From Causal Loop Diagram to Stock and Flow Diagram

1. FromCausal Loop Diagram to Stock and Flow Diagram For the presentation in Ph.D Colloquium NamsungAhn Solbridge International School of Business WoosongUniversity. korea

2. A concise overview of developments in business strategy Key events and publications (Kim Warren, 2005) Practice Publication Product portfolio matrix Long-range planning Discipline SWOT Kaplan & Norton: The Balanced Score Card Corporate planning Value-based management Experience curve Value chain Core competency Porter: Competitive Strategy Strategy Schwartz: The Art of the Long View Scenario planning Scenario planning Systems Thinking Ackoff: Redesigning the future Senge: The Fifth Discipline Business dynamics Penrose: Theory of the Growth of the Firm Competitive strategy dynamics Warren: Competitive Strategy Dynamics Wernerrfelt: “A resource- based view of the firm” Resource-based view System dynamics o Meadows: The Limits to Growth Forrester Industrial Dynamics Meadows: Beyond The Limits Steman: Business Dynamics 1955 1960 1970 1980 1990 2000

3. What is systems thinking ? • System thinking is a way of thinking about and describing dynamic relationships that influence the behavior of systems. • As a language, systems thinking provides a tool for understanding complexity and dynamic decision making. • System thinking language is visual and diagrammatic; has a set of precise rules; translates perceptions into explicit pictures; emphasize closed interdependences

4. What is systems thinking • The essence of the discipline of systems thinking lies in a shift of mind: Interconnected Circular relationship (Loop) rather than Linear relationship. seeing processes of change rather than snapshots. Approach to see the Structure rather than Event • The Key in CLD lies in identifying the structure of system. It helps to identify the Policy Leverage and mental models of clients for easy communication

5.  , tan,  cos, sin, ? Interconnection and Interrelation

6. Events Patterns Structures Level of Understanding We view the reality from the following multiple levels of perspective The Iceberg Because structures generate events and patterns – but are very difficult to see- we can image these three levels as a kind of iceberg, of which events are only the tip. Because we only see the tip of iceberg, the events, we often let those drive our decision-making. In reality, however, the events are the results of deeper patterns and systemic structures. Structures are the ways in which the parts of system are organized. These structures generate the events and patterns we observe

7. Why Boom and Bust Cycle in1980s? 1980s 2000s How can we explain this ? Causal Loop Diagram is enough?

8. FIT: Feed in Tariff RPS: Renewable Portfolio Standard

9. Economy of Scale, Learning Effect in Renewable Energy? It is a “Chicken and Egg” Problem The industry believes that standardization and “learning curves” coupled with R&D investment will drive cost lower over time. But there are “Chicken and Egg” problems with this conclusion

10. CO2 Pricingis very important for Grid Parity Technology Breakthrough Economy of Scale (Business Model) Wind Power Cost Oil Price CarbonPricing (CO2 Tax, Cap and Trading) Electricity Price

11. SystemsThinking vs System Dynamics • Soft Methodology • Qualitative Analysis • Casual Loop Diagram • Peter Senge: “The Fifth Discipline” Systems Thinking • Hard Methodology • Quantitative Analysis • Stock and Flow Diagram • J. Forrester: Industrial Dynamics System Dynamics Systemdynamics is grounded in control theory and the modern theory of nonlinear dynamics. It is designed to be a practical tool that policy makers can use to help them solve the pressing problems they confront in their organizations.

12. System Dynamics • One of the most important limitations of causal diagram is their inability to capture the stock and flow structure of systems and to see the dynamics of the system • Stocks and flows, along with feedback, are the two central concepts of dynamic systems theory. • A major strength of the stock and flow representation is the clear distinction between the physical flows through the stock and flow network and the information feedbacks that couple the stocks to the flows and close the loops in the system

13. Why the distinction between stocks and flow is important? • Stocks create delays by accumulating the difference between inflow and outflow. • Stocks decouple rates of flow and create dis-equilibrium dynamics in systems. • Failure to understand the difference between stocks and flows often leads to underestimate time delays, a short term focus, and policy resistance

14. Challengesin Renewable Energy (Problem Statement) • The penetration of renewable energy in Korean electricity market • The impact of renewable energy on wholesale electricity price • The total cost of Subsidy to renewable energy • How to bring up wind power industry as an engine of green growth

15. Impact of CO2 Pricing on Market Clearing Price

16. Causal Loop Diagram for Renewable Energy penetration in Korean market FIT

17. Behavior of Power Plant Investors • Behavior decision theory • Each producer can estimate, albeit imperfectly, whether a new investment is profitable. As long as producers believe new capacity will be profitable, new producers will enter the market. When the industry is expected to be unprofitable, producers seek to reduce their capacity and some will exit. • The utilization decision responds to the expected profitability of current operations. In case that the current market price is expected higher than the marginal cost of existing plants, producer starts to operate the existing plants for sale. Business Dynamics, John Sternman, 1998

