1. Energy System Investment and Risk Management Unit 2: Energy Economics and Markets Connect Seminar, 3 rd March 2016, 18:30GMT

2. Overview During this seminar, we will: Examine key topics within the Unit Explore specific data sources and approaches for techno-economic analysis Introduce the ‘ITEM Game’ Slide 2

3. Schedule Discuss the ‘ITEM Game’

4. Cashflow Analysis In cash-flow analysis, Net Present Value (NPV) is a metric which reflects a project’s net costs and revenues over its lifetime In simple terms: If NPV > 0 then the investment is projected to be profitable If NPV < 0 then the investment is projected to make a loss If NPV = 0 then the investment is projected to break even In mathematical terms: where A t is the project’s cash flow (revenues minus costs) in time t, from year 0 to year n and d is the discount rate (an interest rate used to calculate the present value of future cash flows). Slide 4

5. Simple Cashflow Analysis – Example #1 Slide 5 Consider an energy efficiency project that costs £78,000 and will save 160 MWh/year of electricity. The end-of-life salvage value of the project is predicted to be £19,000. The electricity is expected to be sold at 10p/kWh and the maintenance and running costs are £2,000 per year. Wiki Question: Carry put a simple cash flow analysis. Is the project viable over a 5 year period?

6. Simple Cashflow Analysis – Example #1 Slide 6 Wiki Question: Carry put a simple cash flow analysis. Is the project viable over a 5 year period? Energy Efficiency Project Cashflow Example YearCostsRevenueYear 0£78,000.0000 1£2,000.00£16,000.001 2£2,000.00£16,000.002 3£2,000.00£16,000.003 4£2,000.00£16,000.004 5£2,000.00£16,000.005 5£0.00£19,000.005 £88,000.00£99,000.00TOTALS £11,000.00PROFIT

7. Discounted Cash-flow Analysis – Example #2a Slide 7 Consider the previous example in which an energy efficiency project that costs £78,000 will save 160 MWh/year of electricity. The end-of-life salvage value of the project is predicted to be £19,000. The electricity is expected to be sold at 10p/kWh and the maintenance and running costs are £2,000 per year. The system will only last for 5 years. Wiki Question: Is this project viable considering a discount rate of 5%?

8. Discounted Cash-flow Analysis – Example #2a Slide 8 Wiki Question: Is this project viable considering a discount rate of 5%? Energy Efficiency Project Cashflow Example Year Discount RateCostsCost PVRevenueRevenue PVNet PVYear 0£78,000.00 0£0.00-£78,000.000 1£2,000.00 £16,000.00 £14,000.001 2£2,000.00 £16,000.00 £14,000.002 3£2,000.00 £16,000.00 £14,000.003 4£2,000.00 £16,000.00 £14,000.004 5£2,000.00 £16,000.00 £14,000.005 5£0.00 £19,000.00 5 £88,000.00 £99,000.00 £11,000.00TOTALS

9. Levelised Energy Cost (LCOE) Slide 9 LCOE is a convenient means of comparing the unit energy costs of different technologies over their economic life Wiki Question: What is the discounted LCOE of a 1MW PV installation with a capital cost of £1M and a specific yield of 1000kWh/kWp? Assume a PPA price of £0.06/kWh, a discount rate of 5% and zero O&M costs.

10. LCOE: Capital vs. O&M costs Slide

11. Levelised cost of new generation resources Source: http://ocw.mit.edu/courses/engineering-systems-divisionhttp://ocw.mit.edu/courses/engineering-systems-division

12. Open EI Database – Cost Distributions Slide 12 Source: OpenEI - http://en.openei.org/apps/TCDB/transparent%20cost%20databasehttp://en.openei.org/apps/TCDB/transparent%20cost%20database

13. Energy Generation Marginal Costs Slide 13 The marginal cost is the “price” of generating one more unit of electrical energy (in kWh or MWh) The marginal cost of generation does not include fixed costs (such as construction loan repayments, O&M contracts, leasing etc) which would be paid anyway, regardless of whether energy is generated or not Marginal cost of generation is heavily influenced by input fuel prices, and other external factors such as carbon emission permit prices Marginal cost plays an important role in electrical energy markets, because it helps to determine the ‘competitive price’ In practice, demand is satisfied first by generating plant with the least expensive marginal cost, and then by plant with sequentially higher marginal costs

14. Energy Generation Marginal Costs Slide 14 The marginal cost is the “price” of generating one more unit of electrical energy (in kWh or MWh) The marginal cost of generation does not include fixed costs (such as construction loan repayments, O&M contracts, leasing etc) which would be paid anyway, regardless of whether energy is generated or not Marginal cost of generation is heavily influenced by input fuel prices, and other external factors such as carbon emission permit prices Marginal cost plays an important role in electrical energy markets, because it helps to determine the ‘competitive price’ In practice, demand is satisfied first by generating plant with the least expensive marginal cost, and then by plant with sequentially higher marginal costs

15. Energy Generation Marginal Costs Slide 15 PLANT CHARACTERISTICSCO2 Price (£/Tonne) FUEL EFFICIENCY (%) FUEL COST (£/MWh) MARGINAL ENERGY COST (£/MWh) CO2 EMISSIONS (tonne/MWh)0 SOLAR PVN/A 00 WINDN/A 00 HYDRON/A 00 CCGT60%25£41.670.4 OCGT30%25£83.330.8 COAL45%10£22.221 NUCLEAR35%2£5.710 BIOMASS45%15£33.330

16. ITEM Game This activity will make use of the on-line platform ITEM-Game (www.item-game.org) and will have the following steps:www.item-game.org There will be 10 rounds of the game, each of them played once a day at any time of convenience of the players. It is also possible to play an accelerated version of the game on request. The game starts on March 11 th. In each round the players (a) make choices about investment in power plants of different technologies and (b) trade generation in blocks of power by offering prices in Euro/MWh in a power pool where all players compete against each other The winner of the ITEM-Game is the player who makes the most profit IN THE FINAL ROUND (not cumulatively). More information and registration is available at http://www.item-game.org/ or https://www.youtube.com/watch?v=tPTJskG9gBIhttp://www.item-game.org/ https://www.youtube.com/watch?v=tPTJskG9gBI Slide

17. ITEM Game Slide