Session 6

Question 1

What is the Leveled Cost of Electricity, what is its formula?

Answer 1

• unit cost of electricity
• highly depends on made assumptions -> often reported in ranges
• definitions:
  
  • I_n = interest payments
  • V_n = variable costs
  • D_n = Depreciation of equipment (reduces tax burden)
  • M = initial production amount
  • d = percentage that equipment produces less every year
  • T = tax rate
  • E₀ = initially invested equity
  • i = internal rate of return of investor = interest rate for equity (depends on opportunity cost)
  • S_N = Salvage value or costs for disposal in last period
  • K_N = installments of a loan (if financed through one)

Question 2

What is a popular variation of the LCOE?

Answer 2

Replace internal rate of return by weighted average cost of capital

• > E₀ would be replaced by overall project cost
• > no explicit modelling of interest payments and loan repayment

More careful modelling of subsidies and tax rebates

-> choice for formular dramatically influence result

Question 3

How do renewable & combustion technologies compare in regards to cost distribution (variable & fixed costs)?

Answer 3

renewables: high fixed costs in beginning, low variable costs of production
combustion: lower fixed costs, high variable costs

Question 4

What is Swansons Law?

Answer 4

• Richard Swanson (founder of SunPower corp) claimed learning curve effects for PV module production
• according to his law, every doubling of cumulative production leads to 20% decrease in manufacturing costs

Question 5

What is grid parity?

Answer 5

• cost of power produced from rooftop PV modules is max. as expensive as power consumed from grid
• reduces required subsidies to make PV roofs economically attractive
• feed in tariffs highly influence profits
• more and more countries reach grid parity

Question 6

The LCOE depends on a lot of uncertain factors that have to be estimated, how can this be countered?

Answer 6

Monte Carlo simulation, use probability distributions instead of fixed values for inputs -> probability distribution of LCOE

Question 7

Why is looking at flexibility important when applying the LCOE calculations to reality?

Answer 7

• LCOE assumes that either power prices or production is constant
• in reality both flluctuate
• flexibility is measured in ability and cost for changing output levels per time unit and restrictions on minimum load
• the more flexibly a technology is, the higher the revenues per produced MWh and MW capacity

Question 8

What is the Levelized Avoided Cost of Electricity?

Answer 8

• cost of levelized generation that is replaced by new generation source
• determine which generators would be generating less if some new plant would be added to existing system
• determine LCOE of this production and sum discounted values over the whole lifetime of it
• if LACE of project is higher than LCOE then project makes sense
• much harder to compute than LCOE, info requirements are much higher, LACEs of different projects are not independent

Question 9

Why is direct support for renewables desirable?

Answer 9

• offering subsidies makes ambitious targets possible to achieve and buys consent of industry
• subsidies might help to create a level playing field with non-renewable technologies
  
  • non-renewables often subsidized as well
  • companies in renewables often get worse financing conditions and require more capital since upfront investments are larger
• there might be other goals attached to the expansion of renewable energy
  
  • energy autonomy: reduce import of fossil fuels
  • security of supply: avoid dependances
  • industry policy: jobs in renewable sector

Question 10

What are Feed-In Tariffs and their advantages/disadvantages

Answer 10

• pays fixed amount per unit of electricity guaranteed for period which is sufficient to finance asset
• advantages:
  
  • owners/developers need no market access to power markets
  • no electricity price risk, creates stable investment conditions
  • effective tool to promote the expansion of renewables
• disadvantages:
  
  • difficult to set correct price, especially for future
  • no control over installed quantities
  • no incentives to build correct tech at correct location
• used in majority of Europe until recently

Question 11

What are Feed-In Premiums and what are their advantages/disadvantages?

Answer 11

• require owner of renewable to sell their production on electricity markets
• a premium on top of (spot) market revenues
• several options:
  
  • fixed (tech specific) premiums
  • difference to certain reference level is paid
  • caps and floors for overall revenue
• advantages:
  
  • renewable production receives coordination signals from markets
  • incentive for cost-effective balancing of forecast errors
• disadvantages:
  
  • introduces price risk to investors
  • hard to manage for intermittent renewables
• manyy European countries switching from FiT to FiP

Question 12

What is the renewable portfolio standard and what are its advantages/disadvantages?

Answer 12

• require electricity supply companies to ensure that a certain quota of electricity is produced renewably
• penalties if not complying
• Producers of renewable electricity receive green certificates that can be traded and used by supply companies to prove compliance
• advantages:
  
  • tech neutral
  • full control over quantities
• disadvantages
  
  • seems to be less effective in promoting renewables
  • no targeted tech subsidies are possible
• some European nations and some states in USA use it

Question 13

How do FiT/FiP auctions work?

Advantages/Disadvantages?

Answer 13

• bidders plalce bids for amount of subisides required
• best bidders are granted subsidies either based on uniform price or according to individual bids
• transform FiT and FiP to quantitiy instruments
• advantages:
  
  • no need to fix premiums by politics
  • creates competition
  • chance to discover real price of renewables
  • cheapest projects are selected, leading to lower prices
• disadvantages
  
  • overhead in auction process: need to secure location, financing, permissions also in case of unsuccessful bid
  • risk of winners curse
  • danger of strategic bidding
  • low realization rates in some countries

Question 14

What is the German EEG?

Answer 14

• first version in 2000: FiT for a range of renewables
• produced energy is delivered to transmissions system operator
  
  • differences between revenues and subsidies charged along with grid fees
  • preferential treatment of renewables on market
  • several energy intensive industries are exempt from paying eeg surcharge
• revisions 2004-2012
  
  • techincal improvements
  • decreasing tariffs
  • possiblity to switch of large wind producers in times of overproduction
  • option to switch to selling on the sport market with a compensation that covers difference between average spot price and FiT plus mgmt compensation
  • exemption of storages from EEG surcharge
• revisions 2014, 2016/17
  
  • goals 45% power from renewables until 2025, 60% until 2035
  • selling on spot market mandatory for plants larger than 5MW
  • switch to auctions for FiP
  • Only small PV installations still get fixed FiT
  • upper limit on new capacities
  • have been critized for not meeting Paris Agreement
• First results from auctions are positive