UPEC 2013 48th Interna<onal Universi<es Power Engineering Conference 2-­‐5 September 2013 Discounted Value of Economic Rent in Hydro and Geothermal Expansion Planning in Iceland Kristján Jónassson1, Gunnar Geir Pétursson1 and Egill Benedikt Hreinsson1 1School of Engineering and Natural Sciences, University of Iceland Hjardarhagi 6, 107 Reykjavik, Iceland Corresponding author’s email: [email protected] Master Plan and Summary Master plan 1: MP1 1999-­‐2003 Master plan 2: MP2 2004-­‐2012 Summary of presenta<on: Review the Iceland hydroelectric and geothermal energy resources in MP •  Economic rent in terms hydro and geothermal resources •  Conclusions and results. • 
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Introduction
Icelandic system overview with generation and resources
The Iceland Electrical Power System
Energy resources Table 1: Break-down of hydro and geothermal energy resources (2010)
Type of
resource
–
Fuel stations in operation
Geothermal in operations
Hydro in operation
TOTAL in operation
New geothermal projects
New hydro projects
TOTAL new resources
Grand total geothermal
Grand total hydro
Grand TOTAL
Egill Benedikt Hreinsson
Energy
Generation
(GWh/yr)
–
4,465
12,592
17,057
30,435
17,500
47,935
34,900
30,092
64,992
Installed
Capacity
(MW)
120
575
1883
2578
3773
2338
6111
4348
4221
8569
{tabee}
UPEC2012 3 Kristján Jónassson
Discounted
Gunnar
Value
GeirofPétursson
EconomicSchool
Rent inofHydro
Engineering
and Geothermal
and
August
Natural
26,
Expansion
Sciences,
2013
Planning
University
4 / 10 in Iceland
of Iceland
Summary of energy resources •  Hydroelectric and geothermal energy resources in Iceland’s Master plan (MP) are a total of 65 TWh/year of which 17 TWh/year are already harnessed or about 26% •  Wind energy resources are not considered Economic rent •  Economic rent (ER) is well known from the history of economics •  It is derived from agricultural land valuaaon •  The ER concept applies as well to energy resources based on markets -­‐ both hydro-­‐ and geothermal resources. •  The ER is the difference between the resource market value and the cost of exploiang it. •  It represenang the net value of the given resource. Economic rent •  ER is most meaningful when there is a developed market for the product. •  However ER can sall be defined calculated in the absence of such a market as the extra cost of replacing the resource with a back-­‐up resource •  Then the ER is the extra value of the availability of a specific hydro project locaaon as compared to other opaons. Principles of economic rent system
(ER) overview
for awith
sequence of Introduction
Icelandic
generation and resources
hydro or geothermal projects Location of Hydro and Geothermal Projects
Energy price
(!/MWh)
Market price
or reference
price
Economic rent
of Project #. 1 (Not taxed)
The more expensive
part of the resources
Cost curve
Economic rent
of Project # 1 (Taxed)
Unit cost of
Project # 1
Unit cost of
Project #. 1
other than cost
of capital
Opportunity cost of capital or general return
in capital markets (for Project # 1)
Project
#. 1
Project
#. 2
Project
#. 3
Accumulated capacity
or firm energy capability
of all projects
(GWh/year)
Figure 1: Principles of economic rent (ER) for a sequence of hydro or geothermal
projects
UPEC2012 7 {Fig:
The Master plan •  Discounted Economic rent (ER) of 84 projects (hydro/geothermal in an spreadsheet model •  Assume rapid market growth (500 GWh/year2) •  Choose a discount rate of 3% per year. •  Salvage value for hydro is chosen 50% but 30% for geothermal. •  Investment cost is given in cost groups shown on the next slide. •  In the following slides we see a map and an overview of the spreadsheet model THE COST GROUPS IN THE MASTER PLAN (MP) WITH A MEDIAN UNIT COST CHOSEN AS AVERAGE OF THE LOWER/UPPER LIMIT UPEC2012 9 THE COST GROUPS IN THE MASTER PLAN (MP) WITH A MEDIAN UNIT COST CHOSEN AS AVERAGE OF THE LOWER/UPPER LIMIT UPEC2012 10 Figure 2. The discounted ER model. The
table shows the 84 hydroelectric and
geothermal projects of the Master Plan
(MP) sorted by unit cost, column (20).
The total energy generation capacity is
around 52.8 TWh/year which is higher
than the 47.9 as given in Table I. The
discrepancy is due to some mutually
exclusive projects and is ignored here
[16]. See the note and column IDs below
the table heading with following notes. (x):
Discounted to the time of project
construction, but based on an infinite
series of annual ER, (xx): Discounted to
first year of the expansion sequence, (a):
Excluding the cost of connection
to the grid, (b): Including the cost of
connection to the grid, (c): Calculated
from the total investment cost excluding
connection cost. (k): This is the sum
of columns (z), (a) and (y). All costs/prices
are in U.S.$. Economic life is assumed 35
years in the case of hydro and 20 years in
the case of geothermal.
Also operations cost is assumed three
times higher for geothermal than hydro,
due to increased drilling of new wells etc.
Salvage value is assumed 30% of
investment cost for geothermal and 50%
of investment cost for hydro. Market price
is 40 U.S.$/MWh. (In the table commas
are used in place of the decimal
point.
Conclusions and discussion •  With market price of 40 U.S. $ per MWh and 3% interest rate the discounted ER for all projects is about 12.9 Billion U.S.$ (Figure 2). With 300,000 inhabitants, this amounts to 43,000 U.S.$ per capita •  If the price is raised to 50 U.S.$ per MWh we get discounted ER of 18.5 Billion U.S.$. This amounts to about 61,700 U.S.$ per capita •  If the price is raised to 60 U.S.$ per MWh we get discounted ER of 24.1 Billion U.S.$. This amounts to about 81,000 U.S.$ per capita. Conclusions and discussion (2) •  To achieve this rent one must take into account the cost of reaching a larger market through a HVDC cable. •  The investment cost of one HVDC cable with about 600-­‐800 MW capacity might be in the order of 3-­‐4 Billion U.S.$. •  A complete life cycle cost esamate and a study the accumulaaon of an Icelandic energy resource fund where the ER is accumulated remains a topic for further research. Conclusions and discussion (3) •  It is concluded that the economic value of the energy resources are extremely important and very valuable in terms of the size of the economy . •  The energy resources of hydro and geothermal could play a vital role in the future economic development in Iceland, if this economic rent is realized.