Cost-benefit risk of renewable energy

Transcription

1 Environmntal Economics and Invstmnt Assssmnt III 85 Cost-bnfit risk of nwabl nrgy K.-J. Hsu Dpartmnt of Construction Tchnology and Facility Managmnt, Ladr Univrsity, Taiwan Abstract Sta-of-th-art conomic analyss of nwabl nrgy chnologis (RETs) includ using portfolio thory in nwabl nrgy policy planning and using Mon-Carlo simulation to attain th risk profil of th chnologis. Most conomic analyss now co-list th risk indx and GWP indx as sults of sarch/policy planning ports. Afr xamining th variants of conomic modls for RETs, th risk dimnsions of traditional nrgis and RETs w compad. Th asymmtry risks allocad btwn traditional nrgy and RETs w shown. Combining ths asymmtry risk allocations, a projct-basd RETs financial fasibility modl which simultanously ingras cost and risk information with spct to nwabl and traditional nrgy chnologis, was dvlopd. Rsults of th analysis showd that th risk pmium of traditional nrgis should includ th ffcts of th scalation and volatility of ful prics. On a national/gional lvl, th subsidy of fossil fuls for traditional nrgy production, which is mbddd in th conomic dvlopmnt policy, should b covd and th dg to which invstmnt of RETs improvd th fficincy of cost-risk portfolio should b masud. On a projct-basd lvl, th ffct of ful pric scalation and th saving of cost of risk-mitigation should b includd. Kywords: nrgy conomics, projct-basd analysis, conomic fasibility, risk valuation, nrgy risk. 1 Introduction Whn analyzing th conomic fasibility of a nwabl nrgy chnology, both ngativ xrnality and pric risk of traditional nrgy chnologis (TETs) a major concrns, as wll as th difficulty garding ingration into th valuation modl. Hsu t al. [1] usd lif cycl cost analysis and a saving-to-invstmnt ratio to analyz th mpirical data of a sidntial BIPV WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin) doi:1.2495/eeia181

2 86 Environmntal Economics and Invstmnt Assssmnt III projct locad at Kao-Hsiung [1]. Th sults showd that compad to th low lctricity pric in th southrn part of Taiwan, it was still not conomically fasibl for a hom ownr-occupant to mbrac nwabl nrgy, vn with a govrnmnt subsidy. Hsu t al. (28) usd discound payback yar and twoway snsitivity analysis to analyz th futu fasibl domain of BIPV basd on mpirical data of a sidntial BIPV projct, but did littl to addss th implication of th risk-mitigation with spct to th pric volatility of fossil ful [2]. Sta-of-th-art chnology for daling with such a problm includs portfolio thory and Mon-Carlo simulation. Som sarchrs and nwabl nrgy policy-makrs usd th portfolio thory to find th optimal nwabl proportion which can dcas th risk of nrgy combinations at th national/gional lvl, bcaus th cost risk of nwabl nrgy always xhibits a low corlation to traditional nrgy chnology. For xampl, som EU ports usd Enrgy chnology portfolios to addss nrgy scurity and divrsity [3 5]: Airtricity us of wind gnrators to nhanc Scotland s nrgy divrsity and scurity [6], along with California s 33% nwabl portfolio standard goal [7]. Othr approachs usd th Mon-Carlo simulation sults and co-lisd th risk dimnsion for fnc in th analysis, lik: nt psnt valu (NPV), inrnal ra of turn (IRR), lif-cycl cost (LCC), and lvlizd cost of nrgy (LCOE/LOE). Only a fw analyss now co-list th risk indx and global warming pontial (GWP) indx as sults of sarch/policy planning ports [13]. Som of thm us th markt transaction valu of GWP as a cost componnt of th nrgy chnologis. But drmining how risk attribus can b ingrad within an conomic analysis framwork still nds b dvlopd. In th following sction, th papr first xamins th variants of conomic analysis for RETs. Thn th risk dimnsions of RETs and traditional nrgy chnologis a discussd in Sction 3. A projct-basd conomic fasibility modl for RETs undr uncrtainty is dvlopd in Sction 4. Finally, a discussion is offd and conclusions a drawn. 2 Variants of conomic modl for RETs Diffnt approachs w usd in th conomic analysis of nwabl nrgy,.g. NPV, IRR, LCC, and LCOE. Whn compad to an alrnativ with a lowr initial cost but a highr futu cost, th prvasiv tool usd in nginring is th LCC. Th LCC practic stablishs a procdu for valuating th lif-cycl costs of a sysm and comparing th LCCs of alrnativ sysms that satisfy th sam functional quimnts. Th mthod ntails computing th LCC for alrnativ building dsigns or sysm spcifications having th sam purpos, and thn comparing thm to drmin which has th lowst LCC ovr th study priod [9]. Sinc RETs a always usd as substitus for curnt nrgy chnologis, nrgy saving and nvironmntal impact a tad as major bnfits. RETs always hav highr initial costs and lowr futu costs (oprating, mainnanc, pair, or placmnt costs); undr ths assumptions, it sms suitabl to us in WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)

