04b Energy Costs and Prices Brussels, 23 th October 2015 Prof. Michel HUART MECA H417 / MECA H530 Sustainable energy A. General overview http://atm.ulb.ac.be Lesson plan Content Prices and costs (CAPEX, OPEX, LCOE) Average costs/prices, marginal costs/prices Time value, Inflation, Retail price index, Discounting, Current value and Constant value International wholesale energy market: Prices and evolutions (oil, natural gas, electricity, coal, ETS CO 2 ) Belgian retail energy market: Prices, components, AAGR, evolutions. (household, companies) General learning outcome You are able : To characterize the energy prices and costs; To solve exercises of energy costs (as a buyer) Specific learning outcomes To describe the presented concept (ie look at the content) To calculate average prices, marginal prices, constant value with energy bill data To estimate future cost making using assumptions and market observations -1- -2-
Bibliography extract EVERETT Chap 12. Costing energy. P. 465-504 Extract p.465-478 HERMANS MACKAY -3- Price and costs Price, what does it mean? Price = Exchange value in a currency of a good or a service. A price is something determined in the marketplace. It does not reflect the intrinsic value of the good or service, but the balanced price between supply (seller) and demand (buyer). On the seller side, the price is the amount the seller receives (without taxes or subsidies) On the buyer side, the price is the amount that the buyer gives (with taxes or subsidies) The price of energy is a market value. Cost, what does it mean? At the buyer side: Cost = Sum of expenses incurred for the purchase of a good/service At the seller side: Cost = Sum of expenses incurred for the production/delivery of a good/ service The cost of energy At the demand side: the cost of energy is the energy bill. At the supply side, the cost of energy is the minimum amount for which the producer must sell energy in order for its production to make an acceptable profit. The key components of cost are: CAPEX: capital expenditure including those of decommissioning OPEX: operation and maintenance expenditure including fuels expenditure and waste management costs. Other material ECOFYS, 2014 - Subsidies and costs of EU energy https://ec.europa.eu/energy/sites/ener/files/documents/ecofys%202014%20subsidies%2 0and%20costs%20of%20EU%20energy_11_Nov.pdf Levelized cost of electricity renewable energies study by Fraunhofer Institut 2013 - http://www.ise.fraunhofer.de/en/news/news-2013/levelized-cost-of-electricity-renewableenergies-study-now-available-in-english -4-
ie Breakdown of production cost for electricity -5- EVERETTp.527-528 OPEX intensive ie gas CCGT: ¾ of the costs are fuel cost CAPEX intensive ie Onshore wind: 8/10 of the costs are capital costs LCOE - Levelized cost of energy LCOE is the value that must be received for each unit of energy produced to ensure that all costs are recovered and it integrates a (reasonable) profit. LCOE discounts the cost of energy (d) and takes into account an incomes by discounting the production (d ) I 0 = Investment ( ) t = year of operation (1,2,, N) N = Economic life time in years C t = Annual total costs of the year t ( ) d = discounted rate (real if excludes inflation or nominal if includes inflation) P t = Energy output of the year t (ie kwh) d = reasonable income interest It is generally used to compare alternative energy supply technologies or systems. OK if LCOE is lower than energy price supply Interesting reference for renewable energy : Levelized cost of electricity renewable energies study by Fraunhofer Institut 2013-6-
Levelized Cost of Energy (LCOE) : New electricity prod. ECOFYS, 2014 - Subsidies and costs of EU energy 7 Levelized Cost of Energy (LCOE) : New electricity prod. ECOFYS, 2014 - Subsidies and costs of EU energy Remarks: - Indicative values - Depend methodology and assumptions 8
Levelized Cost of Energy (LCOE) : New heat prod. ECOFYS, 2014 - Subsidies and costs of EU energy 2012 /MWh Remarks: - Indicative values - Depend on methodology and assumptions 9 Average cost <> Marginal cost In economy, marginal cost is the cost of producing one more unit of a good. Energy costs include two components: fixed costs (standing charges: ie subscription) variable costs (depending on consumption) Variable Fixed Cost ( ) Average cost = total cost / consumption Marginal cost = variable cost / consumption Consumption (kwh) Red slope < Blue slope -10-
