UGC NET Paper 1 Mathematical Reasoning & Aptitude.pdf
Energy Economics
1. Electricity Pricing and Other Topics
Environmental Economics II Spring 2014
Lecture based on Borenstein and Field Ch. 11
Prof. Maggie Winslow
2. Levelized Cost of Electricity
• LCOE is the price for electricity required to
equate the NPV of the revenue from
electricity production with the NPV of the
cost of production.
N
LCOE
Cn(qn ,...qN )
å qn ´ (1 + r )n = å (1 + r )n
n=1
n=0
N
3. N
Cn (qn ,...qN )
å (1+ r)n
LCOE = n =0 N
qn
å (1+ r)n
n =1
• This is the discounted stream of costs
divided by the discounted stream of
quantity produced.
4. Why is LCOE Important?
• These estimates can affect policy
decisions regarding alternative energy
production options.
• However, LCOE is difficult to estimate.
5. Difficulties in Estimating LCOE
• Forecasts of future fuel prices important but lots of
uncertainty. High variance in forecasts.
• Some generation just for peak times, other for base times so
LCOE not comparable (capacity factor issue)
• Timing of generation is important due to difficulties with
storage – how do you value this?
– Electricity demand is fairly inelastic in the short term so supply
must be very elastic to avoid brownouts.
– Dispatchable vs. intermittent
• Location of generation can make a difference in value due to
cost of transmission.
• Doesn’t include changes in price of electricity year to year
which is relevant to timing of costs and generation.
6. LCOE and Externalities
• Cost of externalities not included, but
costs of meeting regulations are.
– Would including cost of externalities matter in
choice of generating facility?
7. How to Promote Renewables?
• Subsidies for green power helpful but not the
right approach:
– Makes power cheaper so doesn’t promote energy
conservation,
– Doesn’t recognize the variations in the power
being replaced. e.g. replacing coal fired plant
more beneficial than replacing gas fired plant.
– Not clear that it helps develop the industry for the
international market.
• Not the same as taxing brown power
8. Energy Subsidies (Field, pg.197)
• Reduced taxes for producers to encourage certain
types of production (ethanol, domestic)
• Public support for R&D (ex. coal gasification)
• Public insurance (nuclear power)
• Not charging for externalities (free use of public
goods)
• Direct payment for adopting certain technologies.
10. Shadow Pricing
• When true value does not show up in the
market, shadow pricing provides a proxy
value.
• This could be used to include the cost of
externalities when evaluating the cost of
various generation options.
13. Net Metering
• Small scale electricity generators being paid for the electricity
they generate.
• Varies in different areas.
• Difficult due to high fixed cost associated with electricity
generation and distribution.
• Fixed costs can vary little when customers generate their own
electricity.
• Off-setting peak power could reduce fixed cost needs.