3 Environmntal Economics and Invstmnt Assssmnt III 87 an conomic analysis of nwabl nrgy and an nrgy fficincy schm. Th psnt valu of lif-cycl cost (PVLCC ) for an nrgy chnology can b psnd as follows: PVLCC = IC + PVM + PVR + PVF - PVS (1) wh IC is th psnt valu of th initial invstmnt cost; PVM, opration and mainnanc; PVR, facility placmnt cost; PVF, ful pric xpnditu; PVS, nrgy saving; and subscription = (traditional nrgy), (nwabl nrgy). Undr th sam thotical concpt, LCOE was dvlopd to compa diffnt nrgy production chnologis. Most nrgy policy sarch organizations, lik IEA, USDOE, or xtbook usd LCC or LCOE to simplify th analysis of RETs,.g. in [1, 8, 1, 11, 14, 15]. Thotically, th dcision procss in slcting btwn th alrnativs should includ considration not only of th comparativ LCCs/LCOEs of compting sysms, but also th risk xposu of ach alrnativ lativ to th invstor s tolranc for risk, any unquantifiabl aspcts attributabl to th alrnativs, and th availability of funding as wll as othr cash-flow constraints. Snsitivity analysis and probability analysis a th two major tools usd in drmining risk and uncrtainty. In cas of RETs valuation, w always includ th diffnt pric risk and xrnality scnarios in all th alrnativs. Bcaus PVLCC and PVLCC a valuad sparaly, w list th sulting PVLCC and risk dimnsion in a dscriptiv tabl. IEA/OECD (25) lisd both th nvironmntal xrnality indx (.g. GWP) and th risk indx (.g. standard dviation) of ach nrgy chnology, as supplmntary to th comparisons [6]; howvr, th port did not provid full information garding th impact of ful pric risk. Rcntly, at th lvl of national/gional nrgy policy, mo and mo sarchs hav usd th portfolio thory to dal with th cost-risk profil of nrgy. Th portfolio thory approach usd man-varianc analysis to find th fficint frontir of diffnt nrgy chnology combinations, thus dciding th optimal proportion of nwabl nrgy chnologis. For xampl, Awrbuch and Brgr (23) usd th portfolio thory to add nwabl nrgy to th EU traditional gnration mix [5]. Awrbuch (25) usd th sam approach in Wind Provids Comptitiv Advantag for Scotland [6]. Bas Whi, LLC, (27) usd th sam approach in Achiving California s Gnration Mix to 22: California s 33% Rnwabl Portfolio Standard Goal [7]. 3 Risk dimnsions of TETs vs. RETs Whn valuating th financial fasibility of a PV sysm, this papr frs to th capital invstmnt in a photovoltaic lctric gnrad sysm in which th initial capital cost can induc stams of cash inflows without ful input and lss nvironmntal ngativ xrnality (.g. GWP) at a minimum mainnanc and WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)

4 88 Environmntal Economics and Invstmnt Assssmnt III Tabl 1: Comparisons of risk characristics of TETs vs. RETs. Input/ Cost componnts RETs 1. Mo xpnsiv initial capital invstmnt compad to traditional fuls 2. Zro ful pric 3. Quantity of lctric powr gnrad fluctuas according to wathr variations 4. Littl mainnanc and low opration f across facility lif cycl TETs 1. Sunkn cost of formr capital invstmnt 2. Ful pric with high scalation ra and volatility ra National/gional scal: 3. Unvn ful distribution affcting nrgy scurity of th country 4. Global ful pontial xhausd Output / Bnfit and Exrnality 1. Elctricity powr 2. Littl GHG mission/gwp 1. Elctricity powr 2. Larg GHG mission/gwp opration f. Normally, th cash inflow of th PV invstmnt is an opportunity to bnfit from th substitution of a traditional lctrical sysm gnrad from a primary nrgy marial lik fossil ful. Compad to th nw nwabl chnologis, on of th most prominnt characristics of th traditional nrgy sysms is a sunkn cost with scalating and fluctuating ful prics, followd by an nvironmntally ngativ xrnality. Tabl 1 psnts a summary of th risk characristics of cost componnts in gard to nwabl and traditional nrgy chnology. Focusing on PV lctric powr gnrad from photovoltaic sysm, du to th unvn distribution of such primary nrgy marial (.g. coal, oil and natural gas) across th continnt, thy a qui concntrad in som spcific aas. This not only sults in complicad go-political lationships, but also sults in nrgy scurity problms in most countris in th world and affcting th vulnrability of th conomic dvlopmnt of most countris. Basd on th primary comparison among nwabl nrgy and traditional nrgy in th abov paragraph, th major diffncs btwn nwabl and traditional nrgy includ Risk and Exrnality. In rms of Exrnality, th ngativ xrnalitis accompanying traditional lctric powr production procss a always on a global scal. Although it is hard to includ xrnality cost complly in a practical way, it is possibl to us th GWP markt WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)