Time value of money In practice, an euro tomorrow is not worth the same as an euro today. Purchase capacity of an amount of money is time-dependent. There are several separate factors involved in the time value of money: Inflation. The rate of change of the retail price index per year. It changes the capacity of purchase of money ( ). The normal time preference for money. Given a choice most people would generally rather have an euro today than an euro in the future. The opportunity cost. Money can be lent out and interest charged. A value X (amount of money) can be invested over time to yield a return -> X+return Generally, 2012 > 2013 and V(expressed in 2012 ) < V(expressed in 2013 ) Retail Price Index - RPI Inflation characterizes the "depreciation" of money over time. It is calculated based on the RPI. For Belgium : Source : http://economie.fgov.be Average (geometric mean) of multiplier factor (1+RPI/100) of last 10 years (2004-2014) = +2.1% -11- -12-
Discount rate (d) The method for converting cash flows to a time-equivalent basis is called discounting. (By discounting, you can mix amounts of different incomes date). PV = Present value ( today ) What will be an amount one year later? FV = PV x (1 + d) FV = Future value ( future ) in two years : FV = PV x (1 + d) 2 Value is an amount of money in «n» years : FV = PV x (1 + d) n Conversely, an amount received in 1 year values : PV = FV / (1 + d) d is a choice parameter that integrates the opportunity cost of the capital (basic rate) and the risk of the investment. It s an individual choice. Current prices or Nominal price : Day by day price. Price without inflation adjustment. Constant prices or Real price (year reference) Discounted prices with inflation as discounted rate. Discounted price Discounted prices with specific discounted rate. Set a Discount rate (d) For example, in the electricity sector in OECD countries, companies consider d = 3-10 % (Ref Systèmes énergétiques p 677) (A) It can be determined starting from a basic rate raised with a risk factor (Basic rate ie: Linear bond 10 years) (B) WACC (Weighted Average Cost of Capital) (C) Simplified for household : ie of references : Opportunity of alternative investment : Passbook : 1-2% Interest rate of loan :.; mortgage : 2-4% (D) Simplified for companies : Opportunity of alternative investment Interest rate of loan : Expected rate shareholders Remark : Of the various factors affecting the net benefit of energy efficiency and renewable energy investments, the discount rate is one of the most dramatic. -13- -14-
Price evolution: Trend lines Price evolution Observation: Energy market prices show an irregular growth trend, an evolution with waves Trend lines are used in simple models (linear or exponential) Linear growth (lg) V n = V 0 (1 + n lg) Exponential growth with index (eg) V n = V 0 (1 + eg) n Eg = AAGR (1 year period) Example : V 0 = 100; V 12 = 314 lg = 17,82% eg = 10% - 15 - Energy price outlook What will be the price of energy in the future? Knowing the price at a date (P 0 ) Making the assumption of a growth rate (Exponential evolution with index - r) Calculate the price n year later P n = P 0 (1 + r) n Remarks - The growth rate in current value include inflation - The growth rate in constant value doesn t include inflation - Since 1990, the trend of price of oil increases (x2 every 10 years index of 7%) more than RPI ( 2%). Spot prices Brent - 16 -
Europe Brent Spot Price FOB (Dollars per Barrel) From May 1987 until October 2015 Which is the interest rate for doubling a value after a determined number of years? 