse the technical & financial viability of possible clean energy projects Minister of Natural Resources Canada 2001 2004.
Total Cost of an Energy Generating or Consuming System Total cost purchase cost Total cost = purchase cost + annual fuel and O&M costs + major overhaul costs + decommissioning costs + financing costs + etc. Minister of Natural Resources Canada 2001 2004.
Accuracy vs. Investment Cost Dilemma $100 to $1,000,000!
Energy Project Implementation Process Pre-feasibility Analysis Feasibility Analysis Significant barrier Clean Energy projects not being routinely considered up-front! Development & Engineering Construction & Commissioning Minister of Natural Resources Canada 2001 2004.
thousands of $ Cashflow Calculations: What does RETScreen do? Cash Inflows Fuel Savings O&M Savings Periodic Savings Incentives Production Credits GHG Credits Cash Outflows Equity Investment Annual Debt Payments O&M Payments Periodic Costs Annual Cashflows 40 20 0-20 -40-60 -80-100 0 1 2 3 4 5 6 7 8 9 10 Year 50,000,000 40,000,000 30,000,000 $ 20,000,000 10,000,000 0 (10,000,000) (20,000,000) Cumulative Cashflow 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Indicators Time (yr) Net Present Value Simple Payback IRR Debt Service Coverage Etc. Years Minister of Natural Resources Canada 2001 2004.
Key (Output) Indicators of Financial Viability Simple Payback Net Present Value (NPV) Internal Rate of Return (IRR & ROI) Meaning # of years to recoup additional costs from annual savings Total value of project in today s dollars Interest yield of project during its lifetime Example 3 year simple payback $1.5 million NPV 17 % IRR Criteria Payback < n years Positive indicates profitable project IRR > hurdle rate Comment Misleading Ignores financing & long-term cashflows Use when cashflow is tight Good measure User must specify discount rate Can be fooled when cashflow goes positive-negativepositive Minister of Natural Resources Canada 2001 2004.
Comparison of Indicators: Remote Telecommunications Example Simple Payback Net Present Value (NPV) Internal Rate of Return (IRR & ROI) PV vs genset* 9 years $4,800 22% Decision Genset PV PV * Discount rate of 12%; 50% debt financed over 15 years at 7% interest rate Minister of Natural Resources Canada 2001 2004.
Indicators of Financial Viability: Remote Telecommunications Example RETScreen provides a range of indicators and a cumulative cash flow graph for the project 3.8 years to positive cash flow Minister of Natural Resources Canada 2001 2004.
Wind Energy Project Analysis Clean Energy Project Analysis Course Utility-Scale Turbine Photo Credit: Nordex AG Minister of Natural Resources Canada 2001 2004.
Elements of Wind Energy Projects Wind resource assessment Environmental assessment Regulatory approval Design Construction Roads Transmission line Substations Installing a 40-m Meteorological Mast, Quebec, Canada Photo Credit: GPCo Inc. Substation, California, USA Photo Credit: Warren Gretz/NREL Pix
Wind Energy System Costs Windfarms $1,500/kW installed O&M: $0.01/kWh Selling price: $0.04-$0.10/kWh Feasibility Study Development Engineering Single turbines & isolated-grid Higher costs (more project specific) Turbines Balance of plant Feasibility study, development & engineering represent a higher portion of costs 0% 20% 40% 60% 80% Portion of Installed Costs Expect one major component replacement of 20 to 25% of initial costs Rotor blades or gearbox
Wind Energy Project Considerations Good wind resource dramatically reduces cost of production Good resource assessment is a worthwhile investment Additional sources of revenue Government/utility production credits or Greenpower rates Sales of emissions reduction credits (ERC s) Constraints and criteria Environmental acceptability Acceptance of local population Grid interconnection and transmission capacity Financing, interest rates, currency exchange rates Turbine of the Le Nordais Windfarm, Quebec, Canada
Your Work # 4 Home work from Lecture 4 Get familiar with the LCOE calculator as you may need it in the Group Work In preparing for Lecture 5 (Cost-effectiveness) Look into RETSCREEN tool