5 Environmntal Economics and Invstmnt Assssmnt III 89 transaction pric as proxy and compu it into th valuation. In rms of Risk, an xamination of th ffcts of diffnt risk proprtis garding nwabl and traditional nrgy chnology vals that RETs a always viwd as an inrmitnt nrgy sourc; as a sult, th stochastic production quantity always involvs variability. Th risk of traditional nrgy chnologis is mainly basd on ful pric scalation and fluctuations along th whol lif span. Variability of RETs Sindn [17] usd UK mpirical data to show that onsho wind spd corlations rapidly dcas as distanc btwn wind farms incas [17]. Thus, th variability of wind nrgy in combination with disprsd location will significantly lowr th lctric gnration risk. Empirical data in Grmany also showd high wind in th winr and mo sun in th summr [3]. Th invrs corlation of sasonal capacity factors (actual powr output dividd by maximum pontial output) of wind and PV can b complmntary via caful nwabl planning; this showd that th variability of nwabl issus can b transformd via managmnt stragis, chnical sysm ingration, and planning procsss. Ful pric risk Markt risk of th traditional nrgy production includs ful pric scalation and fluctuations. Th a two kinds of approach that dal with markt risk: national/gional policy lvl and projct-basd lvl. As w discussd in th pvious sction, national/gional policy uss th portfolio thory to drmin th optimal lvl of RETs. At a projct-basd lvl, if w hop to combin th markt and production uncrtainty in th framwork of th conomic analysis of RETs, w will fac th problm of computing nrgy-saving functions. How can th risky information on traditional nrgy chnology b ingrad into an nrgy-saving function? Som transformational mthod nds b dvlopd in advanc. By xamining th risk proprtis within diffnt nrgy chnologis, w find th asymmtry risk btwn nwabl and traditional nrgy. This will dfinily affct th sult of projct-basd conomic analysis. Ths biass will hindr sarch sults. For xampl, th ful pric risk in a traditional nrgy chnology will sult in highr risk-pmium cost and cost transfr to th nd usr. Also, whnvr analyzing th nwabl chnologis, this risk from th counr-sid alrnativ nrgy cannot b assignd to an nrgy-saving function. Whnvr th asymmtry risk is misallocad, biass will follow. Without propr tatmnts of th modl spcification, ths asymmtry risk proprtis will affct th sult of a projct-basd conomic analysis; thus, biass will dfinily hindr sarch sults. 4 Projct-basd modl for RETs undr uncrtainty If th bnfits and costs can b complly discound, nt psnt valu of a RET invstmnt can b valuad by invrting th sign of th right hand sid in WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)

