ELEC9714
Electricity Industry Planning + Economics
Assignment 2
This assignment will be distributed on thursday of week 5. It is due on Tuesday mid-night of week 8. The assignment must be submitted via Moodle as a pdf file. You must use an EE&T assignment cover sheet. Aim to make your assignment look like a professional consultancy report and paste in Excel plots and calculation tables. You will also need to upload your Excel or other spreadsheet analysis.
The assignment must be submitted individually and must be your own work. The UNSW policy on student plagiarism can be found on the www.unsw.edu.auwebsite. Note also the information on plagiarism detailed in the elec9714 Course Introduction which is available on the course Moodle. Note that UNSW uses automated plagiarism software. Because of this, all text and tables need to be ‘searchable’ within the pdf - ie. not pasted in as graphics. Again, the only acceptable pasted graphics are the plots, not any tables and not any of your discussion. If you are caught doing this you will get zero marks.
You will need to use Excel, or an equivalent modelling package, again for this assignment as with assignment 1. You will also want to spend the time to workout how to automate the calculations as much as possible. There are lots of parts to this assignment that extend the initial analysis - make it easy to change key parameters rather than hard- coding it in. A little automation will make your life much easier, and it is very valuable to have good Excel skills - it is the one techno-economic energy modelling tool that you can guarantee will be available to all energy system engineers in whatever role they have.
This workbook will also be uploaded but only checked if there are concerns about the originality of this assignment. The two assignments are in total worth 25% of your final assessment. This assignment is, therefore, 12.5% of your final mark. Note that late submissions will be very problematic. For extensions of one or two days, please reach out to me via email with your reasons. Otherwise, unless you have formally applied and recieved special consideration, there will be a 10% mark reduction per day.
The assignment will be marked out of 100 as allocated across the assignment parts as outlined. For each part, 20% of the allocated marks is for showing how you undertook the analysis, 60% of the mark is for your answers, and 20% of the mark for your discussion of the findings. If you don’t discuss how you undertook the analysis or discuss your results then you can only get maximum 60% of the assigned mark for that part, assuming you got the numerical analysis right. Finally, no spurious precision please. You are modelling a competitive wholesale electricity market using heroic assumptions. Spurious precision such as reporting an operating profit as $874,392,761.42 rather than $874m or perhaps $874.4m will cost you serious marks – an assignment with lots of spurious precision will get a failing grade even if the answers are strictly correct.
You are a market analyst working for a large international generation company considering investing into a wholesale spot market that has a mix of coal plant, CCGT, OCGT, hydro and Wind and PV generation. This generation is mostly owned by four large generation participants as outlined in Table 1, which also provides annual capital and incremental variable costs for each plant. You may note some similarities to the NSW region of the Australian NEM.
The plants are of different ages and some have been refinanced. The fixed O&M costs of some of the old coal plants are also particularly high. Hence the different annual capital costs that don’t necessarily match the ‘new build’ capital costs of the different generation technologies that you calculated in assignment 1. Each technology other than PV and Wind generation can be assumed to be entirely flexible (ie. it can be instantaneously started and shut down with no cost, and run at any operating level between 0MW and its rated output. It is also assumed to have constant incremental variable cost (ie. short run marginal cost - SRMC) over its entire operating range.
The one exception is the 4000MW of energy constrained hydro. 1000MW of this hydro is bid into the market under the operating cost of the OCGT plants ($140/MWh). The other 3000MW of hydro is offered to the market at $200/MWh (there is not enough water to run the hydro plants higher than an average annual 25% capacity factor and this strategy seeks to not generate too little or too much given the water available.)
Power system demand is modelled as 6000MW during the 9 hours 2300-0700hrs, 4000MW during the nine hours 0800-1700hrs, and 11000MW during the six hours 1700-2300hrs - yes, another major assumption. This demand is bid in at the market ceiling price of $15k/MWh.
