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Inserting risk in the calculation of the Levelised Cost of Electricity (LCOE) Athanasia Arapogianni Research Officer The European Wind Energy Association 23 April 2010

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Outline 1.Objectives 2.Methodology and Results 3.Conclusion

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1. Objectives i.Assess wind competitiveness based on EWEA scenarios on a fair basis of comparison. ii.Develop a model to calculate the levelised cost of electricity generated by newly built power plants. iii.Projection of the cost for the years 2020, 2030 iv.Including the risks associated with the operation of the different power technologies.

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2. Methodology 3 phases: 1.Building the mathematical model and choosing the assumptions to calculate and project the levelised cost of electricity for the different technologies (no risk included). 2. Include the risks associated to fuel cost and carbon price volatility to the calculation and projection of the cost. 3. Comparison of the different results.

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2. Methodology 1. Levelised cost without risks Cost components: capital cost, O&M, fuel and carbon costs. LCOE (/MWh) The levelised cost of electricity DC f (/y)Annual discounted fuel cost L.I. (/y)Levelised Investment DC CO2 (/y) Annual discounted carbon emission cost DO&M (/y) Annual discounted operation and maintenance cost E (MWh/y) Annual Discounted Energy Production

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2. Methodology 1. Levelised cost without risks C(/kW)Capital Costd(%)Discount rate P(MW)Installed CapacityN(y)Lifetime CRF Capital Recovery Factor CRF: converts the present value of the cost components into equal annual payments over a specified time (N) using specified discount rate (d) Levelisation of all the cost components

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Challenge our model using reference assumptions. The results of our model are as valid as the reference results. 2. Methodology 1. Levelised cost without risks – Assumptions Final range of Assumptions chosen from a set of references narrowed with the criterion : Less than <10% difference between the reference and our models results.

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2. Methodology 1. Levelised cost without risks – Assumptions WIND POWERONSHOREOFFSHORE Total Plant Capacity (MW)40 Size of Wind Turbines(MW)25 Inflation (%)2% Nominal Discount rate (%)7.5% Real Discount rate (%)5.61% Capital, Investment Cost (/kW)12502500 O&M costs (including the fixed annual costs, /kWh)0.01450.019 Balancing Costs (/kWh)0.003 Capacity Factor25.00%35.00% The assumptions are based on EWEA targets and scenarios presented in the Economics of Wind and Pure Power reports. Similar sets of assumptions exist for the different technologies based on the literature.

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2. Methodology 2. Projection of the costs (2020, 2030) C future, C present Future and current cost P future, P present Future and current installed capacity in Europe (GW) LRLearning rate GASReferences 201020202030 Fuel cost(/kWh)0.02460.02880.0339WEO 2009 Carbon Cost (/tCO2)203040EWEA Capacity installed (GW)185.60208.00242.00WEO 2009 Learning Rate(%)5.00% IEA, EC WIND ONSHOREWIND OFFSHORE References 200920202030200920202030 Capacity installed (GW) 741902501.4740150 Pure Power Learning Rate (%) 10% 5%7% Economics of Wind

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How? Differentiating Wind Energy from Gas, Coal and Nuclear… –because the main cost components of fossil and nuclear generation: fuel and carbon emission costs –High volatility and uncertainty to forecast fuel and carbon costs Risk Necessary to include in the LCOE calculation the corresponding risk Forming a fair basis of comparison between the technologies. Using a risk-adjusted discount rate when discounting future fuel and carbon costs. 2. Methodology 3. Including risks

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Risk – adjusted discount rate (Awerbuch) to fuel costs and carbon prices Following Awerbuchs methodology, β is considered to be negative for fossil fuels, therefore the new discount rate is lower. d risk-free 30 – years government bonds yield βCorrelating Factor RPRisk Premium

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2. Methodology 3. Including risks Risk adjusted discount rates: Risk Assumptions Cost ComponentGASCOALURANIUMCARBON Risk – free discount rate3.90% β (based on Awerbuch and assumptions from the literature)-0.2-0.4-0.1-0.4 Risk Premium (based on the literature)5% Risk – adjusted discount rate2.90%1.90%3.40%1.90% Discount Rate without taking into account the risk (real) 5.61% Lower discount rate Higher present value Avoid to underestimate the impact of risky cost components

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Increase of the LCOE if risks are included High impact of future installed capacity, future cost of fuel and carbon. 2.Results +30% +34% +47%

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3. Conclusions In order to compare the LCOE of different technologies on a fair basis, the risk on fuel and carbon price volatility has to be included. The volatility of fuel and carbon prices has a great impact on the final LCOE. Without risk wind becomes competitive only in 2030, whereas when comparing the cost on a fair basis, it is competitive in 2020. Wind energy (on and offshore) is becoming more preferable not only as a renewable energy technology but also as an investment which will not suffer from unpredictable and volatile costs.

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Thank you for your attention

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ANNEX

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Assumptions

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First Results Without Risk

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Assumptions of future costs for Coal and Nuclear COALNUCLEARReferences 201020202030201020202030 Fuel cost(/kWh) 0.08430.07280.07650.0050 WEO 2009 Carbon Cost (/tCO2) 203040203040 EWEA Capacity installed (GW) 202.60182.00158.00127.00108.00103.00 WEO 2009 Learning Rate(%) 6.00% 3.00% IEA, EC

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Results Without Risk

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Results With Risk

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