DRAFT 1 Calculating electricity emission factors for SEIP TAG (Oct 08) Mark Dean MED.

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DRAFT 1 Calculating electricity emission factors for SEIP TAG (Oct 08) Mark Dean MED

DRAFT 2 Overview of methodology GEM model Determine “least cost” build schedule of new generation plant over the period 2008-2032. Requires assumptions about capital costs, fuel costs, carbon costs and demand growth. 5 scenarios run with different carbon costs: \$0, \$20, \$40, \$60 and \$80 (per tonne CO2) SDDP model (“SRMC” approach) Determine “optimal” market dispatch over the period 2008-2032. 5 scenarios run with the carbon cost assumptions from GEM. Use build schedules from GEM to determine new plant added in each year. Also use same fuel costs as GEM to determine SRMC of thermal plant. Calculates water values across 74 hydro sequences. Wholesale price forecasts based on SRMC of thermal plant and water values. LRMC supply curves Use capital costs, fuel costs & carbon costs from GEM to calculate LRMC for each project. Stack these LRMC’s from lowest to highest to determine the supply curves for each scenario. Wholesale price forecasts based on LRMC of new entrant plant Emission factors based on SRMC approach Compare SRMC price forecasts including carbon against SRMC excluding carbon to determine price uplift and implied emission factors Emission factors based on LRMC approach Compare LRMC price forecast including carbon against LRMC excluding carbon to determine price uplift and implied emission factors Compare emissions factors from SRMC vs LRMC approaches and decide on the more appropriate method for the first commitment period (2010-2012) ? MW of new plant required each year, by technology (Tom Halliburton undertook the SDDP modelling, whilst MED undertook the GEM and LRMC modelling.)

DRAFT 3 Assumptions GEM We have used the 2008 SOO assumptions where possible, mainly from the "Medium renewables" scenario which was more middle of the road: Gas cost increase from \$5.50 in 2008 to \$11/GJ in 2024, with LNG terminal built in 2020 if required. Coal price \$4/GJ (lignite \$1.80). Huntly coal units switch to dry year reserve plant over the period 2013-2020 and new coal plant able to be built only after 2020 The main modifications we have made to the SOO scenario is: No thermal moratorium for new gas plant (ie. model is free to build CCGT pre 2019). The medium renewables scenario was the only SOO scenario with Tiwai point closing in the future, so I have assumed that Tiwai stays open "Fixed" build years only for those projects currently under construction or recently completed (GEO = Kawerau 90MW, Ngawha2 15MW, Rotokawa 132MW, Centenial drive 23MW; WIND = TeRereHau 46MW, West Wind 143MW; HYD = Manap half life refurb 18MW, DeepStream 6MW). SDDP The build schedules, fuel costs and carbon costs from each of the GEM runs then feed through to SDDP. Other specific assumptions we need to make in SDDP: Huntly coal will have 400MW of "baseload" generation (ie. at zero SRMC), and the 400MW will reduce over time as the units are phased out and turn into dry year reserve plants. CCGT's will also have baseload generation of 150MW-200MW per unit, depending on the technology. These baseload tranches are intended to reflect take or pay fuel obligations.

DRAFT 4 LRMC analysis based on GEM runs

DRAFT 5 LRMC supply curves based on 2008 SOO assumptions Appx 300 MW demand growth by 2012 (@ 1.3% pa), and we have a (net) 230MW of geothermal & wind under construction Shows net MW (ie. reduced by capacity factors) SRMC = O&M + fuel + CO2 costs (ie. excludes capital cost recovery) Uses 2008 SOO CapX assumptions (refer to appendices for details) Gas \$9/GJ, Coal \$4/GJ, Lignite \$1.90/GJ Includes location factors (ie. all @ Haywards prices) Thermal plant run as baseload (around 90% utilisation for CCGT, 85% for Coal)

DRAFT 6 LRMC supply charts for all carbon cost scenarios

DRAFT 7 Calculating emissions factors from full supply curve Discrete increments for peaker vs peaker Discrete increments for geothermal vs geothermal Reflects more expensive renewables moving down the supply curve and also increased thermal costs Supply curves eventually converge with expensive renewable vs expensive renewable LRMC delta \$MWh = (LRMC for relevant carbon cost scenario at cumulative MW point x) – (LRMC with no carbon cost at cumulative MW point x) Emissions factor tCO2perMWh = LRMC delta / \$CO2perTonne However, to calculate emissions factor for SEIP TAG, we need to consider the timing of these potential new plant investments In previous slide we see that up to 1200MW, the carbon inclusive scenarios all have renewables, so the price delta in left chart is very similar for all scenarios up to 1200MW, resulting in relatively high/low emissions factors (note formula above)

DRAFT 8 Supply curve from GEM run ordered by build year “Committed” plant (ie. are under construction) Subset of full supply curve based on baseload plants selected in latest GEM runs (ie. excludes peakers) Also excludes plant that contribute less than 400GWh per annum (appx 50MW thermal or 100MW wind). This is slightly less than a years worth of demand growth at 1.3% pa (520GWh). We want to know what price levels are required to support the larger scale investments Same GEM runs as those used to provide build schedules for SRMC analysis Uses capacity factors from GEM dispatch output Note that 240MW CCGT is built at Rodney in zero carbon case, however, since the capacity factor is less than 50% it is treated as a peaker and so not included in above chart Partially addresses the timing issue but we still need to be able to identify the LRMC level for each year