There are a number of retailers but for simplicity you don’t need to consider them. However, there is one major industrial load, a set of Electric Arc Furnaces with total 300MW capacity, which has fixed costs associated with debt servicing as well as fixed operating costs that total $613.2k/MW/year. The steel product that they produce is priced at A$1500t in a globally traded market. It has variable non-electricity costs of around $1330/t, and the plant consumes around 1MWh/t, hence has a short run marginal benefit (operating benefit) of $170/MWh. These plants are highly flexible over daily cycles being batch processes that can be started and stopped as market conditions require. This plant therefore bids into the market at its short-run marginal benefit. This 300MW is not included in the demand profile noted above – ie. demand could be 6000MW or 6300MW 2300-0800 hours, 4000MW or 4300MW 0800-1700hours and 11000MW or 11300MW 1700-2300 hours depending on the spot market price.
The 2500MW of utility PV generation can be modelled as generating at 1800MW during 800-1700 hours, and 0MW at other times (an overall capacity factor of 27%) - yes, another big assumption. All of the utility PV plants are owned by a variety of smaller market participants.
The 2500MW of utility wind generation can be modelled as generating at 1000MW during 2300-0800 hours, 700MW during 0800-1700 hours and 1300MW during 1700-2300 hours (an overall 38.5% capacity factor) – yes another big assumption. All of the utility wind plants are owned by a variety of smaller market participants.
Table 1: Generating unit and load participant Company Data
All generation and the system load are on a single network bus. This electricity industry is dispatched through an ongoing one-hour spot market. No participant seeks to exercise market power - ie. they offer their generating plants (or EAF) at their operating cost (or benefit), noting again, however, that snowy offers 1000MW at $140/MWh and the other 3000MW at $200/MWh to manage total water consumption - yes, another big assumption).
(a) For each of the three daily demand periods, draw the generation offer curves on the same plot, and determine the spot market price. Assume that all generation participants are preference revealing (offer into the market at their operating costs) including the EAF. The spot market price is set by the marginally dispatched generator, or demand. Keep in mind the offer strategy of Snowy Hydro. Now calculate the time-weighted average spot market price. Put all answers in tables and discuss. (10 marks)
(b) For each of the three daily demand periods, what is the total generation output (MW) of each generation unit, the operating profit ($k/hr) of each unit and hence company ($k/hour), as well as the operating profit of the EAF. Put all answers in tables and discuss your findings. (10 marks)
(c) Now calculate the annual operating profit ($m/year) of each of the generation companies and the EAF plant. Again, put all answers in tables and discuss your findings. (10 marks)
(d) Now calculate the total profit ($m/year) of each of the generation companies and the EAF after covering the fixed (capital and fixed O&M) cost repayments that they are required to make. Also calculate these annual profits as a % of fixed cost and total costs (fixed and operating) for each market participant. Please put your answers in a table. Discuss your findings. (10 marks)
(e) Your international utility generation company is considering investing in a wind plant in this market. You are aware that there are other international and local companies that are also contemplating a similar investment and it seems entirely possible that 2000MW of new wind will enter the market over the next five of years. Given technology improvements the achieved capacity factor of such wind farms will be 40% on average, with a daily generation profile of 45% of rated output over 2300-0800hrs, 25% over 0800- 1700hrs and 55% over 1700-2300 hrs (slightly different from the existing windfarms). Given capital costs of $2000/kW for these wind projects, with financing available at 7% over 20 years, and fixed O&M costs of $20k/MW/year and zero operating costs, estimate the lowest strike price ($/MWh) you could sell a 20 year PPA (a variable volume CFD settled each hour at the spot market price) for? Note that the capital costs and financing already include a reasonable profit for the project developer. Do you consider it likely a retailer or the industrial customer might be interested to purchase this PPA given current market prices? Could you negotiate a higher PPA strike price? (10 marks)
(f) There is of course the question of all the other wind generation projects, and whether they will proceed. For the case where 2000MW of new wind generation does get built by you and other developers without any PPAs (ie. all the developers take full exposure to the market price), estimate the total profit or loss made by the 2000MW of new wind ($m/year and % profit/fixed costs). All the new wind will have the profile noted above in (f). You will of course need to recalculate spot market prices and generator dispatch for the three daily time periods. Is there a commercial case for building this wind? Also estimate the impact on overall profitability of all the other generator companies and the EAF. Be sure to put your results in tables and discuss your findings. In particular, what does it say about the value of a wind PPA should the developers have sold them at their minimum viable strike price before building? (10 marks)
