From Causal Loop Diagram to Stock and Flow Diagram
description
Transcript of From Causal Loop Diagram to Stock and Flow Diagram
From Causal Loop Diagram to Stock and Flow Diagram
For the presentation in Ph.D Colloquium
Namsung Ahn
Solbridge International School of BusinessWoosong University. korea
A concise overview of developments in business strategyKey events and publications (Kim Warren, 2005)
1955 1960 1970 1980 1990 2000
Discipline
System dynam-
ics
Resource-based view
Competitivestrategy dy-
namics
Systems Thinking
Scenario planning
Strategy
Corporate planning
Long-rangeplanning
Experiencecurve
SWOT
Productportfoliomatrix
Schwartz:The Art of the
Long View
Value-basedmanagement
Corecompetency
Kaplan &Norton:
The BalancedScore Card
Scenarioplanning
Senge:The FifthDiscipline
Business dynamics
Warren:Competitive
StrategyDynamics
ForresterIndustrialDynamics
Penrose:Theory of
the Growthof the Firm
Meadows:The Limitsto Growth
Ackoff:Redesigningthe future
oMeadows:Beyond
The Limits
Steman:BusinessDynamics
Wernerrfelt:“A resource-based viewof the firm”
Porter:Competitive
Strategy
Valuechain
Practice
Publication
What is systems thinking ?
• System thinking is a way of thinking about and de-scribing 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 diagram-matic; has a set of precise rules; translates percep-tions into explicit pictures; emphasize closed inter-dependences
• The essence of the discipline of systems thinking lies in a shift of mind: Interconnected Circular re-lationship (Loop) rather than Linear rela-tionship. seeing processes of change rather than snapshots. Approach to see the Structure rather than Event
• The Key in CLD lies in identifying the struc-ture of system. It helps to identify the Pol-icy Leverage and mental models of clients for easy communication
What is systems thinking
?
, tan,
cos, sin,
Interconnection and Interrelation
Level of Understanding
The Iceberg
Events
Patterns
Structures
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 ice-berg, 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
We view the reality from the following multiple levels of perspective
1980s
2000s
Why Boom and Bust Cycle in 1980s?
How can we explain this ? Causal Loop Diagram is enough?
Demand inRenewable by
Utilities
Economics ofRenewable
Order ofRenewable
Economics of Scale,Learning Effect in
Renewable
Vendor's CapacityExpansion inRenewable
+
+
+
+
+
Economy of Scal, Learning Effect Loop
Utility Order Loop
RegulatoryDriver like FIT
ExpectedRenewable
Market such asRPS
Investment inRenewable
EnergyOil Price in
1980s
Financial Crisisin 2008
FIT: Feed in Tariff
RPS: Renewable Portfolio Standard
Economics ofRenewable Energy
Demand ofRenewable
Energy
Order of NewRenewable Energy
Economics ofScale
Cost
Revenue
Investment inR&D
Vendor's CapacityExpansion
GovernmentSubsidies
Developer Order Loop
Learning Effect Loop Loop
R&D Investment Loop
Economy of Scale, Learning Effect in Renewable Energy? It is a “Chicken and Egg” Problem
The industry believes that stan-dardization and “learning curves” coupled with R&D invest-ment will drive cost lower over time.
But there are “Chicken and Egg” problems with this conclusion
CO2 Pricing is very important for Grid Parity
Oil PriceCarbon Pric-ing (CO2 Tax, Cap and Trading)
Technology BreakthroughEconomy of Scale (Busi-ness Model)
Electricity Price
Wind Power Cost
Systems Thinking vs System Dynamics
Systems Thinking
System Dynamics
• Soft Methodology• Qualitative Analysis• Casual Loop Diagram• Peter Senge: “The Fifth Discipline”
• Hard Methodology• Quantitative Analysis• Stock and Flow Diagram• J. Forrester: Industrial Dynamics
System dynamics 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 organi-zations.