DRAFT 9 Annual price forecast based on maximum LRMC West wind Algorithm for forecasting price in a given year: Calculate LRMC for each plant as per previous slide Exclude peaking plant (assume peakers affect the shape of price duration curve, not the average level) Exclude plant less that contribute less than 400GWh per annum (appx 50MW thermal or 100MW wind). This is slightly less than a years worth of demand growth at 1.3% pa (520GWh).  We want to know what price levels are required to support the larger scale investments Of the plant that “qualify” in a given year, take the plant with the highest LRMC as the plant that sets the price forecast for that year If there are no plant built in a given year, or if no plant qualify, then the price for this year will be a linear interpolation between years where there are prices. Notice below how lumpiness of investment schedule results in peaks/troughs in price forecast curves ….. 2010& 2011 Energyhedge prices…. are generators already factoring in the more expensive renewable projects? (Could look at setting price forecast based on expectations for the next 2-3 years?) Cheap geo Cheap lignite & coal plant Dearer geo Coal Wind, expensive geo & some thermal (\$40 & \$20) Post 2020 the carbon inclusive LRMC is mostly in a \$100 - \$110 band irrespective of the size of carbon cost.

DRAFT 10 Emissions factors from LRMC price forecast Similar shape to charts on slide 7 However, slide 8 has a geothermal factor of 0.1 for longer … above emissions factor chart reflects timing of projects with some more expensive geo projects being brought forward and so being compared to cheaper projects in the zero CO2 cost case. Example….In the zero carbon case Tauhara2 is built in stages over 2015-2017, whereas in the carbon inclusive cases that is brought forward to 2012-2015. As a result, in 2012 TeMihi LRMC of \$70 sets the price in the zero case, whereas in carbon inclusive cases Tauhara2 sets the price with an LRMC of \$83-\$90 depending on carbon cost Is also worth noting the difference between slides 7 & 8 …. If new coal build was not restricted to 2020 in GEM then slide 8 pattern may end up closer to slide 7 (ie. not so much geothermal front-ended in zero case) Coal vs Coal Coal vs cheap lignite Geo vs Geo Still Geo vs Geo but also reflects timing of projects

DRAFT 11 SRMC analysis based on SDDP runs (refer to Tom Halliburton’s report for more details)

DRAFT 12 North Island SRMC Lumpy investment profile creates peaks & troughs in curves Increasing gas prices between 2011 & 2024 drive up CCGT SRMC Is not a predictor of “level” of spot market prices … generators need to make profit also

DRAFT 13 Implied emissions factors

DRAFT 14 Comparisons to previous Concept work Shows Concept results for “case 2” (Huntly with 400MW base load component) which is consistent with SDDP work Concept supply scenarios for new plant: A: Renewables only B: Coal + renewables C: Gas + renewables

DRAFT 15 SRMC vs LRMC

DRAFT 16 Price forecasts Convergence of prices in medium to longer term except at very high carbon costs Since SRMC price level tends to increase in response to carbon cost, while LRMC tends to stay in a similar range when there is a carbon cost, we see that typically LRMC>SRMC at \$20 & \$40 CO2 cost, while SRMC>LRMC at \$60+  Going gets tough for thermals when there is a high carbon cost! With a higher % of renewables, there will be additional system costs (providing capacity, transmission, etc) …. these costs are not reflected in LRMC curves

DRAFT 17 Price deltas (vs no carbon case) As CO2 cost increases, SRMC price delta tends to increase, however, LRMC delta tends to stay more constant (LRMC price forecasts post 2020 for all carbon inclusive scenarios sit in a relatively constant \$100-\$110 range – see slides 9&10) Lumpiness of investment schedule leads to peaks/troughs so averaging over several years has some merits First few years SRMC > LRMC for most scenarios, but medium/long term is some convergence if we “look through” the peaks/troughs

DRAFT 18 Emissions factors Reminder that Emissions factor = LRMC delta / \$CO2perTonne, so we can see how trends in previous slide drive the trends here ….LRMC price delta relatively constant so LRMC factors here decrease as CO2 cost increases …. however SRMC factor is relatively constant across scenarios since the price delta tends to increase in line with the CO2 cost Lumpiness of investment schedule leads to peaks/troughs so averaging over several years has some merits First few years SRMC > LRMC for most scenarios but medium/long term is some convergence if we “look through” the peaks/troughs

DRAFT 19 Summary 487MW of consented renewables (see appendices) but with no construction plans as yet … lead in times for completing new projects suggests there is limited scope to develop “substantial additional” renewables before 2010-2012 Genesis and Contact will want to pass on full cost of carbon and may have a window to do so before substantial amounts of new renewables can be built Energyhedge price for 2010/2011 indicates an expectation of higher prices than LRMC of “cheap” geothermal  SRMC modelling approach has some merit for the 2010-2012 period …factor of between 0.48 and 0.54??  Beyond 2013 LRMC has some merit since there will be time for new renewables to enter the mix and put pressure on existing thermal stations …..factor of between 0.18 and 0.45??

DRAFT 20 Appendices

DRAFT 21 Consented renewable projects Wind Hydro Geothermal

DRAFT 22 GEM CapX and O&M assumptions Variable O&M (\$/MWh): Coal \$9 CCGT \$4.25 Geothermal \$10 Wind \$16 Assumes a USD/NZD exchange rate of 60cents

DRAFT 23 Sample GEM build schedules

DRAFT 24 GEM build schedule variance: \$40 CO2 cost vs no cost

DRAFT 25 GEM build schedule variance: \$80 CO2 cost vs no cost

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