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Inserting risk in the calculation of the Levelised Cost of Electricity (LCOE)

Inserting risk in the calculation of the Levelised Cost of Electricity (LCOE). Athanasia Arapogianni Research Officer The European Wind Energy Association. 23 April 2010. Outline. Objectives Methodology and Results Conclusion. 1. Objectives.

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Inserting risk in the calculation of the Levelised Cost of Electricity (LCOE)

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  1. Inserting risk in the calculation of the Levelised Cost of Electricity (LCOE) Athanasia Arapogianni Research Officer The European Wind Energy Association 23 April 2010

  2. Outline • Objectives • Methodology and Results • Conclusion

  3. 1. Objectives • Assess wind competitiveness based on EWEA scenarios on a fair basis of comparison. • Develop a model to calculate the levelised cost of electricity generated by newly built power plants. • Projection of the cost for the years 2020, 2030 • Including the risks associated with the operation of the different power technologies.

  4. 2. Methodology • 3 phases: • Building the mathematical model and choosing the assumptions to calculate and project the levelised cost of electricity for the different technologies (no risk included). 2. Include the risks associated to fuel cost and carbon price volatility to the calculation and projection of the cost. 3. Comparison of the different results.

  5. 2. Methodology1. Levelised cost without risks • Cost components: capital cost, O&M, fuel and carbon costs.

  6. 2. Methodology1. Levelised cost without risks CRF: converts the present value of the cost components into equal annual payments over a specified time (N) using specified discount rate (d)  Levelisation of all the cost components

  7. 2. Methodology1. Levelised cost without risks – Assumptions • Challenge our model using reference assumptions. • The results of our model are as valid as the reference results. • Final range of Assumptions chosen from a set of references narrowed with the criterion : Less than <10% difference between the reference and our model’s results.

  8. 2. Methodology1. Levelised cost without risks – Assumptions • The assumptions are based on EWEA targets and scenarios presented in the Economics of Wind and Pure Power reports. • Similar sets of assumptions exist for the different technologies based on the literature.

  9. 2. Methodology2. Projection of the costs (2020, 2030)

  10. 2. Methodology3. Including risks How? • Differentiating Wind Energy from Gas, Coal and Nuclear… • because the main cost components of fossil and nuclear generation: fuel and carbon emission costs • High volatility and uncertainty to forecast fuel and carbon costs  Risk • Necessary to include in the LCOE calculation the corresponding risk  Forming a fair basis of comparison between the technologies. • Using a risk-adjusted discount rate when discounting future fuel and carbon costs.

  11. 2. Methodology3. Including risks • Risk – adjusted discount rate (Awerbuch) to fuel costs and carbon prices • Following Awerbuch’s methodology, β is considered to be negative for fossil fuels, therefore the new discount rate is lower.

  12. 2. Methodology3. Including risks Risk adjusted discount rates: Lower discount rate  Higher present value  Avoid to underestimate the impact of risky cost components

  13. 2.Results +30% +47% +34% • Increase of the LCOE if risks are included • High impact of future installed capacity, future cost of fuel and carbon.

  14. 3. Conclusions • In order to compare the LCOE of different technologies on a fair basis, the risk on fuel and carbon price volatility has to be included. • The volatility of fuel and carbon prices has a great impact on the final LCOE. • Without risk wind becomes competitive only in 2030, whereas when comparing the cost on a fair basis, it is competitive in 2020. • Wind energy (on and offshore) is becoming more preferable not only as a renewable energy technology but also as an investment which will not suffer from unpredictable and volatile costs.

  15. Thank you for your attention

  16. ANNEX

  17. Assumptions

  18. First Results Without Risk

  19. Assumptions of future costs for Coal and Nuclear

  20. Results Without Risk

  21. Results With Risk

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