Cost analysis of renewables utilization

Financial factors that indicate the required investment and other costs of RE utili-zation (e.g. maintenance and operation), as well as efficiency of energy sources (performance), are two key criteria for RE promotion. For instance, wind energy has been cost-effective in many cases (IPCC 2011). While the efficiency and

re-liability of wind turbines have increased, the capital costs have been halved over the last 30 years (OECD 2012). On the other hand, the cost of solar PV technolo-gies is decreasing as demand is rising (IPCC 2011).

2.7.1 Energy conversion efficiency of energy sources

Efficiency has various definitions in different sciences. One of the definitions of energy efficiency is related to energy conversion efficiency (η), which means using less energy to provide the same or improved desirable output. Two main fossil sources for electricity generation in Finland are coal/peat, and natural gas.

While the share of coal/peat in electricity generation by fossil fuels was 61%

(about 57000 TJ), natural gas had a share of 37% (about 34000 TJ) in 2011 (IEA 2011). However, natural gas has many advantages compared to coal. For instance, natural gas burns more cleanly than coal and other fossil fuels. It is also more efficient compared to coal/peat.

According to EIA 2013, the capital cost of natural gas power plants is almost a quarter of the capital cost of coal/peat power plants. Natural gas can be easily transported via pipelines. Although natural gas is cleaner than oil and coal, it still produces a large amount of carbon. From the supply viewpoint, Finland has 100%

dependency on imports of this source (IEA Sankey 2011).

The costs of RE utilization and development (first scenario) in this dissertation are compared with natural gas as a replacement fossil fuel (second scenario). The reason is because of the role of greenhouse gas reduction in Finland’s national action plans. In other words, to launch the system dynamics model of RE cost analysis, the researcher assumed that the new capacities of fossil source for elect-ricity/heat generation are natural gas power plants.

As discussed in Chapter 1, the main objective is to present and implement a sys-tem dynamics model for cost analysis of RE development. Therefore, natural gas is a scenario for system dynamics model and the presented model can be updated with new scenarios such as nuclear power plants.

The main biomass source in Finland is wood used in combined heat and power (CHP) plants. Wood residual chips (forest chips) are the cheapest available wood fuel and used as a mixture with milled peat. As the costs of generated electricity by wood are clearly higher than other sources, there are no power plants only for electricity generation by wood in Finland. If the CHP plants are used for electrici-ty/heat generation, the investment cost of a merely electricity producing power plant are around 3000 €/kW with efficiency of around 35%.

Statistics show that the average peak load utilization time of wind power plants is about 1800 hours per year in Finland (Holttinen 2007). In this study, a peak load utilization time of 2000 hours per year with 40% energy conversion efficiency is estimated for wind power plants. A lifetime of 25 years is also used for wind tur-bines. Finally, the typical energy conversion efficiency of 60% for hydropower, 20% for solar PV and thermal, and 20% for heat pumps are estimated for electri-city/heat generation (Electropaedia 2013).

2.7.2 Costs of renewables utilization

The costs of producing energy for electricity/heat generation from RERs depend highly on location and the resources involved. Figure 10 reviews different seg-ments of the energy technologies costs extracted from IEA-RETD (2012).

Figure 10. Different segments of the energy system costs

- Research and development (R&D) costs: R&D expenditures have two main sources: public/government and private. While private firms include their R&D costs in the sale price of their product or service, R&D grants or funding by pub-lic institutions and governments are impossible to track for specific cost com-ponents of specific plants (IEA-RETD 2012).

- Capital costs: These costs include all expenses needed to bring an energy plant to commercially operating status such as the costs of land acquisition, buildings, construction,  financing costs and equipment for electricity/heat generation. Ac-cording to an IEA-RETD report (2012), four main types of capital costs include:

1) engineering, procurement and construction (EPC) costs (or Base plant costs);

2) owner’s costs; 3) interest during construction (IDC); 4) integration costs (transmission or grid).

- Contingency costs: this group of costs comprises all the unplanned costs during the construction or operating phases.

- Operating and management (O&M) costs: They include the expenses during the energy system operating. Two types of O&M costs include fixed O&M costs and

variable O&M costs. Fixed O&M costs mean fixed maintenance costs plus main-tenance and operation staff costs. Variable O&M costs depend on the source of different items that may be included. Fuel costs can be a part of O&M costs (ope-rating costs). Emissions costs (greenhouse gases costs) that is usually for fossil fuel sources, can be also bring in fuel costs.

