Promoting Renewable Energy by Transforming Its Unreliability Risk
Background
One of the key barriers to promoting grid-connected renewable energy (GRE) power generation (wind, solar) is that the supply from this generation source is unreliable. The reason is that the availability of the resource depends upon natural conditions beyond the control of the renewable energy developer. As a result, GRE power is not considered as ‘firm power’ that can be called upon when needed.
As a result, when an independent GRE developer sells power to the grid, the grid does not want to pay a ‘capacity credit’ to the developer, and would want to pay only the energy costs avoided by the grid. The reason is that the grid operator claims that since the grid has to build its own firm capacity, in case GRE power is not available, there are no capital cost savings for the grid.
Objective
The objective of this note is to present an innovative, practical, economically and financially viable way for GRE to earn at least partial capacity credit, which would increase the production of GRE generation. It is a preliminary note that describes the key concepts, without a detailed analysis.
Analysis
In this note, examples are used to explain the concepts. A more formal, theoretical analysis can be prepared if there is sufficient interest.
Suppose there is a 20 MW wind farm in a developing country, for which no capacity credit is available because the buying utility has to install its own 20MW capacity to back up the wind farm. The proposal is that the GRE developer buy and install used, low capital cost diesel generators of a size less than 20 MW. Let us arbitrarily set the diesel capacity at 9 MW; how this value should be actually chosen is discussed below.
Now, the GRE developer will receive capacity credit for 9 MW per month. The capacity credit will be based on the utility’s avoided capital cost per MW. This avoided capital cost will be more than the amortized monthly capital cost of the diesel generators. Thus, there is a net revenue flow to the GRE developer. Call this revenue as the Net Capital Gain (NCG).
The GRE developer faces potential additional costs, which will be incurred whenever the high operational cost (economic plus environmental) diesel generators are operated. Though the GRE developer will receive a payment from the utility buyer for the kWh sold, it is assumed that there will be loss because the diesel operational costs are more than the payment from the utility. While the per kWh loss is a fixed number, the total loss – Net Operational Loss (NOL) – will depend upon the actual kWh generated from the diesel generators (DkWh). Note that DkWh is a random variable because it depends upon, among other factors, on the randomness of GRE power generation.
Thus, it is possible that NCG is greater than or less than NOL, in other words, the GRE developer may make a profit or a loss as a result of installing diesel generation capacity to back up GRE generation.
Key result
This leads to the key conclusion that the unreliability of GRE power can be turned into a matter of financial risk for the GRE developer. This is the type of risk that entrepreneurs are capable to bearing, and the whole range of available risk-related instruments can be applied. The unreliability of GRE power is no more an issue to be discussed with the utility.
Factors determining probability of profit
The value of the NOL depends upon the value of DkWh, the number of kWh generated from the diesel generators. In turn, this depends upon two key factors. The first is the size of the firm capacity sold, which is equal to the size of the diesel generators installed. In the above example, the value is 9 MW. Clearly, if this value is increased to, say, 16 MW, then there would be a greater need for diesel generation, while if the value is reduced to 5 MW, then there would be a reduced need.
The conclusion is that the value of the firm capacity, i.e., 5 MW, 9MW, or 16MW, should be chosen so that the diesel generators are used only occasionally.
Case with two separate renewable energy resources
Suppose there are two separate renewable energy resources, say 2 wind farms, or 1 wind farm and a solar generator. If they have zero or low correlation, it would be beneficial to operate them under a single entity. This entity would benefit by being able to profitably sell more ‘firm capacity’ under one entity than the sum of the ‘firm capacities’ by two separate entities.
For example, when one resource is producing at a low value, the other could be producing at a high value. Thus, in effect, one resource is providing a partial back-up for the other resource. This would reduce the value of the diesel generation required.
Key result
The conclusion is that it would be beneficial for a single GRE developer to operate several uncorrelated generation resources plus an appropriately sized diesel back-up capacity that is used only infrequently.
Possibility of using existing captive diesel capacity
The possibility of using existing captive diesel capacity to back-up renewable power generation has not been analyzed, but there may be some potential here.