Benchmarking renewable energy sources carbon savings and economic effectiveness

Abstract

Over the last decade, the levelised cost of energy (LCOE) of many renewable technologies has sharply declined. As a result, direct cost comparisons of LCOE figures have made renewables to be perceived as economically very competitive options to decarbonise energy systems when compared to other low-carbon technologies such as Nuclear and Carbon Capture and Storage. We identify several theoretical shortcomings in relation to using LCOE or similar life-cycle economic metrics to make inferences about the relative economic effectiveness of using renewable technologies to decarbonise energy systems. We outline several circumstances in which the sole reliance on these metrics can lead to suboptimal or misguided investment and policymaking decisions. The thesis proposes a new theoretical framework to measure and benchmark the cost- effectiveness of decarbonising electric systems using renewables. The new framework is generic, technology-neutral, and enables consolidation of the results of decarbonisation studies that consider various renewable technologies and low carbon technologies. It also enables measuring and tracking the cost-effectiveness of the renewable decarbonisation process at a country or a system level. As a result, it also allows the direct comparison of the economic implications of different decarbonisation scenarios and various policy proposals in a very intuitive graphical way. In addition, the thesis proposes a new, unit-free metric, tentatively called Carbon Economic Effectiveness Credit (CEEC), to benchmark the relative cost-effectiveness of using different renewable technologies to achieve long-term carbon emission savings. Theoretically, CEEC represents the elasticity of the system total cost with respect to the carbon reduction savings attributable to renewables. In contrast to stand-alone, life-cycle metrics such as the LCOE, the proposed metric considers the economic and technical parameters of the renewable technologies and characteristic of the system under study. It also allows expressing the cost- effectiveness of the renewable decarbonisation process as a function of the system-wide decarbonisation level. Using historical load profiles, high-resolution solar radiation data and long-term meteorological data for a relatively small Gulf country, we investigate the deep decarbonisation of the electric system through the large-scale deployment of different renewables technologies. In particular, we use two well-established optimisation methodologies that have been used extensively in the literature to study the decarbonisation of power systems, namely: the screening curve (SC) method and the unit commitment (UC) method. In analysing the results of the two methodologies, we find that the choice of the modelling methodology, in some cases, can greatly influence the perceived carbon cost- effectiveness of renewables and subsequently their carbon abatement cost estimates. In particular, our results suggest that under deep decarbonisation scenarios, the estimate of the long-term carbon savings of renewables is strongly influenced by (1) the choice of the modelling method and (2) the technical specifications of the simulation models. Our results suggest that under deep decarbonisation scenarios, using simpler optimisation models may change the perceived economic effectiveness of renewables to decarbonise some electric systems. More importantly, our research sheds light on potential shortcomings in the current modelling practices and help identify patterns of possible inaccuracies or biases in renewable decarbonisation results. Moreover, our research suggests that the variations in the technical characteristics of renewable technologies can have a large influence on the economics of the decarbonisation process. We show that not all renewable technology types can have a suppressing effect on the variable costs of the systems due to their “zero marginal costs.” In particular, we identify certain technologies and circumstances in which an increase in renewable penetration can significantly inflate the variable energy costs of the system. More specifically, we find that under deep decarbonisation scenarios, renewable technologies with a highly volatile production profiles can act as an amplifier for the variable cost of the systems through (1) reducing the effectiveness of thermal generation units due the increased start-up and shutting downing activities, and (2) increasing the energy output levels from more flexible and yet more expensive thermal technologies. In addition, we identify circumstances in which an increased renewable penetration can materially affect the capacity adequacy of electric systems, leading to an increase in capacity investment in thermal flexibility assets. Perhaps more importantly, we find that these additional flexibility assets will not be commercially viable on an energy-output basis. We believe that this might have specific implications for the energy-only markets. Finally, we discuss the policy implications of our findings and propose several important recommendations. Altogether, we hope that our work will advance the understanding of the economics of climate change and integrating renewables into energy systems.