(g) You are also considering opportunities to build a utility PV plant. Again, you are aware that there are other companies that are also contemplating a similar investment and it seems very possible that 2000MW of new PV will enter the market over the next five years. Given technology improvements the achieved capacity factor of new PV plants will be 30% with a daily generation profile of 80% of rated output over 0800-1700hrs (slightly higher than the existing solar plants). Given capital costs of $1150/kW for these PV projects, with financing available at 7% over 20 years, and fixed O&M costs of $10k/MW/year and no operating costs, estimate the lowest strike price ($/MWh) you could sell a 20 year PPA (avariable volume CFD settled each hour at the spot market price) for?? Again, note that the capital costs and financing already include a reasonable profit for the project developer. Do you consider it likely a retailer or the industrial customer might be interested to purchase this PPA given current market prices? (10 marks)
(h) There is of course the question of all the other PV generation projects, and whether they will proceed. For the case where 2000MW of new PV generation does get built by you and other developers (not any of the existing companies), without any PPAs (ie. all the developers take full exposure to the market price), estimate the total profit or loss made by the 2000MW of new PV ($m/year and % profit/ costs). Assume that the wind generation in part e) was not built. Note that the 2000MW of PV willgenerate 1600MW during the hours of 0800-1700 hours, and 0MW outside these hours. You will of course need to recalculate spot market prices and generator dispatch for the 0800-1700hrs time period. Is there a commercial case for building this PV? Also estimate the impact on overall profitability of all the other generator companies and the EAF plant. Be sure to put your results in tables and discuss your findings In particular, what does it say about the value of a PV PPA should the developers have sold them at their minimum viable strike price before building? (10 marks)
(i) Origin Energy’s Eraring coal plant is becoming increasingly unreliable and expensive to maintain. Ignore, for a moment, the potential new wind or utility PV generation investment. For the case where none of the proposed additional wind or solar was built, calculate the expected total profit of each of the generation companies and the EAF, (including the fixed capital and O&M cost repayments they are required to make), should Origin Energy’s 2000MW of coal plant be suddenly closed by the. Again, you will need to recalculate spot market prices and generator dispatch for each of three daily demand periods. Calculate the average spot market price. Discuss your findings. (10 marks)
(j) Discuss the implications for the EAF of these three possible futures - 2000MW of wind is built, 2000MW of PV is built, and the 2000MW Eraring coal plant exits the market. If you were to assume that each possible scenario was equally likely (ie. 33.3% each) what is the expected profit ($m/year) of the EAF. What risk management opportunities do you think they could consider including buying different possible derivatives from different possible project developers? (10 marks)
(k) One possible option for PV developers is to install their PV with a BESS. Envisage the possibility of the 2000MW of additional PV being built with 800MW of 6 hours BESS. This would enable the PV generation to operate at 1000MW from 0800-1700hrs but also now at 800MW for the period 1700-2300hrs (you’ll note there are some losses in the roundtrip efficiency of the BESS as 600MW of PV over 9 hours charging becomes 800MW over 6 hours of generation). The fixed capital costs of this hybrid PV per MW is $1.15m/MW for the PV plus 0.4MW (remember that you only build 800MW of BESS for 2000MW of PV) of 6 hour BESS which costs $150k/MWh. Total it up and you get a total capital cost of around $1.5m/MW for this hybrid plant. Assume again 20 year financing at 7%, and fixed O&M of now $20k/MW/yr. For the case where no additional wind is built and Origin Energy’s 2000MW Eraring power plant remain in service, and 2000MW of new hybrid PV and BESS does get built by you and other developers without any PPAs (ie. all the developers take full exposure to the market price), estimate the total profit or loss made by the 2000MW of new hybrid PV ($m/year and % profit/ costs). Is there acommercial case to build these plants?
What happens to the profitability of other generators in this case? Does PV have a future in a
decarbonizing electricity industry? (bonus 10 marks)