Wednesday, November 26, 2014

Economic Analysis - Clean Energy Investment Proposals

Economic and Financial Analysis - An Illustration
The economic analysis presented in the knol Clean Energy 2030, is very interesting to provide an illustration to economic and financial analysis of investment proposals. I extracted the economic analysis portion from that knol to present it here.


We made the following economic assumptions in calculating the cost of the Clean Energy 2030 proposal:

  • Efficiency capital cost of 25 cents per kWh annual savings (one-time cost)
  • Savings from efficiency of 10 cents per kWh (average electricity price)
Renewable energy:
  • Renewable electricity capital costs:
    • Onshore wind: $2 per watt (W) falling to $1.5/W in 2030
    • Offshore wind: $2.5/W falling to $2/W in 2030
    • Solar PV: $6/W falling to $2/W in 2030
    • Solar CSP: $3.5/W falling to $2/W in 2030
    • Conventional geothermal: $3.5/W flat through 2030
    • Enhanced geothermal systems: $5/W falling to $3.5/W in 2030      
  • Intermittency cost of $20/MWh (applied to wind and solar)
  • Avoided fossil capital costs (for plants planned in baseline but not built in our proposal because of efficiency and renewables):
    • Coal: $2/W constant
    • Natural gas and oil: $1/W constant
  • Saved fossil fuel cost (that is not already counted as efficiency savings):
    • Coal: $2/MBtu constant
    • Natural gas and oil: $10/MBtu constant
  • No write-down cost for retiring coal plants (all plants assumed to be older than 40 years when retired), no decommissioning cost or salvage value for plants
  • Transmission infrastructure cost: $0.30/W for wind (including offshore) and solar CSP
  • Plug-in vehicle premiums: $5000 per plug-in hybrid vehicle (PHEV), $10,000 per pure-electric vehicle (EV), plus $1000 per vehicle for charging infrastructure
  • Higher-efficiency conventional vehicle premium $3000 for 45 mpg (pro-rated for lower mpg, down to zero cost for 22 mpg today)
  • Fuel cost: $4/gallon gasoline today, doubling to $8/gallon by 2030
  • Plug-in electricity cost: 7 cents per kWh (discounted due to flexible smart-charging price)
  • Older vehicle buy-back cost: $5000 per vehicle
Carbon (not counted in net savings):
  • Carbon credit for CO2 not emitted (relative to baseline): $20/ton CO2, doubling to $40/ton in 2030 (applied to both electricity and vehicles)

    Table 1. Economic summary (billions of 2008 US dollars).

    Costs Undiscounted total Net present value*
    Electrical efficiency investment $348 $175
    Renewable capacity investment $1,642 $712
    Transmission capacity investment $133 $59
    Intermittency cost $329 $121
    Coal plant write-down, decommissioning and salvage $0 $0
    Plug-in vehicle premium $1,221 $374
    Plug-in electricity cost $122 $35
    Higher efficiency conventional vehicle premium $325 $146
    Vehicle buyback cost $322 $119
    Subtotal $4,442 $1,742

    Electrical efficiency savings $1,599 $620
    Avoided fossil fuel generation capacity savings $267 $117
    Avoided fossil fuel savings $437 $162
    Plug-in fuel savings $2,193 $626
    Conventional fuel savings $939 $368
    Subtotal $5,435 $1,893

    Net savings $994 $151
    Carbon credits $1,134 $397
    Net savings with carbon credits $2,128 $548
    * Discount rate of 7%/year used for net present value calculations.

    Bottom line: undiscounted savings exceed costs by $994 billion over the 22 years of the scenario, or if carbon credits are included, $2,128 billion.

    Economic variants:
    • Making gasoline significantly more or less expensive changes the cost of the scenario relative to the baseline, and here the change can have a sizable impact on net savings. If gasoline rises to $12/gallon in 2030 rather than $8, an additional $1,189 billion in undiscounted savings are realized. If gasoline remains constant at $4/gallon in 2030, an additional cost of $1,317 billion is incurred, changing the balance to a net cost of $323 billion. 

                    Original knol -

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