6 9 Environmntal Economics and Invstmnt Assssmnt III Eq. (1). By comparing th risk attribus of additional invstmnt of nwabl nrgy spct to ach ims of traditional nrgy, th cost-bnfits of nwabl nrgy is dvlopd, as shown in Tabl 2. Tabl 2: Th cost-bnfit of choic nrgy chnologis. Ims RETs TETs (psnt valu) Cost Initial invstmnt cost C C Opration and mainnanc M M Facility pair or placmnt cost RP RP Ful pric xpnditu F Cost of nvironmnt xrnality/gwp GWP (small) GWP (larg) Bnfit Elctricity powr Elctricity powr Elctricity powr NPV Nt psnt valu PW PW Lt PW dno th psnt valu of traditional nrgy chnology. C dnos th psnt valu of th sunkn valu of th capital invstmnt, M dnos th psnt valu of th annual opration and mainnanc costs; RP dnos th psnt valu of th pair or placmnt f of th nrgy facility; F dnos th cost of th ful and GWP dnos th cost of GHG missions which w summarizd as an indx of global warming pontial (GWP). Lt A dno th initial bill of th nrgy usr at tim. Without considring th scalation ffct of nrgy prics, th nt psnt valu of unit invstmnt in traditional nrgy with lif span, n, can b writn as follows: PW = -C - M - RP - F -GWP + A n ( 1+ i) -1 i( 1+ i) n - (2) Th first fiv rms on th right hand sid of Eq. (2) a a summation of th psnt valu of th cost componnts; th last rm is th psnt valu of th cash inflow from lctric bills. Normally, if th nt psnt valu is positiv, th valuad projct is fasibl. Supposing th nrgy markt is complly comptitiv and th normal profit of th invstmnt is zro, thn PV(B )=PV(C ) can b st without loss of ality. Th quivalnt compud lctric pric ( A ) of th traditional nrgy-k (including th cost of * WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)

7 Environmntal Economics and Invstmnt Assssmnt III 91 nvironmntal xrnality and risk pmium of th ful scalation ra and volatility) at tim zro thus can b obtaind; thfo A can b inrpd as th risk-adjusd lvlizd cost of traditional nrgy chnology. Th psnt valu of nrgy savings for nwabl nrgy invstmnt in Eq. (1) will show th ful markt pric risk of traditional nrgy chnologis ( PVS ). Howvr, du to th asymmtry risk btwn traditional nrgy and RETs, th stochastic proprty of ful pric risk should not b dictly spcifid in th invstmnt valu function of RETs. Th risk pmium of risk-mitigation of RETs should b cound as part of nrgy saving, thus raising th normal traditional lctric markt pric. Th traditional lctricity pric function with pric ful risk includs a high scalation ra () and high volatility (v), thus raising th opportunity cost of risky capital invstmnt. Thus th psnt valu function of a RET, lik BIPV can b writn as follows, * PW = -C - M - RP - GWP + A * n ( 1+ i) -1 i( 1+ i) n (3) In Eq. (3) th cost of th ful M F is zro. Th psnt valu of opration and, th pair or placmnt f of th nrgy facility GWP of th nwabl mainnanc cost RP, and th cost of nvironmntal xrnality nrgy, lik BIPV, is rathr small. But th risk-pmium of th ful pric risk of th traditional nrgy is now positiv for nwabl nrgy, which can b * considd in impud quivalnt lctric pric A. At th national/gional lvl, th subsidy of fossil ful for traditional nrgy production mbddd in conomic dvlopd policy should b covd, Δ A1. Th ffct of ful pric scalation Considring that th ra of nrgy pric scalation tnd () is always fasr than th ra of gnral pric inflation, th final rm of Eq. (3) can b placd as j n 1 A, which dnos th psnt valu of nrgy saving for TETs. j 1 1 i Th adjusd psnt valu factor of nrgy saving can thn b drivd as follows, n n i f 1 f 1, if f 1. f 1 (4) j 1 i 1 nr, f 1. if WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)

8 92 Environmntal Economics and Invstmnt Assssmnt III in which f 1+ = ; and i is th discount ra. 1+ i Th ffct of ful pric volatility Th risk pmium of th compud quivalnt lctricity pric A * should includ both th ffct of ful pric scalation and volatility in th markt. Th bnfit from improving th fficincy frontir for th cost-risk portfolio of social wlfa ( Δ A2 ) with spct to th spcific RETs invstmnt and nrgy scurity ( Δ A3 ) should b masud and addd to th bnfit rms of RETs. On a projct-basd lvl of projct fasibility valuation, th opportunity cost of riskmitigation for traditional nrgy production with spct to fossil fuls Δ A4 should b stimad and addd to th opportunity bnfit rms of RETs. On a national/gional lvl, th subsidy of fossil fuls for traditional nrgy production, which is mbddd in th conomic dvlopmnt policy, should b covd and th invstmnt of RETs improvd by th fficint frontir of costrisk portfolio as wll as th nrgy scurity of th socity should b masud as: Δ A1 + ΔA2 + ΔA3. On a projct-basd lvl, th ffct of ful pric scalation and th saving of opportunity cost of risk-mitigation should b includd: Δ A4. Basd on th compud quivalnt lctricity pric of th traditional nrgis, which includs th adjusd factor of pric scalation of nrgy-saving, th lvant risk-pmiums for Eq. (3) can b summarizd and xpssd as follows: 5 Conclusion Δ A = ΔA ΔA ΔA ΔA (5) By xamining diffnt risk dimnsions of nrgy chnologis, th asymmtry risks allocad btwn and TETs and RETs w shown. Combining th attribus of th asymmtry risk, a projct-basd conomic fasibility modl of RETs was dvlopd. Such a modl can simultanously ingra all of th cost and risk information of RETs and TETs into on. This showd that th paramrs of asymmtry risk of th two kinds of nrgy chnologis and th nvironmntal xrnalitis could b adjusd. Th risk pmium of traditional nrgis should includ th ffcts of scalation and volatility of ful pric. On a national/gional lvl, th subsidy of fossil ful for traditional nrgy production which is mbddd in th conomic dvlopmnt policy should b covd and th invstmnt of RETs improving th fficint frontir of costrisk portfolio should b masud. On a projct-basd lvl, th ffct of ful pric scalation and th saving of opportunity cost of risk-mitigation should also b includd. 4 WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)

