PRICING ON EMBEDDED GENERATION MASTER OF SCIENCE W.D.A.S. RODRIGO DEPARTMENT OF ELECTRICAL ENGINEERING UNIVERSITY OF MORATUWA SRI LANKA October 2004 PRICING ON EMBEDDED GENERATION THESIS PRESENTED By W.D.A.S. RODRIGO BSc (Electrical Engineering), University of Moratuwa, Sri Lanka, November 2002 This thesis was submitted to the Department of Electrical Engineering of the University of Moratuwa- Sri Lanka in partial fulfilment of the requirements for the Degree of Master of Science OCTOBER 2004 Supervised By Prof. Priyantha D.C. Wijayatunga DECLARATION The work submitted in this thesis is the results of my own investigation, except where otherwise stated. It has not already been accepted in substance for any degree, and also is not being concurrently submitted for any other degree. Signed W.D.A.S. Rodrigo (Author) Signed Prof. Priyantha D.C. Wijayatunga (Supervisor) Dedicated to my loving farther & mother and teachers who encourage me for my education i EXECUTIVE SUMMARY Power generation sources which are connected to the medium voltage distribution system of the National Grid with relatively small installed capacit ies are presently classified as Embedded Generators. Most of embedded generators including small- hydroelectric in many countries have been financed, developed and operated by the Private sector. The purpose of this research was to develop an appropriate pricing methodology for the embedded electricity generation with emphasis on the Sri Lankan system. The study recommended that the embedded generation tariff be based on the avoided cost, and this avoided cost calculation should include the cost of externalities in the energy sector and the exact cost of avoided network loss. Traditionally electricity tariff reflects only the cost of production and delivery electricity to the consumers, which includes cost of labour, capital, operation, taxes and insurance. But the production of electricity causes some damage to environment, which associated some cost. Level of environment damage due to electricity generation varies with the technology, site etc. Since there are no Sri Lankan studies on the damage costs related to the pollutants associated with the power sector. Estimation of externalities of electricity production in this study mainly depends upon the results of studies done elsewhere specially the “ExternE” Project of the European Commission. Therefore an adjustment was made to those results by using a factor based on per capita GNP ratio to adopt those values for Sri Lanka. From that, it was found that there is an external cost of 0.22 ECU cents/kWh for the oil based power generation in Sri Lanka and that would be around 11-14% of the total avoided energy cost. The study recommends nodal based avoided network loss calculation for the embedded generation tariff. It is also found that there is a considerable contribution of the cost of avoided network loss to the proposed embedded generation tariff and final tariff would vary significantly with the location of the node. Pricing on Embedded Generation ii The proposed pricing methodology would provide important information for the investors to choose the most economical site. This can be done by examine the tariff at each node, which can also be used to optimize the network use and finally improving on the benefit of society. Guidelines were suggested to improve accuracy of the tariff and to minimize the uncertainty of the calculation. These will allow the developers of embedded generation facility and the Utility to maximize the potential of embedded generation and the net benefit of the society. iii ACKNOWLEDGEMENT It is a great pleasure to express my gratitude to those who were behind me in completing my research successfully. First of all I would like to express my gratitude to my research supervisor, Professor Priyantha D.C. Wijayatunga (Professor in Electrical Engineering, University of Moratuwa) for proposing this interesting research idea as a timely important topic and for guiding me through out the research. At the same time I would be thankful to Prof. Ranjith Perera (Head- Dept. of Elect. Engineering, University of Moratuwa), Prof. J.R. Lucas (Professor of Electrical Engineering, University of Moratuwa), Dr. D.P.N. Nanayakkara (Senior Lecturer), Dr. D.P.T. Nanayakkara (Research coordinator), Dr. Tilak Siyambalapitiya (Consultant- Resource Management Associate, Sri Lanka) and Engineers in Ceylon Electricity Board, specially Tariff Branch and System Control Center who gave assistance during my research. And also, I would like to thank Asian Development Bank (ADB), Post Graduate Division of University of Moratuwa and all who decided to award a full scholarship to me for my Masters Degree. Finally, all my friends and post graduate students in University of Moratuwa and all the others who helped me in various ways through out my research are also appreciated. W. D. Asanka Sanjeewa Rodrigo Department of Electrical Engineering University of Moratuwa, Sri Lanka. October 2004. iv Table of Contents Executive Summary................................................................................. i Acknowledgement..................................................................................iii Chapter 1.............................................................................................. 1 Introduction .......................................................................................... 1 1.1 Embedded Generators ............................................................... 1 1.2 Current Status of Embedded Generation in Sri Lanka..................... 1 1.3 Embedded Generation Tariff....................................................... 3 1.3.1 India ................................................................................. 3 1.3.2 Europe .............................................................................. 4 1.3.3 Germany............................................................................ 4 1.3.4 China ................................................................................ 5 1.4 Present Embedded Generation Pricing Mechanism in Sri Lanka ....... 5 Chapter 2.............................................................................................. 7 Methodology.......................................................................................... 7 2.1 Concept of Marginal Cost Electricity Pricing .................................. 7 2.2 Opportunity Cost Electricity Pricing.............................................. 