- Other costs: such as selling price, taxes, and subsidies

Given that one of the steps of the current research is to build a system dynamics model for cost analysis of RE development, we need different parameters of the costs. The costs are summarized in four items, including initial investment (cost of capital), operations and maintenance costs (O&M), cost of fuel, and costs of greenhouse gases (e.g. carbon emissions). Other costs including selling price, taxes, and subsidies are not included. In recent years, beyond the effects of tech-nology development on prices decreasing in RE technologies, the overall price level of RE systems has risen remarkably (e.g. construction prices such as metals and other materials used in the power plant components and fuel prices). To inc-rease the validity of the research and provide a comprehensive and similar scale implementable for other countries or cases, the cost levels calculated and pub-lished by the US Department of Energy are used in this study (except fuel cost and emission costs). This reference is the most valid and reliable source of energy cost analysis (IEA 2012). However, any other references can be implemented for use in system dynamics models.

While the investment costs are based on estimations until 2017, value added costs such as taxes are not included. To calculate the costs, the “Levelized Cost of Energy” (LCOE) is used in this dissertation. LCOE shows the cost of an invest-ment assuming the certainty of production costs and the stability of electricity prices based on the following formula (IEA-NEA 2010):

The LCOE factor allows a comparison between energy technologies with very different generation characteristics and plant sizes. It is a most typical variable used by many scientific articles and reports on the energy sector. However, ac-cording to the IEA-RETD report (2012), LCOE factor drawbacks are such as:

– variables are included that make it difficult to trace the cause, – it is just a “partial” figure for policy makers or investors, – It does not reflect total costs, being just a ratio.

The researcher assumes that if the policy makers plan to develop electricity gene-ration via fossil fuels, new combined cycle gas turbine plants can be located near the existing natural gas network in Finland. Therefore, the connection fee does not contribute to the investment cost. The investment cost of the combined cycle gas turbine plant is estimated at 7.4 €/GJ. The O&M costs is also proposed as 0.86 €/GJ (EIA 2011). As the prices of fossil fuels have recently risen, the natural gas prices are assumed as 11.25 €/GJ (EIA 2011). According to EU regulations, an additional cost for fossil fuels should be also added as a greenhouse gas emis-sion price. The emisemis-sion price is estimated at 60 €/tonCO2 during 2013-2020 (Tarjanne & Kivistö 2008).

For RERs, the investment cost of a wood power plant is assumed to be 12.14 €/GJ (EIA 2011). The fuel prices are also estimated for peat at 2.47 €/GJ and for wood chips at 3.7 €/GJ. The O&M cost is estimated at 2.9 €/GJ (EIA 2011). The level of investment in wind power plants (on-shore) is estimated at around 17.8 €/GJ.

However, the investment cost level depends on the market, regional conditions, competition, and project size (Tarjanne & Kivistö 2008). According to the opera-tion experience of existing wind power plants, the O&M cost of wind power plants is estimated at 2.08 €/GJ, that is bigger unit size decreases the O&M cost (Tarjanne & Kivistö 2008).

In 2009, the average cost of installed solar panels systems was 5.8 €/W installed capacity in Germany, $3.5 €/W in Japan, and ranging from 3.8-8 €/W in the Uni-ted States (NREL 2009; Branker et al. 2011). Therefore, a 2KW capacity solar panel system would cost between 7100 € and 15000 € installed depending on the location. About 20% additional costs such as using batteries for power saving

should be added to the named costs (Branker et al. 2011). The prices of solar technologies dropped by 50% in 2011 due to adoption of new technologies in related industries (Branker et al. 2011). The cost of installing a heat pump using ground-heat is about twice the price of installing systems based on electricity.

However, the running costs of ground-heat systems are much lower (Kukkonen 2000). The investment and O&M costs of this technology are estimated at 16.36

€/GJ and 2 €/GJ respectively (EIA 2011). Finally, the investment and O&M cost of electricity generated by hydropower are approximately estimated at 16.4 €/GJ and 0.86 €/GJ (EIA 2011).