Renewable Energy Tariffs Price-Setting from the ... · 1 Renewable Energy Tariffs Price-Setting...

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1 Renewable Energy Tariffs Price-Setting from the Profitability Index Method Bernard CHABOT Senior Expert ADEME 500 route des lucioles - 06560 Valbonne - France E-mail: bernard.chabot @ ademe.fr OPA – OEB – OSEA - ADEME Workshop – Oct. 7th, 2005 www.ademe.fr

Transcript of Renewable Energy Tariffs Price-Setting from the ... · 1 Renewable Energy Tariffs Price-Setting...

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Renewable Energy Tariffs Price-Setting

from the Profitability Index Method

Bernard CHABOTSenior Expert

ADEME500 route des lucioles - 06560 Valbonne - France

E-mail: [email protected]

OPA – OEB – OSEA - ADEME Workshop – Oct. 7th, 2005

www.ademe.fr

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I

Market regulationFor renewables

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Market regulations in favour of Renewables

Success from regulation from prices : Germany, Spain,France, Portugal…

Advantages of regulation from quantities are not yetdemonstrated, and price for consumer are higher: wind UK> 10 c€/kWh, Italy > 15 c€/kWh vs 7 to 9 G, Sp, F, Portugal

Sea based RE for power Regul. From prices Regul. from quantitiesTargeted on Subsidies Calls for tenders

initial Fiscal incentivesInvestment Soft loans

Targeted on Environnemental bonus Quotas + green certificatesProduction Simple guaranteed tariffs or + carbon credits

Advanced tariffs systems + derivative marketsSource: adapted from Menanteau & alii "How to promote RES successfully & effectively", Energy Policy, vol 32/6, 20

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Two main options to regulate market for RES

Regulation by quantitiesQuotas + competitive calls for tenders (eg: UK, France, Ir)Quotas verified from RECs in % of consumption (or sales) +

penalties in case of no compliance (UK, Be, It)Regulation by prices"Fixed prices" (eg wind power in Dk & Germany in the 90's)"Environ. premiums" over the annual avoided cost (Spain)"ADVANCED TARIFFS" (eg wind in Germany, France, Portugal)Defined for each technologyDefined for each project, e. g. if variable average wind speed in diff. sitesFixed tariff within a contract, e. g. defined first from the potential and then

from the actual energy yield measured during the first 5 yearsTariffs for new projects may decrease each year to take into account costs

decrease

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II

Introduction to theProfitability Index Method

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The context to apply the PI method

A global economic analysis for preliminary studies Constant inflation, results in constant money of year 0 Constant mean yearly Cash-flows :Defines the « references cases »By extension following cases are also relevant :Cash-flows parameters varying by x%/year above or under inflation rateCash-flows parameters varying by steps (e.g. wind tariffs T1, T2)Variable cash – flows (replaced by the equivalent constant cash-flow)

Links with other methods :Direct access from PI to IRR (Internal rate of Return), PBP (pay back period),

but much more precise (linear variation of PI versus NPV)Direct link of PI versus Margin on Cost ==> link with industrial and

commercial strategies and policiesWise states: almost same economic and fiscal profitability levels

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III

The linear and universal model:Profitability Index versus Tariff

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The model PI = NPV / I = f(tariff T)

NPV = (-I + Sum of discounted economic CFs before taxon profit in constant $ of year 0, from year 1 to n)

Discounted CF of year j = CFj / (1+t)^jFor constant Cash-Flow CF from years 1 to n:Sum of discount. CFs = CF / CRF(t,n), with CRF = t / (1-(1+t)^-n

Variable CFs can be replaced by the « constant equivalentCF » which gives the same economic profitability than then variable CFs

By definition: Profitability Index = PI = NPV / IPI results from tariff T by a linear relationship :PI= a (T-Cvu) – bWhere a and b are defined by project ratios (costs, energy yield)And Cvu is the variable cost due to fuel costSo Cvu is zero for hydro, wind, solar, geothermal power plants

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The model PI = f(tariff T) (2)Gives access to the universal linear diagram : PI versus tariff TPI = aT - b = (Nh / CRF.Iu)(T - Cvu) - (1 + Kom / CRF)With : T = kWh tariff; Iu = I / P, Nh = Ea / P, Kom = Dom / I, CRF= t / (1 - (1+t)exp-n),

Cvu = variable part of the kWh cost = 0 for renewables, except biomassWhere I = initial investment cost ; P = rated power ; Ea = annual energy sold ; Dom =

annual O&M expenses, t = discount rate (AWCC) ; n = years of operation

M

Tariff T

Cvu

ODC

PI

TV

-(1+Kom/CRF)

Com Ci

-1 S

Cost Price

Ci = CRF*Iu/NhCom = Kom*Iu/NhCvu = 0 for wind,hydro, solar

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The model PI = f(tariff TV) (3)Gives access to the direct link between PI and the Margin On Cost

