Lec. 07: Investment in Electricity Generation Flashcards
(17 cards)
What is the contribution margin in the context of the merit order?
Contribution margin in the context of the merit order
CM = MCP - MC
- It is the contribution towards covering the fixed costs
Draw and explain the price duration curve.
Draw and explain the variable costs, capacity factor and the contribution margin of a new power plant in the graph.
Price duration curve
- Compare slide 11
- Market price [€/MWh] and MC [€/MWh] over Annual hours of operation (cumulative) [h]
- Intercept of MC [€/MWh] and price duration curve delivers the expected annual operation hours/FLh h_exp
- Total contribution towards covering the fixed costs = Area between price duration curve and MC (h < h_exp)
–> Are these contributions sufficient for risk-adequate financing of the the power plant investment?
How do you determine the optimal mix of generation for each generation typ using the price duration curve?
Price duration curve + optimal mix of generation for each generation typ
- For each technology: CM = fixed costs
- CM = area between price duration curve and MC of each technology
- Compare slide 12
How do you calculate the annual cost per unit capacity [€/kW_peak] of a power plant using the LCOE?
Annual cost per unit capacity [€/kW_peak] of a power plant
AC = LCOE * Q/G = LCOE * CF * 8760h = LCOE * FLH
(In this case: Q [kWh], [MWh]; G [kW], [MW])
AC = LCOE * Q/G
= ((I_O * AF(r,T) + B)/Q + o) * Q/G
= i_0 * AF(r,T) + b + o * FLH
1) What is “a” screening curve?
2) What is “the” screening curve?
1) “A” screening curve
- It plots the annual cost per capacity AC [€/(kW * a)] of different technologies as a function of the FLH [h]
–> AC [€/(kW * a)] over FLH [h] - Y-axis: annual fixed costs
–> i0 * a(r,T) + b - Slope: variable costs
–> o
AC = LCOE * Q/G
= ((I_0 * AF(r,T) + B) / Q + o) * Q/G
= i_0 * AF(r,T) + b + o * FLH
2) “The” screening curve
- It is the overall cost-minimal aggregation of the screening curves of each technology
- From the screening curve we can read off which generation technology is lowest cost for a given FLH
- For each FLH the more expensive technologies are “screened away”
What is the screening curve analysis?
Screening curve analysis
Graph A: Includes the screening curves of each technology (AC [€/(kW*a)] over FLH [h])
Graph B: Load duration curve (Load [GW] over FLH [h])
Graph C: y-Axis of load duration curve (Load [GW])
Procedure
- Determine the crossing points in the screen curve, so we know for each FLH range what technology is cheapest
- Map the FLH ranges from the screening curve to the FLH ranges in the load duration curve
- Read off the generation capacities from the y-axis of the load duration curve
Result
- Optimal capacity mix
Different technologies have a different role in the merit order and screening curve analysis.
For each power plant type (baseload, intermediate, peaker) and load shedding provide the typical annual FLH, operation features, fixed costs, variable costs and examples.
Baseload
- Annual FLH: > 7000h
- Operation features: continuous
- Fixed costs: high
- Variable costs: low
- Examples: nuclear, lignite
Intermediate
- Annual FLH: 4000-5000h
- Operation features: during peak hours (wd 8am-8pm)
- Fixed costs: medium
- Variable costs: medium
- Examples: hard coal
Peaker/Peak-load power plant
- Annual FLH: < 1500h
- Operation features: hours with annual peak demand
- Fixed costs: low
- Variable costs: high
- Examples: gas, pumped- hydro storage
Load shredding
- Annual FLH: 1-5h
- Operation features: annual peak demand
- Fixed costs: none
- Variable costs: very high
- Examples: load shedding
Screening curve: What happens if fixed costs of specific technology increase?
E.g. CAPEX, hurdle rate, fixed O&M costs
- Compare slide 19
- If fixed costs increase –> y-axis of screening curve increases
- Result: share of specific technology in the optimal capacity mix decreases steadily and is finally zero
Screening curve: What happens if variable costs of specific technology increase?
E.g. fuel costs, CO2 costs, variable O&M costs
- Compare slide 20
- If variable costs increase –> slope of screening curve increases
- Result: share of specific technology in the optimal capacity mix decreases steadily and is finally zero
How are fluctuating renewables integrated into the screening curve analysis?
Integrating renewables into the screening curve analysis
- For a given capacity of renewables we can determine the optimal capacity mix of the rest of the system by projecting the screening curves onto the residual load duration curve
- Residual load curve = Load curve - RES generation curve
- Residual load duration curve = sorted residual load curve (from highest to lowest residual load)
True or false?
Integrating renewables into the screening curve analysis
A growing share of PV and Wind pushes out conventional baseload power plants (e.g. nuclear, lignite).
True!
Missing money problem
1) What is the missing money problem?
1) Missing money problem
- If there is enough generation capacity to always cover the total demand, then the highest market clearing prices during the year will be equal to the marginal cost of the peak-load power plant (e.g. natural gas)
- In other words in this scenario there are no hours during the year in which the peak-load power plant generates a CM > 0 to generate contributions towards covering its fixed costs
Missing money problem
2) Explain a potential solution to the missing money problem.
2) A potential solution to the missing money problem
Solution: Scarcity pricing
- Compare slide 27/28
- Enable scarcity prices by allowing load shredding (demand > supply)
–> Allow some demand not to be met - In this case the market price jumps to the value of lost load (VOLL)
–> VOLL
= consumers willingness to avoid power outages
= economic impact of power outages on consumers - VOLL > > MC_peaker –> CM_peaker > 0
Alternative solutions: introduction of capacity markets
Missing money problem
3) What is hindering this potential solution in reality?
3) What is hindering this potential solution in reality?
- In reality on many markets there are maximum market price caps (MPC) which are below the value of lost load (VOLL)
- There may be political or administrative restrictions on prices going to very high levels
–> E.g. consumer protection, concerns about market abuse
Missing money problem
4) How do power plants which are affected by missing money problem generate positive contribution margin in reality despite existing maximum market price caps hindering scarcity prices?
Missing money problem
4) How do power plants which are affected by missing money problem generate additional profits in reality despite maximum market price caps hindering scarcity prices?
- Peak-load power plants can generate positive contribution margins by bidding in other markets (e.g. intra-day, reserve power markets) or by providing redispatch services
What is the value of lost load (voll)?
Value of lost load (VOLL)
- Is an economic measure of the cost or value associated with an interruption in electricity supply to consumers
VOLL
= consumer’s willingness to avoid load shredding/power outages
= economic impact of load shredding/power outages on consumers
True or false?
Episodes of High Prices are an Essential Part of an Energy-Only Market
- In an energy-only market (in which generators are only compensated for the energy they produce), the wholesale spot price must at times be higher than the variable cost of the highest-variable-cost generating unit in the market
- Episodes of high prices and/ or price spikes are not in themselves evidence of market power or evidence of market failure.
- However, there may be political or administrative restrictions on prices going to very high levels (i.e. consumer protection, concerns about market abuse).
True!