• 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 cen-tral 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
System Dynamics
• Stocks create delays by accumulating the dif-ference 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 re-sistance
Why the distinction between stocks and flow is important?
Challenges in 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
Impact of CO2 Pricing on Market Clearing Price
ElectricityGeneration
Generation from MustRun Units (Hydro,
Nuclear)
ElectricityPrice
Fraction ofOperation in Fossil
Technologies
Generation fromFossil Technologies
ExpectedProfit
Construction ofCC and CoalGeenration from New
CC and Coal
+
+
- +
+
+
Cost of FossilTechnologies
+
+
-
Marginal Cost ofExisting Units
Generation fromrenewable energy
Construction ofrenewable energy
Degree of FIT
+
+
+Total Cost of FIT
Causal Loop Diagram for Renewable Energy penetration in Korean market
FIT
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
Behavior of Power Plant Investors
Energy Price
Heat Rate forMarginal Coal
Plant
Price ofImported Coal
Variable O&MCost of Coal
Fuel Cost ofMarginal Coal
Unit
GenerationImported Coal
Fraction of Coal in Operation
Imported CoalCapacity
UnderConstruction
Retirement
The Theory of Investor Behavior on Existing Capacity Utilization
The Theory of Investor Behavior on New Investment
-3
128
0
62
5
52.9
15
44.3
29
33
Investors Expected RM (%)
Market Assessment
application
approvals
constructioncompletion
CCs UnderReview
CCs in the SiteBank
CCs UnderConstruction
CCs on Line
constructionstart
The estimated market price is compared to the estimatedcost of a CC to determine the fraction of investors withpermits that will start construction. In this example, the
construction starts would probably be zero
Investors estimate thelevelized cost of a new CC.This assessment includes afixed charge rate and and
estimate of future gas prices.If gas prices are expected at3.82$/MMBTU, for example,
the full cost might beestimated at 37.17$/mwh
Investors prepare an assessment ofthe capacity that will be available
in the future. They estimate outageof thermal units, and they assume
average weather for hydrogeneration. As an example, theymay foresee 150GW of capacity
ExpectedReserve Marginwould be 15% in
this example
Investors prepare an assessmentof peak demand around the time
that a new CC would come online. Their forecast is based on the
growth over the past few years.As an example, they may foresee
130GW of peak demand
1
Fraction Starting Construction
Cost Assessment
Supply Assessment Demand Assessment
Investors estimate the future market pricebased on their estimate of the future reservemargin. 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$/mwh
In case of Renewable Energy
• The same Behavior decision theory can be applied
• The current market price and the degree of FIT are crucial to the profit of investors in renewable energy
New OffshoreWind underconstruction
NewOffshoreWind
CapacityOffshore Windconstruction
starts
OffshoreWindcomplete
construction
Wind Constructiondelay in yearsDelayed
Windcompleted
Construction of New Offshore Wind Capacity
<Construction Startsto keep pace>
OffshoreWind startsif keeping pace
<OK to startConstruction?>
<Offshore windexpected cap factor>
<Market ShareOffshore Wind>
Offshore Switch
Example: SFD for the Wind Power Capacity Acquisition Supply Line
Market Shares of NewConstruction
return
<biomass totallevelized cost>
<CCs totallevelized cost>
<Coal totallevelized cost>
<Offshorewind total
levelized cost>
Cs
Ccc
Ccoal
Cw
construction marketshares diversity
parameter
L
Cs to L
Ccc toL
Ccoal to L
Cw to L
Sum of Cost to Lpower
Market ShareSolar
Market ShareCCs
Market ShareCoal
Market ShareOffshore Wind
<Fuel Cell totallevelized cost>