MOC = (Price - Cost) / Cost = (TV-ODC) / ODC) :From our Thalès colleague, from the green and yellow triangles: PI / 1 = (TV - ODC) / Ci ===> TV = ODC + PI*Ci ==> basic role of Ci PI = MOC / (Ci/ODC) ==> MOC = (Ci/ODC)*PI ==> basic role of Ci/CGA

M

Tariff TV

Cvu

ODC

PI

TV

-(1+Kom/CRF)

Com Ci

-1 S

Cost Price

Golden rule

PI > 0,3

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The link: PI = k.MOC (2)

The « zero fuel cost RETs paradox » (wind, hydro, solar,geothermal based power plants) :(MOCwind / MOCfossil) = (cost / non fuel cost part)fossilMOC wind = 2 times MOC coal = 3 times MOC nat. gas !Minimum 10 % MOC from coal plants ==> PI = 0,3

Implies also minimum PI value of 0.3 for RE projects

Wind: Coal: Nat.gas:120

110 106

Different selling prices for thesame profitability (PI = 0.3)

Fuel cost part

Non-Fuel cost part

Same kWh cost100

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Comparing criteria PI, IRR, DPBT IRR, DPBT: values of t and n for which project NPV = 0Profitability if: IRR > AWCC = t, and if DPBT < nsimple PBT=I / CF=> Profitability if SPBT < 1 / CRFLimits and actual and potential problems (IRR & PBTs):Criteria not proportional to profitability in $ of NPVNo fixed and universal "zero point" for profitability = 0No direct access to the project NPVNo possible use with simple formulas

Versus advantages of the PI criteria:PI is proportional to the profitability in $ (NPV)Logical starting point: PI = 0 for profitability zeroDirect access to the NPV (from the definition: NPV = PI.I)Direct explicit formula possible using PI (like °K versus °C !)

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From efficient PI value to IRR and PBT rational values

Link PI IRR (Internal Rate of Return of the project):CRF (IRR, n) = (1 + PI).CRF (t, n) ;with (1+PI) = Benefit /Cost Ratio NPV = I * PI = I * {[CRF(TRI,n)/CRF(t,n)] - 1}

Link PI DPBT (Discounted Pay-Back Time):CRF (t, DPBT) = (1 + PI).CRF (t, n)

Link PI SPBT (Simple Pay-Back Time) :SPBT=1 / (1 + PI).CRF(t, n)=1 / CRF(t, DPBT)=1/CRF(IRR, n)

See following graphs and examples

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Links PI / IRR for n = 15 years Ex: t = 6 %: 100 % PI variation from 0.15 to 0.3 : IRR vary only from 8 to 10.3 %

TRI = f(TEC, t) pour n = 15 ans

0 %1 %

5 %

10 %

12 %

t = 15 %

0

5

10

15

20

25

30

0 0,1 0,2 0,3 0,4 0,5 0,6 0,7

TEC = VAN/I

TR

I (%

)

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Link PI / discounted PBT for t = 6 % Ex: n = 15 years: 100 % PI variation from 0.15 to 0.3 : PBT vary only from 8.2 to 7 years !

TRA = f (TEC, n) pour t = 6 %

358101215

20

n = 30 ans

0123456789

1011121314151617181920

0 0,1 0,2 0,3 0,4 0,5 0,6 0,7

TEC = VAN/I

TR

A (a

ns)

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Links PI / simple PBT Ex1 : 15 years 6 %: sPBT vary from 8 to 7 years ==> PI and NPV divided by 2 !

Lien entre le Temps de retour Brut TRB et le TEC

5 ans, 10%

10 ans, 8%

15 ans, 6%

25 ans, 5%

0123456789

101112131415

0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1 1,1 1,2

TEC

TR

B (a

ns)

Actualisation:

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IV

Case study of an advanced tariff:The 2001 French Wind Power

Tariff System

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The French advanced wind tariff sytem

Two successive tariffs levels :T1 fixed for all projects from years 1 to 5 (= German idea !)T2 variable for projects from years 6 to 15 (diff. from Germ.)T1 and T2 define a virtual constant “equivalent tariff”, Teq

For a specific project :Nh = averaged Ey / P from values years 1 to 5 (hours/year)T2: linear calculation from values at Nhr = 2000, 2600, 3600Teq from (T1, T2, t)

5 15

T1

T2Years

Tariffs

Teq

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Tariffs: Other Principles and Final “Details”Indexation for tariffs within a specific contract:Only 60% ==> decrease of profitability with inflation rate

Provisional tariffs decrease for next years: -3.3 % per year from 2003 (current EUROS)Formula for correction from inflation from 2003+

