2. Electricity is a tradable commodity
• Characteristics
– Completely fungable – 1 MWh produced from gas/coal/… contains exactly
the same amount of energy
– It must be produced and consumed (in the absence of batteries),
simultaneously
– Supply must exactly equal demand & adjustments to either must be
handled immediately
• ISO
– Responsible for keeping the grid balanced between generation and load
– Remains neutral and independent of commercial players
3. Basic principles
• Demand
– What do we use electricity for?
• Cooking, lighting, charging
batteries, transport,…
• Manufacturing, irrigation,
computers,…
– Powers technology that
delivers value
• Supply
– How is it produced & what is
the cost of production?
• Resources such as coal, gas,
hydro
• Technology for conversion
Supply
Demand
Too much
Too little
Price
How does society decide:
how much and at what price?
4. Electricity demand
• Factors influence demand
– Structure of economy: size of manufacturing, industry, agricultural, households
– Use by sectors in economy: input into production, steel, aluminium, irrigation,
powering services etc.
– Changing structure, more services oriented economy, population growth &
urbanisation
– Technology: enables energy savings (rebound effect?), electric vehicles, demand
side management, smart grids
– Policy: subsidies, electrification, …
– Climate: increased use air conditioning, …
5. Electricity supply
• Factors influence supply
– Resource endowment: coal, gas, nuclear material, hydro,
geothermal, wind, solar, tidal
– Cost of recovery, cost of importing
– Technology: relative efficiency of gas turbines, binary cycle
power plants, carbon capture, wind turbines, load factors, …
– Economic life of capital
– Regulations, drilling off-shore, off-shore wind, location wind
farms, carbon pricing,...
– Climate: dry years, changes in frequency dry, wind patterns
6. Dry Taupo weather has led Mercury NZ to
trim its guidance for the June financial year
by $10 million.
The firm now expects to earn about $500
million - on an EBITDAF basis - for the year
through June, down from an earlier forecast
of $510 million.
"This reflects an expected 170 GWh
decrease in full year generation to 3,900
GWh due to dry weather conditions in the
Taupo catchment in H2-FY2020 to date,"
Mercury says
7. Cost of electricity supply
• Levelised costs
– Constant price for electricity that would equate the present value of
revenue from the plant’s output with the present value of the cost of
production
• Engineering factors: vary with technology but usually there is common
agreement on inputs and outputs
• Economic variables: can result in differences – e.g. inflation rate, real interest
rate, future input costs
• Interaction between engineering & economics: optimal usage of plant
depends on marginal cost production and market price
– Assumptions need to be transparent
8. … Generation costs
• Other complicating factors
– The same generation plant (e.g. wind) may not have same
levelised cost because of location
• Site characteristics
• Property values
• Local labour costs
• Environmental constraints
• Access to network
• Network constraints
• Climatic conditions
10. LCOE as Guide to Investment
• Careful use data from existing
or recent plants to base
investment decisions
– Technological progress,
economies of scale, experience
tends to lower cost of the
marginal plant relative to the
average of recent additions
– Scarcity of locations, access etc.
tends to increase the cost of the
marginal plant relative to the
average
12. Limitations of LOCE
Electricity generation plants have different temporal &
spatial production profiles
– Ramping rates – e.g. coal v. gas plants, hydro
– Intermittent sources are least dispatchable e.g. solar
produced only during daylight hours, wind
– How frequently does the market reveal the value of a plant’s
generation?
– Implicit assumption that the marginal value of electricity
will be constant over time
– Impact of transmission constraints (spatially)
13. Estimated LCOE new generation 2022
U.S. Energy Information Administration, AEO2017, Levelized Costs, April 2017
14. Price discovery in electricity markets
MWh
A
B
C
B
Peak
Demand
Peak
Price
Off-
Peak
Demand
Bid
Price
$/MWh
Off-
Peak
Price
1. One-sided power pool market
• Generators bid into a common pool –
typically free to bid eg. bid might be
based on variable costs, variable plus
return on capital, etc.
• Their bids are stacked from lowest
bid to highest bid to form a supply
curve.
• Central dispatch
• Market (system) operator forecasts
demand & dispatches generation
against this.
15. Price discovery in electricity markets
2. Two-sided power pool
market
• Generators bids stacked as before
• Demand curve created from price-
quantity bids made by the buyers
on the market, such as
distribution companies and large
consumers
• Central dispatch
• More sophisticated pool
Demand Supply
MWh
$ price/MWh
16. Operation of the market
• Matching supply & demand can be based on day ahead forecasts,
close to real time say 5 minutes ahead
• Can treat entire area as one market, regardless of capacity
constraints, resulting in one price, or
• Take into account location, physical constraints of network, referred
to as Locational Marginal Pricing (LMP).
• LMP = incremental cost of supplying an additional unit of electricity
taking into account network constraints. Each bidder pays for
congestion.
• Price discovery occurs at each node.
