Competitiveness and System Value
of Electricity Generation
Technologies
The Brazilian Case
LUCIANO LOSEKANN
DIOGO LISBONA
EDMAR DE ALMEIDA
Energy Planning questions
• How to compare different types of electricity generation
technologies?
• What is the value of the electricity generated by each
source?
Traditional answer:
levelized cost of electricity – LCOE
annualized capital cost
𝐋𝐂𝐎𝐄 =
$/MWh
internalizing externalities
𝐝𝐢𝐬𝐜𝐨𝐮𝐧𝐭 𝐫𝐚𝐭𝐞 × 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐜𝐨𝐬𝐭𝐬 + 𝐟𝐢𝐱𝐞𝐝 𝐎&𝐌
+ 𝐯𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐎&𝐌 + 𝐟𝐮𝐞𝐥 + 𝐜𝐚𝐫𝐛𝐨𝐧 𝐩𝐫𝐢𝐜𝐞
𝐚𝐧𝐧𝐮𝐚𝐥 𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐠𝐞𝐧𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐡𝐨𝐮𝐫𝐬
projected capacity factor
• Treats electricity as a homogeneous good (subject to single price
law)
• Academics, policy makers, and industry actors compare different
sources in terms of LCOE
LCOE is based on evident misconception:
electricity is not a homogeneous good
• It is not economically viable store electricity on a large scale
– Real-time balancing between supply and demand
• Renewable energy diffusion
– Electricity can be generated both through dispatchable and nondispatchable sources (availability depends on the weather)
• Electricity is a heterogeneous good in space and time dimensions
– Value depends on “when, where, and how” it is produced
• Joskow (2011), Boresntein (2012), Hirth (2013), Schmalensee (2016),
Finon (2016), and many others recognize that we must compare
different types of technologies according to their expected
generation profiles and respective market values
Benefit-cots analysis (LACE – LCOE)
levelized avoided cost of electricity (LACE)
different
time periods
𝐋𝐀𝐂𝐄 =
$/MWh
𝐓
𝐭=𝟏
expected generation
weighted by marginal price
backup cost
(LCOE of SCCT)
capacity contribution
for peak hours
𝐦𝐚𝐫𝐠𝐢𝐧𝐚𝐥 𝐠𝐞𝐧𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐩𝐫𝐢𝐜𝐞𝐭 × 𝐝𝐢𝐬𝐩𝐚𝐭𝐜𝐡𝐞𝐝 𝐡𝐨𝐮𝐫𝐬𝐭 + 𝐜𝐚𝐩𝐚𝐜𝐢𝐭𝐲 𝐩𝐚𝐲𝐦𝐞𝐧𝐭 × 𝐜𝐚𝐩𝐚𝐜𝐢𝐭𝐲 𝐜𝐫𝐞𝐝𝐢𝐭
𝐚𝐧𝐧𝐮𝐚𝐥 𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐠𝐞𝐧𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐡𝐨𝐮𝐫𝐬
projected capacity factor
• LACE: expected revenue from energy market + capacity market
• Benefit (marginal value) = avoided cost by the displacement of
more costly dispatches and by avoided additional capacity reserve
• US EIA annually publishes estimates for several sources since 2013
Variable renewable energy (VRE)
Avoided costs or additional (hidden) costs?
In traditional power systems
(not designed for VRE), a high
VRE penetration level imposes:
DYNAMIC EQUILIBRIUM PROBLEMS
(SYSTEM ADEQUACY)
MERIT-ORDER EFFECT
SELF-CANNIBALIZATION EFFECT
STATIC EQUILIBRIUM PROBLEMS
(REAL-TIME BALANCING)
GRID CONSTRAINTS
VRE: a new protagonist
Prominence imposes challenges
LOAD
(GW)
LOAD DURATION CURVE
LOW CAPACITY
CREDIT
NET LOAD DURATION CURVE
BASELOAD REDUCTION
HOURS OF ONE YEAR
OVERPRODUCTION
From cost to value
Assimilating integration costs

All sources are subject to integration cost (even if negative = benefit)
– It is not a market failure, but it is inherent to any kind of source
• In the policy debate is often suggested that once the cost of a
source reaches a certain level (in relation to the wholesale average
electricity price or the grid parity), this source becomes
competitive
• This is completely misleading! Given the integration cost
recognition, a certain source is never competitive “ad infinitum”
–At a certain cost level, a certain AMOUNT of a
source power is competitive
System Value Approach and the
Brazilian case
• The IEA advocates and spreads the
system value approach in its
reports
• The IEA has also studied the
Brazilian case, BUT
– Neglected the comparison method
deployed in centralized auctions to
selected the source of new capacity
SOUTHEAST/MIDWEST
BRAZIL
HYDRO RESERVOIRS = 212 TWh
POWER CONSUMPTION
TWh
SOURCE: CCEE, ONS, EPE
High complementarity between hydro and VRE
Lower Integration Costs?