Reference Nh value: average on 3 years (5 -worst-best)

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Wind tariffs: June 8th 2001 Arrêté, 2001 tariffs

Hypothesis for Teq:Real discount rate t = 6.5%n = 15 years

Reference values for 2001 tariffsMainland France, projects < 12 MW

P (MW) P (MW) cEUR / kWhNh: <1500 <1500 T1 T2 Teq

Nhmin: 2000 1900 8,38 8,38 8,38Nhint: 2600 2400 8,38 5,95 7,02

Nhmax: 3600 3300 8,38 3,05 5,41Corsica & Overseas Depart. projects <12 MW

P (MW) P (MW) cEUR / kWhNh: <1500 <1500 T1 T2 Teq

Nhmin: 2050 9,15 9,15 9,15Nhint: 2400 9,15 7,47 8,21

Nhmax: 330 9,15 4,57 6,59

2001 Tariffs (M ainland France, P < 1500 M W )

8,38

5,95

3,05

7,028,38

5,41

0123456789

1800

2000

2200

2400

2600

2800

3000

3200

3400

3600

Nh (hours/year at rated power)

cEU

R /

kWh .

T1 T2 Teq

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Tariffs: 2001 potential profitability (Mainland)

Reference case (P < 12 MW per project):Iu=1067 EUR/kW. Value at year 16: 15% of initial invest.Yearly O&M expenses: Kom = 4 % of initial investmentMean inflation rate 2001 - 2015: i = 0% or i = 2 % / yearProfitability index: NPV per € invested

Profitability Index - 2001, Mainland

i=0 %

i=2%

0,0

0,1

0,2

0,3

0,4

0,5

1800

2000

2200

2400

2600

2800

3000

3200

3400

3600

Nh (hours/year at rated power)

PI =

NPV

/ I

Internal Rate of Return - 2001, Mainland

i=0 %i=2%

56789

10111213

1800

2000

2200

2400

2600

2800

3000

3200

3400

3600

Nh (hours/year at rated power)IR

R (%

)

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Wind Power development in France

+ 156(+73 %)

405 MW(+ 70 %)

0

100

200

300

400

500

1997 1998 1999 2000 2001 2002 2003 2004 2005

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Effectiveness of wind tarifs: 3 GW of Buill. Permits

Répartition 6/05 des 3087 MW de demandes de raccordement RPD

Biomasse: 13,3; 0,4% PV: 6,8; 0,2%

Biogaz : 33,3; 1%

Géothermie; 0Hydro : 41, 1%

Eolien: 2991 MW,

97%

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France: Potential Wind Power Development up to 2020

MWonshore

6 000

11 600

Total France

7 700

17 260

dP/year (MW)1 870 1 870

Germany (WindEnergy

04)

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

2000 2005 2010 2015 2020

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Global Wind power Market Asessement (BTM05)

Eolien monde: historique 1996-2004 et perspectivesParc: GW, production: TWh/an - Source: BTM Consult 2005

48 GW

235 GW

134 GW96 TWh

280 TWh

530 TWh

0

100

200

300

400

500

600

1995 2000 2005 2010 2015

GW

, TW

h/an

GWTWh/an

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Global PVmarket: history and one scenario

Production Cellules Photovoltaïques (MWc/an)

202287

401560

750

1256

0

500

1000

1500

1998 1999 2000 2001 2002 2003 2004 2005

Prospective 2005-20020

14 07629 553

MWc/an

74 770

Cumul: 188 832

MWc

0

50000

100000

150000

200000

2000 2005 2010 2015 2020

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PV pricing: Case study OSEA (soft loans)

Place Iu I Nh ODC PIi Si Siu TV TV(Eia kWh/m2.year) $/Wp $ h/year $/kWh $/kWh % $/kWh % $ $/Wp $/kWh €/kWh

12 36 000,0 825 1,018 0,727 71% 0,291 29% 0,000 0 0,00 1,02 0,61TORONTO 10 30 000,0 825 0,848 0,606 71% 0,242 29% 0,000 0 0,00 0,85 0,51

1100 7 21 000,0 825 0,594 0,424 71% 0,170 29% 0,000 0 0,00 0,59 0,3612 36 000,0 825 1,018 0,727 71% 0,291 29% -0,300 10 800 3,60 0,80 0,48

TORONTO 10 30 000,0 825 0,848 0,606 71% 0,242 29% -0,300 9 000 3,00 0,67 0,401100 7 21 000,0 825 0,594 0,424 71% 0,170 29% -0,300 6 300 2,10 0,47 0,28

12 36 000,0 1050 0,800 0,571 71% 0,229 29% 0,000 0 0,00 0,80 0,48OTTAWA 10 30 000,0 1050 0,667 0,476 71% 0,190 29% 0,000 0 0,00 0,67 0,40