• Bilateral contracts between generator & user can operate.
17. Bi-lateral contracts
• Buyers and sellers enter into contracts for
supply
• Buyers are distribution companies & single users
(eg. Aluminium plant), sellers are generators
• Generators could become buyers – if they can’t
meet their contract obligations. Buyers could
become sellers too – maybe contracted too
much power, or hedge in the market. Many
possibilities.
• Self dispatch
18. Hedge market
• Instruments for managing
risk arising from
unpredictable electricity
prices
• Over the counter (OTC)
hedges
– contracts for difference
(CFD)
– fixed price fixed volume
– fixed price variable
volume
https://www.ea.govt.nz/operations/wholesal
e/hedges/how-the-hedge-market-works/El
19. Hedge contracts
1. Fixed Price Supply contract
– Contract between generator & buyer (retailer, large user)
– Fixed price variable volume – could specify base volume which locks the
buyer into a quantity at the fixed price, any demand over the base is met
at spot price.
– Many variations – each may result in different distributions of risk
between seller & buyer
20. Hedge contracts
2. Contracts for
differences
– Also called swaps,
common form of hedge
contract
– Buyer receives $ for the
difference between the
spot price and contract
price when spot price >
contract price & pays $ on
the difference to the
contract seller when spot
price < contract price.
21. Capacity market
• Incentive for generators to stay on line
– System operator determines installed capacity
required
– Run as a uniform auction for a forward capacity
contract
– Suppliers bid capacity offers, stacked smallest to
largest
– System operator balances against demand for
capacity to determine market price
– Suppliers that clear the market have an obligation to
generate power at some point in the future (1-3
years?)
22. Uniform auction
• Efficient if individual
can’t influence price
• Simple, price set by
marginal bid & all
bidders pay P*
• Shading of bids: large
interests may bid below
their trues value so as
to influence price
P*
S
Price
Capacity
Winning bids Losing bids
Demand
23. Reverse auction
• Roles of buyer and seller are reversed. In
an ordinary auction (also known as a
forward auction), buyers compete to obtain
a good or service by offering increasingly
higher prices.
• In a reverse auction, the sellers compete to
obtain business from the buyer and prices
will typically decrease as the sellers
undercut each other.
25. NZ’s Electricity Market
• NZ transitioned from economy dominated by large government
departments to an economy in which markets play a key role in
resource allocation subject to regulations & government over
sight.
• In the case of electricity: progression was from centralised
production and price setting to a more competitive framework
within a regulatory framework.
26. Reforming NZ’s electricity Sector
• Before 1987: large government agencies, 95% electricity, prices controlled, poor
investment performance
• SOE Act 1986, ECNZ set up as for profit
• Transpower & Contact Energy spun out of ECNZ mid 1990s
• Contact privatised 1999, ECNZ split into 3 generating SOEs
• By 2014 SOEs partially privatised – Crown owns 51% shares
• Commerce Commission & Electricity Authority oversight.
27. New Zealand Electricity Market
Competitive generation
State Owned Transmission
Local line companies
28. New Zealand Electricity Market
• Auction system: generators bid price and quantity available, market clears
every 30 minutes.
• Generation and retail are both open, competitive markets; some vertically
integrated “gentailers”.
• Monopoly owned transmission network (SOE) and local monopoly owned
line companies distribute electricity to consumers.
• Regulation of electricity market: The Electricity Authority is responsible for
the efficient operation of the market, but does not regulate electricity prices.
33. Price elasticity
• Is this relevant?
• Factors affecting elasticity: availability of substitutes, % income, necessity,
brand loyalty
• For inelastic goods, an increase in unit price will tend to increase revenue,
while a decrease in price will tend to decrease revenue.
• Surprisingly few estimates:
– apan:LR for household sector is − 0.121, and the industrial sector is − 0.033 to − 0.157.
• Car fuel −0.09 (Short run) −0.31 (Long run)
• What about income elasticity?
P
Q
%
%
36. Demand side management
Smart use in production
Agriculture:
Electricity savings
$16,000/year
Water savings: 28% of total
Industry:
Aluminium smelter
14% NZ electricity (541 MW)
Shell Heat Exchanger
37. Demand side management
Genesis Initiative
15 Households
Energy saving
devices
Remote access
Variable rate tariff
Average savings ~
14%
Average household uses
around 9,000 kWh, at
$0.27 = $2,430
55% space & water heating
38. Samoa: Domestic economic feasibility summary for distributed solar and
battery
PV capacity: 1.77 kWp
Battery capacity: 4.80 kWh
Battery power: 1.08 kW
Battery to PV capacity ratio: 2.71
Distributed system specifications:
Key system and economic metrics:
Average grid electricity price: 37 c/kWh
$/W installed price PV: 1.71 $/W
$/kWh installed battery: 1,020 $/kWh
Financial comparison metrics
System generation to grid balance
Wet season Dry season
- LCOE of the solar and battery solution in real terms is 25.2 c/kWh, very competitive with grid unit price of 37 c/kWh
- NPV of system is $438, Expected payback on initial capital cost of $9,335 is about 13 years
- Slightly oversizing of the system means that exported energy is 750 kWh per year and the system would still require 130 kWh of
imported grid electricity. This is due to the combination of the timing of energy loads, PV and battery capacity assumed from the system
- Domestic solar and battery structure exhibits a higher battery to PV capacity ratio as the expected daytime energy load is lower. This
ultimately increases the levelized cost of energy as greater amount of storage would be required for a small peak solar capacity.