100*(1+r) y 100 Year(y) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 r (%) 0 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 0,5 101 101 102 102 103 103 104 104 105 105 106 106 107 107 108 108 109 109 110 110 111 112 112 113 113 114 114 115 116 116 1 101 102 103 104 105 106 107 108 109 110 112 113 114 115 116 117 118 120 121 122 123 124 126 127 128 130 131 132 133 135 1,5 102 103 105 106 108 109 111 113 114 116 118 120 121 123 125 127 129 131 133 135 137 139 141 143 145 147 149 152 154 156 2 102 104 106 108 110 113 115 117 120 122 124 127 129 132 135 137 140 143 146 149 152 155 158 161 164 167 171 174 178 181 2,5 103 105 108 110 113 116 119 122 125 128 131 134 138 141 145 148 152 156 160 164 168 172 176 181 185 190 195 200 205 210 3 103 106 109 113 116 119 123 127 130 134 138 143 147 151 156 160 165 170 175 181 186 192 197 203 209 216 222 229 236 243 3,5 104 107 111 115 119 123 127 132 136 141 146 151 156 162 168 173 179 186 192 199 206 213 221 228 236 245 253 262 271 281 4 104 108 112 117 122 127 132 137 142 148 154 160 167 173 180 187 195 203 211 219 228 237 246 256 267 277 288 300 312 324 4,5 105 109 114 119 125 130 136 142 149 155 162 170 177 185 194 202 211 221 231 241 252 263 275 288 301 314 328 343 358 375 5 105 110 116 122 128 134 141 148 155 163 171 180 189 198 208 218 229 241 253 265 279 293 307 323 339 356 373 392 412 432 5,5 106 111 117 124 131 138 145 153 162 171 180 190 201 212 223 236 248 262 277 292 308 325 343 361 381 402 424 448 472 498 6 106 112 119 126 134 142 150 159 169 179 190 201 213 226 240 254 269 285 303 321 340 360 382 405 429 455 482 511 542 574 6,5 107 113 121 129 137 146 155 165 176 188 200 213 227 241 257 274 292 311 331 352 375 400 426 453 483 514 548 583 621 661 7 107 114 123 131 140 150 161 172 184 197 210 225 241 258 276 295 316 338 362 387 414 443 474 507 543 581 621 665 711 761 7,5 108 116 124 134 144 154 166 178 192 206 222 238 256 275 296 318 342 368 395 425 457 491 528 567 610 656 705 758 814 875 8 108 117 126 136 147 159 171 185 200 216 233 252 272 294 317 343 370 400 432 466 503 544 587 634 685 740 799 863 932 ### 8,5 109 118 128 139 150 163 177 192 208 226 245 266 289 313 340 369 400 434 471 511 555 602 653 708 769 834 905 982 ### ### 9 109 119 130 141 154 168 183 199 217 237 258 281 307 334 364 397 433 472 514 560 611 666 726 791 862 940 ### ### ### ### 9,5 110 120 131 144 157 172 189 207 226 248 271 297 325 356 390 427 468 512 561 614 673 736 806 883 967 ### ### ### ### ### 10 110 121 133 146 161 177 195 214 236 259 285 314 345 380 418 459 505 556 612 673 740 814 895 985 ### ### ### ### ### ### 10,5 111 122 135 149 165 182 201 222 246 271 300 331 366 405 447 494 546 603 667 737 814 899 994 ### ### ### ### ### ### ### 11 111 123 137 152 169 187 208 230 256 284 315 350 388 431 478 531 590 654 726 806 895 993 ### ### ### ### ### ### ### ### 11,5 112 124 139 155 172 192 214 239 266 297 331 369 412 459 512 571 636 709 791 882 983 ### ### ### ### ### ### ### ### ### 12 112 125 140 157 176 197 221 248 277 311 348 390 436 489 547 613 687 769 861 965 ### ### ### ### ### ### ### ### ### ### 12,5 113 127 142 160 180 203 228 257 289 325 365 411 462 520 585 658 741 833 937 ### ### ### ### ### ### ### ### ### ### ### 13 113 128 144 163 184 208 235 266 300 339 384 433 490 553 625 707 799 902 ### ### ### ### ### ### ### ### ### ### ### ### 13,5 114 129 146 166 188 214 243 275 313 355 403 457 519 589 668 758 861 977 ### ### ### ### ### ### ### ### ### ### ### ### 14 114 130 148 169 193 219 250 285 325 371 423 482 549 626 714 814 928 ### ### ### ### ### ### ### ### ### ### ### ### ### 14,5 115 131 150 172 197 225 258 295 338 387 443 508 581 666 762 873 999 ### ### ### ### ### ### ### ### ### ### ### ### ### 15 115 132 152 175 201 231 266 306 352 405 465 535 615 708 814 936 ### ### ### ### ### ### ### ### ### ### ### ### ### ### -17- -18-
Exercices -Calculate average unit cost and marginal cost of a bill of energy - Calculate constant value (at a reference year) - Add amounts of different incomes date - Estimate future price making assumption of the evolution index Exercise 1. Smith family lives in Brussels and has an annual electricity consumption of 3,000 kwh. The energy bill of 2014 amounted to 740 2014 including a fixed charge of 80 2014. Calculate the average price of 1 kwh and the marginal price. What will be electricity bill in 2017? (Expressed in current and in 2014 ). Justify your assumptions Average price = 740 2014 / 3,000 kwh = 0.247 2014 Marginal price = (740-80) 2014 / 3,000 kwh = 0.22 2014 Assumptions : AAGR = +4% RPI= +2.1% (because trends observed in the last 5 years) Bill in 2017 : 740 (1.04)³ = 832 Bill in 2017 : 740 (1.04)³ / (1.021)³ = 782 2014-19- -20-