Cmhy Cmhy to LMarket Share Fuel
Cell
<Cs>
<Ccc>
<Ccoal>
<Cw>
<Cmhy>
Weighted Aver Costof New Capacity
<Solar totallevelized cost>
CbCb to L
Market sharebiomass
<OffshoreSwitch>
Market Shares of New Construction
Market Prices ($/mwh)
100
80
60
40
20
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Year
Price : FITPrice simulated in previous Qr : FITPrice simulated over previous Yr : FITWeighted Aver Cost of New Capacity : FIT
Feed in Tariffs & the Gov. Estimate of the SMP
100
50
0
2004 2006 2008 2010 2012 2014 2016Year
Feed In Tariff for Biomass : FITFeed in Tariff for Mini Hydro : FITFeed in Tariff for Wind : FITGovernment estimate of SMP : FIT
Market Shares of New Constrution
1
0.5
0
2004 2006 2008 2010 2012 2014 2016Year
Market Share CCs : FITMarket Share Coal : FITMarket Share Wind : FITMarket Share Mini Hydro : FITMarket Share Biomass : FIT
Capacity Under Construction (endogenous)
10,000
7,500
5,000
2,500
0
2004 2006 2008 2010 2012 2014 2016Year
New CCs under construction : FITNew Coal under construction : FITNew Wind under construction : FITNew Mini Hydro under construction : FITNew Biomass under construction : FIT
Renewable Gen. as Fr of Total
0.4
0.3
0.2
0.1
0
2004 2006 2008 2010 2012 2014 2016Year
Fr of Gen from FIT Renewables : FIT
Cumulative Cost of Wholesale Electricity and the FIT
400,000
300,000
200,000
100,000
0
2004 2006 2008 2010 2012 2014 2016Year
Cumulative Cost of Wholesale Electricity and the FIT : Base CaseCumulative Cost of Wholesale Electricity and the FIT : FITCumulative Cost of Wholesale Electricity and the FIT : 3 % annual growthCumulative Cost of Wholesale Electricity and the FIT : Gas CCs
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 bring up the Competitive Wind TBN Ven-dors 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 En-ergy Producers
RPS
FIT
Oil Price
REC
REC (Renewable Energy Credit), RECs (Renewable Energy Certificates), Green Tags, TRCs (Tradable Renewable Credits), Renewable Energy Attributes
Economics ofRenewable
Market Share ofRenewable
Economics ofFossil Fuel
Investment inRenewable
Order ofRenewable
Energy
Economies of Scale,Scope, Learning Effectin Wind Power Vendor
Unit Cost ofRenewable
+
+
+
+
+
-
Market Size inRenewable
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
0
5
10
15
20
25
30
35
40
45
50Annual Capacity Addition (GW)
Total Wind Capacity (GW)
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
0
2
4
6
8
10
12
14Wind Target (GW-Year)
RPS Target (GW-Year)
Analysis Wind Power Market Environment in Korea : Total Installation and Annual MW addition
Drivers
• RPS Enforcement to Genera-tion Companies: 3% of total Generation until 2012 and 10% until 2030 (Government Police Goal)
• Possible Supply Technology for this requirement is Off-shoring Wind Power
Insights
• Annual 400MW addition in 2010, annual 800MW new addition in 2012.
• Annual 3-4GW Capacity addi-tion after 2020 will be needed
Korean Wind Turbine Supplier
• Lack of Track Record• No Experience to Export
Challenges to Export• Active Investment by
Ship Building Companies• M&A and Share Acquisi-
tion
World shipbuilding production by Top10 ship-yard
Sungdong Shipbuilding
Imabari Shipbuilding
Univesal Shipbuilding
Mitsubishi Heavy Industries
Dalian Shipbuilding
STX Shipbuilding
Hyundai Mipo shipbuilding
Daewoo Shipbuilding & Marine Engineering
Samsung Heavy Industries
Hyundai Heavy Industries
0 5000000 10000000 15000000 20000000
2441922
2603960
3013563
3079591
3380429
4668399
4877129
8965768
10726338
17285660
Top10 shipyard CGT
Date by Dec 31th, 2007
Shipyard will build Chinese wind plant (April 02, 2010)
Korea’s Hyundai Heavy Industries Co. said yesterday it had signed a deal with a Chinese state-run power company to set up a joint venture to produce turbines for wind power generators in China.
