Chapter 5

Question 1

LCOE

Answer 1

levelized cost of energy. sums on a consistent basis all of the cost elements involved in the creation, operation, and fueling of an asset and divides that total cost evenly over the output of that asset.

LCOE amortizes the cost of building, operating, and fueling an electricity generator over the output of that generation.

Aggregates and averages over the time period all of the costs per unit of electricity (kWh or MWh)

Question 2

overnight costs

Answer 2

the cost of completing the generation asset and putting it into service, as if it were to happen overnight.

For electricity generation: the moment the builder transfers ownership of a newly constructed generator to the operator, moment before it is turned on for electricity production

usually denominated in units pf power, $/W.
incurred only once at beginning of project

Question 3

O&M costs

Answer 3

FIXED: operations and maintenance costs needed to keep the asset at full operating capacity, before it is used to produce the first unit of output. Examples: site maintenance, staffing, operating repairs. Denomination: $/W per year. cost per unit of capacity incurred each year.

VARIABLE: maintaining the plant gets more costly the more it is used. Denomination: c/kWh. determined on a marginal basis (per unit of output)

Question 4

discount rate XX

Answer 4

the discount rate is usually measured as the Weighted Average Cost of capital (weighted average debt and equity that an owner uses to fund investment).

Re LCOE: costs incurred in one period need to be spread over many periods (e.g. overnight cost)….

Question 5

heat rate

Answer 5

=thermal energy in / electrical energy out

indicates power plant efficiency, lower heat rate is better
Denomination: (ex. MJ/kWh) rate at which energy is converted into kWh

Question 6

busbar cost

Answer 6

aka LCOE

called such b/c electricity from generator is usually priced and delivered into the Grid at Busbar (substation connection device)

Question 7

asset life

Answer 7

Useful life, duration for which the item will be useful (to the business), — NOT how long the property will actually last. Many factors affect a property’s useful life: the frequency of use, the age when acquired and the repair policy and environmental conditions of the business

Question 8

financing period

Answer 8

also, cash gap. The time period from:

the purchase of inventory until it is ultimately sold and collected MINUS the amount of time creditors give the company to pay for the inventory

This is the period of time the company will be without cash from a particular series of transactions. The company will need to have funds available or borrow from the bank.

financing period is always shorter than useful asset life of an electricity generator

At the end of an asset’s life, there is often RESIDUAL VALUE beyond the financing period.

Question 9

decommissioning costs

Answer 9

shut-down, scrap, or
environmental remediation

decommissioning costs aren’t always incorporated into LCOE estimations

Question 10

repowering

Answer 10

substantial overhauls of a generator’s life or performance during the middle of the original discount period by subsequent capital investment

effect: shortens discount period of original investment AND leverages the investment to create more output or lower costs in the future

Question 11

market clearing price

Answer 11

the market has achieved a market clearing price when:

an equilibrium price has been reached where all profit opportunities for sellers and all benefit opportunities for buyers have been exhausted

Question 12

merit order

Answer 12

prioritization by lowest cost. means lowest cost producers are the first ones called on, followed by next lowest cost, till load is met

aka economic scheduling, economic dispatch

Question 13

marginal cost

Answer 13

The change in total cost that comes from making or producing one additional item

OR

The cost to produce one more or one less unit of something. Producers will produce till MC = MR.

In Dutch auction, suppliers usually set bid price at MC

Question 14

supply stack

INSERT GR p. 208

Answer 14

grid operator creates supply stack by collecting all of the electric generator bids into the wholesale market that they are able to produce at their MC to produce that electricity

In graph, y-axis = currency per unit of electricity ($/MWh) and x= cumulative volume that suppliers are willing to supply

Question 15

average cost

Answer 15

In forward markets (used by utilities for bulk electricity purchases), bidders will bid their average cost - since they’ll likely only invest capital to build generator if they win the bid

AC = TC/Q and
AC = ATC = AVC (VC/Q) + AFC (FC/Q)

Question 16

power purchase agreement

Answer 16

when a successful bidder signs a contract with a utility to supply electricity at a fixed rate, this part of the contract delineates the payment terms.

Contract = interconnection agreement (gives generator right to interconnect to the grid) and PPA

Question 17

feed-in tariffs

Answer 17

policy mechanism designed to accelerate investment in renewable energy technologies

offers long-term contracts to renewable energy producers, typically based on the cost of generation of each technology

typically make use of long-term agreements and pricing tied to costs of production for renewable energy producers.

A FIT program typically guarantees that customers who own a FIT-eligible renewable electricity generation facility, such as a roof-top solar photovoltaic system, will receive a set price from their utility for all of the electricity they generate and provide to the grid.

Question 18

risk-adjusted return

Answer 18

making new asset finance investments in physical capital requires people willing to put their financial capital to work based on an expectation of getting a fair return for the risks that they bear in the investment

Investors who believe that they are likely to achieve expected returns should charge less for the capital they provide.

Question 19

balance sheet finance

Answer 19

aka direct financing

buyers of assets (sometimes sellers) can offer to provide the necessary asset finance to have assets put into service. to do so, they rely on the strength of their own balance sheet
+: company can internally determine the suitability of an investment w/o need to go to 3rd party lenders

Question 20

project finance

Answer 20

as opposed to balance sheet finance –

where assets can be carved out into a separate entity and financed on their own merits.
+: aligns cost of capital with the project/asset type.
+: allows larger investment pool that many investors can participate in

Question 21

credit enhancements

Answer 21

In the case of non- diversifiable risks, government or IGO like WB or AB steps in to provide risk backstop and other credit enhancements so project happens.

can include: fixed revenue or cost components, loan guarantees, insurance

Question 22

non-diversifiable risk

Answer 22

risks beyond the capability of the individual corporations or private market financial investors to manage. range from technical or safety risks to political risks.

Question 23

completion risk

Answer 23

risk tha t new project, once funded and the building has started, won’t be ready to perform within anticipated time frame and/or cost of original plan

Question 24

revenue risk

Answer 24

risk that revenues may not live up to original expectations once project is built and in operation. includes volume risk and price risk.

Question 25

price risk

Answer 25

risk that the price received for the output changes from the original forecast, even if the expected volume if available.

Question 26

take-if-offered contract

Answer 26

type of offtake contract to mitigate revenue risk

obligates the buyer to
take delivery of the good or service, if available, at a pre-agreed price for a pre-agreed period of time

Question 27

take-or-pay contract

Answer 27

type of off-take contract to mitigate revenue risk

obligates buyer to pay agreed price for the agreed volume whether or not they either take delivery of the good or service

Question 28

supply risk

Answer 28

risk relating to access to the inputs necessary to operate the plant and future changes in the cost of that supply from original expectations.

causes of supply risk: loss of physical resources availability, exposure to market risk around costs, upstream disruptions.

if project owners/investors don’t want to take on supply risks, they can: tolling or throughput arrangement

Question 29

operation risk

Answer 29

risk that the asset will fail to perform cost effectively or at all (even if project is completed on time and has relatively stable supply and demand).

demands on operators themselves, decisions about O&M and expenditures

Question 30

throughput agreement

Answer 30

arrangement to mitigate operation risk

allows for cost-sharing by proportion of use AND may also have some protections to ensure that the asset remains in operation and available for use in the future

(often used for pipelines)

Question 31

4 Raw Components of LCOE

Answer 31

1. Overnight Cost
2. Fixed O&M Cost
3. Variable O&M Cost
4. Fuel Cost

Question 32

Real vs. Nominal LCOE

Answer 32

Nominal: LCOE on current dollars basis.

Real: LCOE on constant-dollar basis (uses real discount rates and model assumptions)