Transcript Portfolio theory approaches to facing the future: the case of

The Economics of Marine
Renewable Energy
Peter McGregor
Fraser of Allander Institute, Department of Economics,
University of Strathclyde
Second Forum on Economics of Marine Renewable Energy
HMRC, UCC,Cork, 13th June 2011
Our research
•
Macroeconomic impact analysis
– Contributing to our understanding of the relationship between
developments in the marine industry and the wider economy
•
Calculating the costs and benefits of marine energy provision
– Identifying the ‘cost competitiveness’ of marine energy
– Calculating the cost & benefits of marine energy to society
•
Portfolio theory applications for marine energy
– What contributions can wave and tidal energy make to the
broader portfolio of electricity generation in the UK?
I. Macroeconomic Impact Analysis of
Developments in the Marine Energy
Industry
I. Macroeconomic impact analysis
• Marine energy is attracting significant investment in the UK (and
worldwide)
- Increasing number of commercial installations now operating/due
to be operationalised in UK waters
• Associated domestic expenditures could provide an important
demand stimulus for the local, regional and national economies:
– R&D, manufacturing, installation, O&M
• UK has a ‘first mover’ advantage in the world tidal energy
industry.
– Potential for the development of an export market for UK tidal
devices and technologies?
Estimating the economic impact of
expenditures on tidal energy installations
•
Many uncertainties involved in estimating economic (esp
economy-wide) benefits
– Unknowns: cost of devices; deployment timepath; subsidies
•
But important for appropriate policy-making
– Important as national and regional governments look to
justify assistance for renewable energy projects
•
We estimate the UK economy-wide benefit from a demand
stimulus to the tidal energy industry
– 25-sector CGE model of the UK, UKENVI
– Simulate expenditure over 2008-2025 across sectors
– Incorporate estimates of both domestic and export demand
CGE models
•
Initially tightly based on Walrasian GE theory: complete
specification of demand, supply and equilibrium
– But now often accommodate market imperfections
•
Widely employed to analyse energy-economy-environment
issues
– Link to micro theory – optimising households and firms
– Multisectoral – so capture the wide variation in sectoral
impacts
– System-wide: accommodate economic interdependencies
– Can explore a huge number of actual and hypothetical
policy instruments/packages and other ‘disturbances’
Results: GDP
We find that the demand stimulus could potentially deliver a
significant UK economic benefit…
Absolute demand stimulus and GDP impact (£m)
6000
5000
4000
Absolute GDP impact
Total demand stimulus
3000
2000
1000
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Year
…but the increase in GDP relative to base falls short of the
annual aggregate stimulus
Results: employment
Absolute change in aggregate employment
30,000
25,000
20,000
15,000
10,000
5,000
0
Absolute change in employment
in year 2025
Results: sectoral employment
35000
30000
25000
20000
15000
10000
5000
0
-5000
-10000
II. The Costs and Benefits of Wave and Tidal
Energy Provision
(i) The levelised cost of wave and
tidal energy
• The present value of the total cost of building & operating an
energy plant over its economic life
• Conventional approach to comparing the cost of energy
technologies; widely used in discussions of energy policy
• Include ‘private’ costs, i.e. costs to the developer (construction,
fuel, O&M, decommissioning)
• Calculations exclude revenues; social costs and benefits; system
factors
Point estimates of levelised costs
of electricity
200
Carbon Capture and Storage
Waste fund and decommissiong
160
Fuel delivery
140
Pre-development costs
Variable O&M
120
Fixed O&M
100
Fuel
80
Construction
60
40
20
Electricity generation technology
CCGT with CCS
IGCC Coal
Pulversied fuel with
CCS
Retrofit coal
IGCC with CCS
Pulverised fuel
CCGT
PWR Nuclear
Offshore wind
Onshore wind
Tidal
0
Wave
Levelised cost of generation (£/MWh)
180
The impact of policy support
mechanisms on cost competitiveness
• In the UK, “banded” ROCs to provide technology-differentiated
support.
-
Renewables Obligation Certificates (ROCs) – intended to act
as a subsidy to renewables
Onshore wind receives 1 ROC/MWh; wave, tidal, offshore wind
receive 2 Rocs/MWh
In Scotland, proposed additional ROCs proposed for wave (to
5 Rocs in total) and tidal (3 ROCs in total)
• We include these in levelised cost calculations as negative private
costs
Levelised costs with ‘banded’ ROCs
Levelised cost of generation (£/MWh)
200
180
DTI - Low ROC price
160
DTI - High ROC price
140
SG - Low ROC price
120
SG - High ROC price
Levelised cost
100
80
60
40
20
0
Electricity Generation Technology
(ii) The social costs and benefits
of wave and tidal energy provision
• Social optimality drives public policy - government is concerned
with social costs and benefits (not just levelised costs)
• Different technologies have different ‘externalities’ attached to them
(the social cost of carbon emissions; visual disamenity)
• Cost benefit analysis – measure whether the benefits of the
technology exceeds the costs, from the viewpoint of society
• Use WTP & WTA theory: Are those who would gain from the
project willing to pay more, in aggregate, than those who would be
worse off than the project?
CBA in practice...
Assume marine energy project of 50MW
Output displaces either gas or coal or onshore wind energy (i.e.
gas/coal/onshore wind counterfactuals)
20 year lifetime, after 2 year construction phase (22 year project
lifetime)
Future costs and benefits discounted at HM Treasury discount rate
for project (3.5%) in central case
For net benefit to society, “disamenity” values matter
BENEFITS
COSTS
Provisional results (1)
TIDAL
DISPLACES
£ MILLIONS
GAS
67.61
CONSTRUCTION
13.38
O&M
EXTRA BALANCING COSTS TO GRID
0.85
CO2 RELEASED DURING MANUFACTURE
VISUAL DISAMENITY
-203.71
NON-USE DISAMENITY
-121.87
TOTAL COSTS
45.47
AVOIDED FUEL COSTS
6.06
AVOIDED GDP LOSSES
19.40
AVOIDED CO2 DURING OPERATION
70.93
TOTAL BENEFITS
NET PROJECT BENEFIT
192.80
TIDAL
DISPLACES
COAL
53.04
10.96
1.93
-203.71
-137.78
15.17
6.06
43.91
65.14
202.92
TIDAL
DISPLACES
WIND
35.38
-9.95
-74.08
-48.65
48.65
III. Portfolio Theory Applications to Wave and
Tidal Energy
Analysis of alternative electricity
portfolios
• Use of standalone measures of levelised costs of technologies can
be misleading
- Ignores financial risk
- Can understate the value of renewables projects relative to
fossil alternatives
• Each generating technology is one component within a wider
electricity portfolio
• What contribution can each technology make to the portfolio?
• Compare technologies not on basis of standalone levelised cost,
but on cost contribution relative to risk contribution to a portfolio of
generating technologies
- Where risk is a measure of cost variability
• “Portfolio effect”: (typically) renewable technologies can help to
decrease portfolio risk for a given level of portfolio cost
- Largely due to their zero correlation with fuel prices
Sensitivity: greater marine share
10
9
8
Cost: p/kWh
7
Double Wave and
Tidal limits
6
Central
5
4
3
2
1
0
0%
2%
4%
6%
8%
10%
12%
Risk: standard deviation
14%
16%
18%
20%
www.strath.ac.uk/fraser
www.supergen-marine.org.uk