Comments:
Load: 2,090 kWh
Generation: 2,709 kWh
Import: 131 kWh
Export: 753 kWh
39. EVs: No free lunch
• Lithium ion batteries (LIB) are widely used
to power electric vehicles. The popular
LMO-graphite LIB pack used on Nissan Leaf
and Chevrolet Volt.
• A 24 kWh battery pack with 192 prismatic
cells: 29.9 GJ of energy is embedded in the
battery materials,58.7 GJ energy consumed
in the battery cell production, and 0.3 GJ
energy for the final battery pack assembly.
• Imported – energy in production from ?
40. NZ policy on renewable energy
• Market incentives & regulatory framework to
support investment
• No direct subsidies, no opportunity to export
(Hydrogen?)
• Requires national benefits of renewables to be
fully considered in the consenting process
• NZ’s ETS prices carbon
– Energy emissions:
• Transport 44%
• Generation 19%
• Manufacturing industries 16%
41. Government initiatives elsewhere
• In January 2012, the ACT Government opened Australia’s first
Solar Auction, issued an RfP to support the delivery of up to 40
MW of large-scale solar generation capacity.
• Royalla Solar developed by Fotowatio Renewable Ventures
(FRV) was successful in the Solar Auction. Grant of feed-in-
tariff entitlement.
• The Royalla Solar Farm 20 MW commissioned in 2014. The
ACT’s solar (reverse) auction proved to be a simple and
effective way of attracting large solar projects to the Territory.
44. Early European Initiatives
• In 2001 the EU moved to promote Renewable Energy Sources (RES)
as a priority for sustainable development and for meeting Kyoto
Protocol targets.
• European Council set an objective of a 20% contribution of RES on
total European energy production in 2020. Combined as a Climate
and Energy package:
– Reduction of at least 20% of GHG from 1990
– Production from RES of 20% internal energy consumption; and,
– Use of bio-fuels to cover at least 10% of energy consumption for transport.
• The ambitious goals could only be achieved by incentivisation policies
and improvements of energy efficiency.
45. European Incentives
• Feed in tariffs (FITs):
– In Europe, one of the main forms of support for renewable energy is a
set of incentive programs in which generators, including individual
households, can sell energy to the grid at a guaranteed price.
• Other instruments:
– Tradable Green certificates (TGC): producers receive tradable right
based on quantum supplied, suppliers required to cover % of supply with
TGCs.
– Capital subsidies: direct $ contribution.
– Tax credits: based on installation cost.
– Net metering: deduct energy outflows from metered electricity inflows.
46. Germany FIT for Roof Top Installations
For 2011 <= 30kW >=30kW >100kW >1000kW
FIT values* 0.3601 €/kWh 0.3425€/kWh 0.3242€/kWh 0.2703€/kWh
Digression rates** 9% 9% 9% 9%
*RES Act that established FIT’s with a contract duration of 20 years and a constant remuneration for
produced electricity.
**The digression rate is set by law and applies to a statutorily defined additional capacity. When the
total additional capacity installed exceeds or falls below a certain amount, the digression percentage
increases or decreases by a statutorily fixed number of percentage points.
47. Italy FIT (2010)
Years Field Installed PV Partial Integrated Building PV Building Integrated PV
1-3 0.384€/kWh 0.422€/kWh 0.470€/kWh
4-20 0.364€/kWh 0.412€/kWh 0.442€/kWh
>20 0.346€/kWh 0.384€/kWh 0.422€/kWh
48. Greece
• High sun radiation. One of the most favourable FITs.
• Hampered by administration and regulatory delays – require
permission from 32 regulatory bodies/agencies.
• A new regime introduced in 2010, 0.55€/kWh, up to 10kW,
guaranteed & inflation adjusted for 25 years. Subsidies also
available. However:
– From January 2015, FIT will be linked with wholesale price + mark-up of
30-50% - NPV < 0 at any discount rate
49. US Initiatives
• FITs are not common
• Tax credits – federal allowance of one-time credit up to 30% of cost
of installation
• Cash rebates – first-come-first-served basis until budget runs out
• Net metering – most states allow PV generators to receive the retail
price
• Renewable portfolio standard – require utilities to acquire certificates
equivalent to 1 MWh of energy created by renewable resource.
• Solar renewable energy credits – 1 MWh of solar energy produced,
tradable & utilities