18. Energy Price Variable O&M Cost of Coal Fuel Cost of Marginal Coal Unit Fraction of Coal in Operation Heat Rate for Marginal Coal Plant Generation Imported Coal Price of Imported Coal Imported Coal Capacity Under Retirement Construction The Theory of Investor Behavior on Existing Capacity Utilization

19. Market Assessment Fraction Starting Construction Investors estimate the future market price based on their estimate of the future reserve margin. They have production costing models which will lead to higher market prices. A nonlinear curve is used to represent their market assessment. As an example, they may foresee 15% reserve, and they use the curve to estimate the future price at 44.3$/mwh The estimated market price is compared to the estimated cost of a CC to determine the fraction of investors with 128 permits that will start construction. In this example, the application construction starts would probably be zero CCs Under Review 62 1 52.9 Cost Assessment 44.3 approvals 33 Investors estimate the levelized cost of a new CC. This assessment includes a CCs in the Site Investors Expected RM (%) fixed charge rate and and Bank -3 0 5 15 29 estimate of future gas prices. If gas prices are expected at 3.82$/MMBTU, for example, construction the full cost might be start estimated at 37.17$/mwh Demand Assessment Supply Assessment CCs Under Expected Construction Investors prepare an assessment Investors prepare an assessment of Reserve Margin of peak demand around the time the capacity that will be available would be 15% in construction that a new CC would come on in the future. They estimate outage this example completion line. Their forecast is based on the of thermal units, and they assume growth over the past few years. average weather for hydro As an example, they may foresee generation. As an example, they 130GW of peak demand CCs on Line may foresee 150GW of capacity The Theory of Investor Behavior on New Investment

20. In case of Renewable Energy • The same Behavior decision theory can be applied • The current market price and the degree of FIT are crucial to the profit of investors in renewable energy

21. Example: SFD for the Wind Power Capacity Acquisition Supply Line

22. Market Shares of New Construction

26. Economies of Scale, - Scope, Learning Effect in Wind Power Vendor Unit Cost of Renewable + Order of + Renewable Energy Economics of Renewable + Investment in + Renewable + Market Share of Economics of Renewable Fossil Fuel Market Size in Renewable • Change in Government Policy for Renewable Energy: RPS Adaptation instead of FIT from 2012 • In case of Wind Power, • Government policy is pursuing Wind Market expansion and bringup the Competitive Wind TBN Vendors in Korea • Domestic market is developed to have generation companies fulfill their obligations of RPS and for the test bed for domestic vendors • REC (Renewable Energy Certificate) is being developed to compensate the economics of Renewable Energy Producers FIT REC RPS REC (Renewable Energy Credit), RECs (Renewable Energy Certificates), Green Tags, TRCs (Tradable Renewable Credits), Renewable Energy Attributes Oil Price

27. WindPower MarketEnvironment in Korea : Total Installation and Annual MW addition Analysis • Drivers • RPS Enforcement to Generation Companies: 3% of total Generation until 2012 and 10% until 2030 (Government Police Goal) • Possible Supply Technology for this requirement is Offshoring Wind Power • Insights • Annual 400MW addition in 2010, annual 800MW new addition in 2012. • Annual 3-4GW Capacity addition after 2020 will be needed

28. Korean Wind Turbine Supplier Challenges to Export • Active Investment by Ship Building Companies • M&A and Share Acquisition • Lack of Track Record • No Experience to Export

29. World shipbuilding production by Top10 shipyard

31. Results expected from the Government Policy • Huge Capital Investment equal to $10 Billion in 2012, $48 Billion until 2030 in Wind Industry until 2012 is required in Korean Wind Market • In the wind TBN supply prospective, new ship building companies such as Samsung, Hyundae, Daewoo, and STX will play a major role to supply domestic offshoring TBN and export Wind TBN to foreign demands. • The government policy to catch two rabbits using two feedback loops will be optimistic because of the implementation of RPS and REC.

32. Key Issues arising from the government renewable energy Policy • Can wind power industry play a major role in green growth? • How to overcome the difficulties expected from the follower position? • Is government policy to support wind power industry such as RPS (test bed) effective? • What kind of business model do we need to model this policy?

33. Factors to affect TBN Choice • Exchange Rate • Vertical Integration • Economies of Scale • Manufacturing Efficiency • Economies of Scale • Production Portfolio • (Core Model + Track Record) • TBN Design Spec. • VariousTBN Model • (Site Specification) • Production • Supply Chain Effectiveness • Economies of Scale • Manufacturing Efficiency • 2-3 yearsWarranty • O&M Warranty • Control System • Machine Efficiency

34. Wind IPP’s EconomicsFactors • Government Policies such as FIT, Goal, Subsidies • Wind Velocity • TechnicalPerformance • Power Sale Price ($/kWh) • Investment Volume • Grid Connection • Land Lease • Capital Cost (Equity- ROE- Expectation& Debt- Interest Rate) • O & M Service • Insurance • Administration (technical& Financial/ Insurances/ taxes + Fees)