SOURCE: CCEE
Expansion through centralized auctions
SOURCE: CCEE
Cost-benefit Index (ICB)
• Compares and selects different sources that are contracted by
"availability contracts" in the expansion auctions
– Thermal power (NG, coal, oil products, biomass), wind, and solar
• Objective: estimate future operation costs and availability costs
(the cost of new capacity contracted and not dispatched in the
future)
– ICB captures the system value of backup thermal
complementation and the complementarity of VRE in face of
hydro predominance
• Calculation depends on operation marginal cost (OMC) projected
– 2000 monthly hydrological series (values of OMC)
– Horizon of simulation: 60 months
Cost-benefit Index (ICB) calculation
𝐂𝐎𝐏 =
𝟔𝟎
𝐢=𝟏
𝟐𝟎𝟎𝟎
𝐣=𝟏 [𝐂𝐕𝐔
= Fixed Revenue
× (𝐆𝐄𝐑𝑨𝐢,𝒋 − 𝐈𝐍𝐅𝐋𝐄𝐗) × #𝒉𝒐𝒖𝒓𝒔]
𝐢×𝒋
𝐂𝐄𝐂 =
𝟔𝟎
𝐢=𝟏
× 𝟏𝟐
𝟐𝟎𝟎𝟎
𝐣=𝟏 [𝐏𝐋𝐃 ×
(𝑮𝑭 − 𝐆𝐄𝐑𝑨𝐢,𝒋 ) × #𝒉𝒐𝒖𝒓𝒔]
𝐢×𝒋
× 𝟏𝟐
𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭𝐬 + 𝐄 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐂𝐨𝐬𝐭𝐬 + 𝐄 𝐀𝐯𝐚𝐢𝐥𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐂𝐨𝐬𝐭
𝐈𝐂𝐁 ≡
𝟖𝟕𝟔𝟎 𝐱 𝐏𝐡𝐲𝐬𝐢𝐜𝐚𝐥 𝐆𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞
$/MWh
estimated benefit of capacity for the future
supply (reduces capacity credit by taking into
account expected capacity factor)
Energy contracted in all expansion auctions
GWavg
6%
15%
18%
7%
1%
22%
18%
12%
7%
5%
46%
SOURCE: CCEE
6%
36%
Energy contracted in auctions with ICB
GWavg
16 GWavg [Oil 33% | Hydro 30%]
SOURCE: CCEE
10 GWavg [NG 35% | Wind 33%]
Integration Costs in Brazil
backward-looking or forward-looking?
• ICB is in accordance with hydrological variability BACKWARD-LOOKING
– favored flexible thermal power plants (low fixed cost and high variable
cost) and complementary sources to hydropower (wind)
• But ICB is insensitive about VRE variability
– Does not account for short-term variability, neither the location of
power plants
• System is changing  transformations point to a new operation paradigm
– Loss of the hydro reservoirs regularization degree FORWARD-LOOKING
• Higher annual depletion  higher thermal complementation
– Higher penetration level of VRE (new dimension of variability)
• Short-term variability (cost) must be internalized
• Flexibility (benefit) must be recognized (pricing)
System transformation
marginal value of water (shadow electricity price) is
changing
“water tank” is losing importance due to load
increases and stagnation of storable energy
SOURCE: ONS
After all, what is the moral of the story?
We cannot compare different sources without
taking into account integrations costs
For expansion purposes, we must look to
dynamic integration costs
The big challenge of system value approach lies
in correctly identifying, at an appropriate time,
the ongoing system transformations
Thanks for your attention!
[email protected]