8 2.3 Cost the Externalities of Energy ................................................ 11 2.4 Impact Path Way Approach ...................................................... 14 2.4.2 Dispersion........................................................................ 16 2.4.3 Impact............................................................................. 19 2.4.4 Economic Valuation........................................................... 21 2.5 Mathematical Representation of Impact Pathway Approach.......... 22 2.6 Costing of Avoided Network Loss .............................................. 23 2.7 Proposed Embedded Generation Pricing Mechanism .................... 26 Chapter 3............................................................................................ 29 Case Study for Sri Lanka System............................................................ 29 3.1 Estimation of Fraction of Time the Plant is in Margin ................... 29 3.2 Estimation of Environment and Social cost in Sri Lanka................ 31 Pricing on Embedded Generation v 3.3 Avoided Energy Cost Calculation ............................................... 34 3.4 Avoided Network Loss Calculation ............................................. 37 3.5 Embedded Generator Price at Node........................................... 40 Chapter 4............................................................................................ 42 Analysis and Discussion ........................................................................ 42 4.1 Damage Estimation ................................................................. 42 4.2 Network Loss Estimation .......................................................... 46 4.3 Comparison With Present Tariff................................................. 47 4.4 Economic Objectives of Tariff.................................................... 48 Chapter 5............................................................................................ 50 Conclusions and Recommendations........................................................ 50 Bibliography and References ................................................................. 52 APPENDIXES ....................................................................................... 55 Appendix I Variable Cost Calculation for Thermal Plant....................... 55 Appendix II Avoided Cost Calculation without Environment Cost........ 56 Appendix III Avoided Cost Calculation with Social & Environment Cost 57 Appendix IV Sri Lanka Transmission Network................................... 58 Appendix V Sri Lanka Transmission Network Parameters ..................... 59 Appendix VI Nodal Incremental Loss............................................... 61 Appendix VII Embedded generation Price at Node ............................. 65 Pricing on Embedded Generation vi List of Figures Figure 2.1 Marginal Cost Concept......................................................... 7 Figure 2.2 Avoided Cost Calculation Concept ......................................... 9 Figure 2.3 Cost Relationship of Power Generation ................................ 10 Figure 2.4 Illustration of top down approach for externalities estimation. 13 Figure 2.5 Impact Pathway Approach ................................................. 15 Figure 2.6 Gaussian plume models..................................................... 17 Figure 2.7 Secondary Pollutants ......................................................... 19 Figure 2.8 Dose-respond functions ..................................................... 20 Figure 2.9 Illustration of Proposed Tariff Methodology......................... 28 Figure 3.1 Load Duration Curve ......................................................... 31 Figure 3.2 Illustration of Normalized External Oil Cost Variation............. 33 Figure 3.3 Total Variable Cost of Thermal Plants .................................. 35 Figure 3.4 Load Duration Curve ......................................................... 38 Figure 3.5 Percentage Network Avoided Cost....................................... 40 Figure 4.1 Illustration of Total Variable Cost Variation .......................... 43 Figure 4.2 Percentage Variable cost Variation ...................................... 44 Figure 4.3 Illustration of Avoided Cost Variation with External Cost ....... 45 Figure 4.4 Illustration of Contribution of External Cost to Avoided Cost... 45 Figure 4.5 Percentage avoided cost at the Node .................................. 47 Figure 4.6 Comparison of the present tariff with proposed tariff............. 48 Pricing on Embedded Generation vii List of Tables Table 1.1 Existing Embedded Generation in Sri Lanka............................ 2 Table 1.2 Small Power Purchase Tariff (1997-2003) .............................. 6 Table 2.1 pollutant mitigating cost .................................................... 12 Table 3.1 Marginal Fraction of Thermal Power Plants........................... 30 Table 3.2 Damage estimation ........................................................... 32 Table 3.3 Normalized External Cost ................................................... 33 Table 3.4 Variable cost of Thermal Power plants................................. 34 Table 3.5 Total Variable cost ............................................................ 35 Table 3.6 Avoided Cost of Each Thermal Plant.................................... 36 Table 3.7 Total Avoided Cost............................................................ 37 Table 3.8 Avoided Network Losses .................................................... 39 Table 3.9 Embedded Generation Price at each node............................ 41 Pricing on Embedded Generation viii Abbreviations IPP - Independent Power Produces SPP - Small Power Produces CEB - Ceylon Electricity Board SRMC - Short Run Marginal Cost LRMC - Long Run Marginal Cost ECU - European Currency Unit Incr. - Incremental DSCR - Debt Service Coverage Ratio ROE - Rate On Equity INR - Indian Rupees Rs. - Sri Lankan Rupees n/a - Not Applicable LDC - Load Duration Curve O&M - Operation and Maintenance WTP - Willingness to Pay WTA - Willingness to Accept GNP - Gloss National Product GTR - Kelanitissa Gas Turbines GTNW - Kelanitissa New Gas Turbine KPST - Kelanitissa Steam Turbines DLTL - Lakdhanavi (Pvt) Ltd., Diesel Power Plant APPL - Asia Power (Pvt) Ltd., Diesel Power Plant DSP - Sapugaskanda Diesel DSPX - Sapugaskanda Diesel (Extension) BARGE - Barge Mounted Power Plant