9 Environmntal Economics and Invstmnt Assssmnt III 93 Acknowldgmnt Th authors would lik to thank th National Scinc Council of th Rpublic of China for financially supporting this sarch undr Contract No. NSC E MY2. Rfncs [1] Hsu, K-J, Lai, C-M, Chiang, C-M, Th Economic Evaluation of Buildingingrad Photovoltaic Sysms, Procdings, Annual Confnc - Canadian Socity for Civil Enginring, v 1, Annual Confnc of th Canadian Socity for Civil Enginring 27: Wh th Road Ends, Ingnuity Bgins, pp , 27. [2] Hsu, K-J, A projction of BIPV sysms in Taiwan: costs vrsus bnfits. Environmntal Economics and Invstmnt Assssmnt II, WIT Transactions on Ecology and th Environmnt, Vol 18, pp , WIT Pss, 28. [3] IEA, Empowring Variabl Rnwabls - Options for Flxibl Elctricity Sysms, Organisation for Economic Co-opration and Dvlopmnt and Inrnational Enrgy Agncy, Paris. 28. [4] IEA, Contribution of Rnwabls to Enrgy Scurity, Organisation for Economic Co-opration and Dvlopmnt and Inrnational Enrgy Agncy, Paris. 27. [5] Awrbuch, S. and Brgr, M., Enrgy Scurity and Divrsity in th EU: A Man- Varianc Portfolio Approach, IEA Rport Numbr EET/23/3. [6] Awrbuch, S., Th Rol of Wind Gnrations in Enhancing Scotland s Enrgy Divrsity and Scurity: A Man-Varianc Portfolio Optimization of Scotland s Gnrating Mix; Volum II: Dtaild Analysis and Conclusions. Ppad for Airtricity, Gnock, Scotland, 25. [7] Bas Whi, LLC, A Man-Varianc Portfolio Optimization of Achiving California s Gnration Mix to 22: California s 33 Prcpt Rnwabl Portfolio Standard Goal. Ppad For: California Enrgy Commission. 27. [8] IEA/OECD, Projcd Costs of Gnrating Elctricity, 25. [9] ASTM, Standard Practic for Masuring Lif-Cycl of Buildings and Building Sysms, Annual Book of ASTM Standards, Vol [1] USDOE, Solar Enrgy Tchnologis Multi Tar Program Plan, , 27. [11] USDOE, Solar Enrgy Tchnologis Multi Tar Program Plan, , 28. [12] Olivr, M. and Jackson, T., Th markt for solar photovoltaics. Enrgy Policy 27, pp , [13] Olivr, M. and Jackson, T., Th volution of conomic and nvironmntal costs for crystallin silicon PVs. Enrgy Policy 28 (14): , 2. [14] Olivr, M. and Jackson, T., Enrgy and conomic valuation of buildingingrad photovoltaics, Enrgy 26 (4): , 21. WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)

10 94 Environmntal Economics and Invstmnt Assssmnt III [15] Lsourd, J-B, Solar photovoltaic sysms: th conomics of a nwabl nrgy sourc, Environmntal Modlling & Softwa 16 (2): , 21. [16] Maycock, P., Cost duction in PV manufacturing. Impact on gridconncd and building-ingrad markts. Solar Enrgy Marials and Solar Clls 47: 37 45, [17] Sindn, G., Characristics of th UK wind sourc: Long-rm patrns and lationship to lctricity dmand, Enrgy Policy 35: , 27. WIT Transactions on Ecology and th Environmnt, Vol 131, 21 WIT Pss ISSN (on-lin)