The world’s leading shipbuilder clinched the deal with Datang Shandong Power Generation Co., an af-filiate of China Datang Corp.
The joint venture will be funded 80 percent by Hyundai Heavy and the rest by the Chinese power firm, the shipbuilder said.
The plant, to be built in Weihai, China’s Shandong Province, is projected to start producing turbines with a generating capacity of 2 megawatts in January 2011, Hyundai Heavy said.
Shipbuilder signs Canada power deal (March 09, 2010)
Daewoo Shipbuilding & Marine Engineering Co., a Korean shipyard, said yesterday that it plans to establish a joint venture with the Canadian province of Nova Scotia to build a wind farm.
The Korean firm will hold a 51-percent stake in the venture, with the remainder to be owned by Nova Scotia. The farm will call for the production of 600 wind turbine blades and 250 towers annually. In August last year, the shipyard took over DeWind Inc., a U.S. wind power company, as part of efforts to diversify its revenue sources amid falling orders.
• Huge Capital Investment equal to $10 Billion in 2012, $48 Billion until 2030 in Wind Industry until 2012 is required in Korean Wind Market
• In the wind TBN supply prospective, new ship build-ing companies such as Samsung, Hyundae, Daewoo, and STX will play a major role to supply domestic off-shoring TBN and export Wind TBN to foreign de-mands.
• The government policy to catch two rabbits using two feedback loops will be optimistic because of the implementation of RPS and REC.
Results expected from the Government Policy
Key Issues arising from the government renewable energy Policy
• Can wind power industry play a major role in green growth?
• How to overcome the difficulties expected from the follower position?
• Is government policy to support wind power industry such as RPS (test bed) effective?
• What kind of business model do we need to model this policy?
Factors to affect TBN Choice
• Exchange Rate• Vertical Integration• Economies of Scale• Manufacturing Efficiency
• Economies of Scale• Production Portfolio (Core Model + Track Record)
• TBN Design Spec.• Various TBN Model (Site Specification)
• Production• Supply Chain Effectiveness• Economies of Scale• Manufacturing Efficiency
• 2-3 years Warranty• O&M Warranty
• Control System• Machine Efficiency
Wind IPP’s Economics Factors
• Government Policies such as FIT, Goal, Subsidies
• Wind Velocity
• Technical Performance
• Power Sale Price ($/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)
Attractiveness ofWind Power
K-Model
Market Shareof Wind Power
Demand of WindPower in Domestic
Market
Construction of WindPower in Domestic
Market
Wind Power Cost Dueto Economies of Scale
Wind TBNK-Model Order
Wind TBN Cost due toEconomies of Scale, Learning
Effect, R&D Investment
Attractiveness of OtherWind TBN Models
+
+
+
--
+
-
-Track Record ofWind TBN K-Model
+
+
Demand inForeign Market
Market Share inGlobal Market
+
+
+
Wind TBNsunder
Approval
Wind TBNsunder
Construction
Wind TBNsunder
OperationApplicationRate
ApprovalRate
ConstructionCompletion Rate
RetirementRate
Network SizeAttractiveness
InnovationAttractiveness
Attractivenessof K-Model
Order Rate inDomestic Market
Unit Cost
<Unit Cost>
ReferneceUnit Cost
Sensitivity ofInnovation
Attractiveness
Sensitivity ofAttractiveness toNetwork Effect
Wind TBNs with noNetwork Effect
LearningIncreasing
Rate ofLearning
Capital Cost
O&M Cost LearningCurve
Strength ofLearning Curve
Initial CumulativeOperation Experience
Learing Effecton Cost