1400 7 21 000,0 1050 0,467 0,333 71% 0,133 29% 0,000 0 0,00 0,47 0,28

Ci Com

Either PI = 0 or if PI < 0: subsidy Si on initial investmentTwo cases: t = 3 % and t = 0 % (“soft loans”)Two locations: Toronto (1100 kWh/m2.year in the plane of PV modules and Ottawa (1400 kWh/m2.year)

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The coming Energy and Climate crisis…

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Wind Tariffs as an insurance against increasing power prices

Tarif TVe kWh centrale à gaz à CC avec et sans pénalité 20 €/tCO2(TEC = 0,4, t = 5 %, n = 20 ans, Iu = 633 €/kW, kem = 5,7 %, Re = 59 %)

0,023

0,037

0,054

0,068

0,009

0,022

0,031

0,040

0,054

0,046

0,00

0,01

0,02

0,03

0,04

0,05

0,06

0,07

0,08

0,09

10 15 20 25 30 35 40 45 50 55 60

Coût équivalent constant sur 20 ans énergie primaire gaz en $/bep

€/kW

he

Tve kWhe GazCvu (part comb.)TVe+CO2

Tarifs éoliens

2000 h/an 2001

3600 h/an 2001 ou 2400 h/an 2010

2000 h/an 2010

30

V

Case Study 2:OSEA Wind Power Pricing

Workshop 1/2005

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Preliminary results in January 2005 Capacity factor Nh replaced by Specific energy yield Ey (kWh/year.m2) Hypothesis: full indexation to inflation (constant power purchase of tariff)

Tariffs versus energy yield per kWh/m2t = 5% (real), n = 20 years, Kom = 4%, Iu = 1600 $/kW

7,6

10,0

14,8

10,111,7

0,0

5,0

10,0

15,0

600 700 800 900 1 000 1 100 1 200 1 300

Eas (kWh/m2.year)

c$C

/kW

hT2T1Teq 20 y

Profitability Index Versus Energy Yield per m2

0,350

0,100

0,250

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0,40

500 600 700 800 900 1 000 1 100 1 200

Eas (kWh/m2.year)

ys

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Information on project IRR from PI values

Project IRR on 20 years (% real or nominal)

6,27,8

8,8

12,1

9,311,0

0

5

10

15

20

500 600 700 800 900 1 000 1 100 1 200

Eas (kWh/m2.year)

%

IRR real IRR nominal

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III

Taking into account or designingpotential incentives for

renewables

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Designing an « Efficient tariff »Defining a tariff for a sustainable good or service

M

TV

Cvu

ODC

PI

TVr

-(1+Kom/CRF)

PIr

-1S

ComCi

Golden rule:PI > 0.3

« Efficient tariff"

« Cost"

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Effect of a subsidy si on the initial investment ISimple relationship :

Subsidy rate si: si = (PIf - PIi) / (1 + PIf) where:PIf = target value of final profitability index PI (after subsidy)PIi = initial PI value (before subsidy)

The "PI versus tariff" line turns around its "S" point

TV

Cvu

PI

TV

PIi

-1S

PIf

Com

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Impact of soft loansConventional financing scheme: to = AWCC0 ==> CRFo(to,n)Soft loans => soft financing ==> ts < to ==> CRFs(ts,n) < CRFo(to,n)Increase of PI: (1 + PIs) / ( 1 + PIo) = CRFo / CRFs

Equivalent subsidy si on investment: si = 1- CRFs/CRFo

TV

Cvu

PI

TVr

PIi

-1S

PIf

Com

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Potential impact of selling "Carbon Credits"Avoided CO2 emissions : Quce (kg CO2/kWhe). Selling price of

carbon credit : TVce (€ / avoided kg of CO2). Price bonus: TVce*QuceThe "PI line" translates horizontally of a TVce*Quce value (€/kWhe) The Thalès - Chabot theorem: dPI = (Quce*TVce) / CiOr: dPI = {(Quce*TVce)/CGA} /(Ci/CGA) => basic role of Ci/CGA

M

TV

Cvu

ODC

PI

TV0

-(1+Kom/CRFa)

PIi

-1S

PIf

-Quce*TVce

dPI

Ci

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Conclusions

"A bit of theory is very practical"Simple, innovative and powerful method and tools to

define market deployment strategies and policies forsustainable energy technologies

A vast prospect for use :Extension to all other energy services : energy savings, energy

efficiency, DSM (see ECEEE 2005 Mandelieu conference)Clean and efficient buildings versus conventional onesClean and efficient industrial process versus conventional onesCO2 policies: easy demonstration that CO2 taxes would lead to

coal based power plants instead of natural gas combined cycles !Potential stranded costs analysis in a context of rising fossil fuels

costs.ADEME is open to co-operation by sharing knowledge

and experience