Energy wholesale markets in Belgium 21 Barrel oil price http://www.bp.com Energy price is driven by barrel oil price. Current price Constant price $2012 Wholesale oil prices is related to world events affecting oil production or oil demand. Until 1970, energy constant prices has globally decreased. Oil shocks in 70 and end 80, and end 90. Since end 90, prices increase dramatically -22-
Europe Brent Spot Price FOB (Dollars per Barrel) From May 1987 until October 2015-23- Production > Consumption Supply and demand law www.eia.gov price http://www.eia.gov/
/MWh Wholesale natural gas international market 2012-2015 Natural gas wholesale (Market M+1, [ /MWh]) between 2012 and September 2015. Henry HUB : USA ; PEG Nord : France ; NCG, GASPOOL : Germany ; TTF, ZIG : Belgium Source : CREG /MWh Wholesale electricity international market Belgium and neighbours countries 2011-2015 Wholesale electricity current price (long term Y+1) Belgium (BE), Netherlands (NL), Germany (DE), France (FR): Evolution 2011 September 2015 Source : CREG -25- -26-
Coal $/tonne Source : AIE Key World Energy Statistics 2014 ETS CO2 Market 30 + 9 c /l + 6 c /l + 3 c /l + 1,5 c /l Source : Thomson Retuers Point Carbon The combustion of 320-360 litres of oil emit 1 ton CO 2 28
Energy retail prices in Belgium Electricity : 1 kwh (for domestic use or company use) Gas oil (diesel) : 1 litre Petrol, gasoline : 1 litre Domestic fuel oil : 1 litre LPG Natural gas : 1 m³ Propane : 1 litre 1 kg of coal 1 kg of wood pellets 1 stere of logs wood Breakdown of retail energy prices Delivered energy price includes three main components Energy production Energy transport and distribution Taxes (excise, value added tax (VAT), others contributions) -29- -30-
Electricity Wallonia Annual bill - 3,500 kwh Source CWaPE: 04/07/2015 Average price VAT included 2015: 21.1 c 2013: 23.4 c Average price exclusive of VAT 2015: 19.9c 2013:19.3 c Note VAT applied on every component: 21% April 2014 - Augustus 2015: 6% Natural gas Wallonia Annual bill - 23 260 kwh Source CWaPE: 04/07/2015 Average price VAT included 2015: 6.8c 2013:7.0 c
Fuels Belgium Transport fuel - gasoil Heating fuel - gasoil Production Distribution APETRA contribution BOFAS contribution Excise and energy contribution VAT (21%) Production Distribution APETRA contribution Heating social funds contribution Excise and energy contribution VAT (21%) Maximum fuel prices September 2015 Source: http://www.petrolfed.be/fr/prix-maximums date 12/09/2015 APETRA contribution : (oil minimal bulk storage) BOFAS contribution (soil rehabilitation of filling station) Energy contribution (social funds) -34-
Retail price for private individuals (BE) Average current prices - Belgium (last five years) Ref. Renouvelle 69 December 2014 Electricity (3500 kwh) Brussels Electricity (3500 kwh) Flanders Electricity (3500 kwh) Wallonia Natural gas (23260 kwh) - GCV Gas oil (2000 l) - GCV Wood chips (30% RH) - NCV Wood logs (30% RH) - NCV Wood pellets (bulk) - NVC Propane (bulk) - GCV Evolution trends: AAGR of prices for household (BE) Average current prices - Belgium Ref. http://www.apere.org/observatoire-des-prix AAGR Dec. 2013-14 AAGR Dec. 2009-14 Domestic fuel oil - 24.1 % -3.6% Natural gas + 3.2 % - 0.1 % Electricity +8.9 % - 3.3 % RTI + 1.3 % + 1.3 % Average Annual Growth Rate: AAGR Value n Value 0 AAGR is a geometric mean of a proportional growth or an exponential evolution -35- -36-
Electricity price Evolution Household : Average price ( /kwh VAT included) by annual consumption level Eurostat Ref : Icedd SPW DGO4 Oct 2014 Companies : Average price ( /kwh exclusive of VAT) by annual consumption level Eurostat - 37 - Natural gas Evolution Household : Average price ( /GJ GCV VAT included) by annual consumption level Eurostat 1 GJ = 278 kwh 15 /GJ PCS = 5.4 c /kwh PCS GCV = 11.1 kwh/m³ - NCV = 10 kwh/m³ 5.4 c /kwh GCV - 6.0 c /kwh NCV Companies : Average price ( /GJ GCV exclusive of VAT) by annual consumption level Eurostat Ref : Icedd SPW DGO4 Oct 2014-38 -
Oil prices (Belgium -> 2012) Petrol 98 RON Petrol 95 RON Pump gas oil Heating gasoil Figure 16 Average annual current prices 1990-2012 Source SPF EPMECME, DGSIE (Prix maxima TVAC à monnaie courante) From ICEDD - Bilan énergie 2012 SPW-DGO4 2014 Year /l Transport fuels evolution (Belgium 2006-2014) http://economie.fgov.be/fr/statistiques/chiffres/energie/prix/moyen_24/#.vfjntvdi6k8-39- -40-