Energy, Climate, and Society – Lecture 2 Make Sense of Numbers and Project Economics

Photo by Gang He on the train to UNFCCC CoP15 conference, Dec 6, 2009.

NYC’s daily carbon dioxide emissions as one-tonne spheres

Climate stripes

Carbon budget

Emission and concentration

Get comfortable with units

Scale of numbers

Comparing the world’s energy resources

Energy stock and flow

Energy vs. power

Energy vs power

Energy is the ability to do work. Energy is power integrated over time.
Basic unit: joule = watt·second

Power is the rate at which work is done, or energy is transmitted.
Basic unit: watt = jourle/second

We need to know what we are talking about!

Back-of-the-envelope estimation

Art Rosenfeld

Rosenfeld Effect

Comparing with the Three Gorges Dam

Common sources of energy and climate data

Energy:
- IEA (OECD)
- EIA
- UN
- WB
- BP Statistical Review of World Energy

Climate:
- NASA
- NCAR
- EUCCI
- UNEP
- NOAA

Carbon:
- CDIAC (Carbon Dioxide Information Analysis Center)
- EDGAR (emissions database for global atmospheric research system)
- Carbon Budget Project
- Carbon Monitor

Data quality

Availability
Accessibility
Credibility

Comparison, Validation, Verification

Use data tools

API
Packages
Open-souce tools

Big data and AI era

Big climate, earth, energy data available due to satellite, use-generated data, devices, sensors, smart meters
Data driven approaches

Big data doesnot necessarily mean big picture

AI doesnot necessarily mean better insights

Project economics

Simple payback
Discounting
Present/future value
Uniform payments (annuities)
Capital recovery factor
Comparing technologies/costs (LCOE)
Learning curve
Market and technology drivers

Sample analytic questions

What’s the LCOE of a new technology?
When to retire a nuclear/coal power plant?
Should I install rooftop solar or buy an EV?
How long should the government subsidies heatpump?
When can offshore wind achieve grid parity?

Time is money

Money value changes in time: a dollar today worth more than a dollar tomorrow.
When money is invested, its amount changes with the return.
When money is transferred into assets, its value change due to depreciation and/or inflation.
Discounted cash flow is a technique that allow us to evaluate values as they change over time.

Payback period

\(Payback\ Period = Initial\ Investment ÷ Annual\ Cash\ Flow\)

Simple payback: no discounting
Payback: with discounting

Capital Recovery Factor (CRF)

Ratio of a constant annunity to the present value of receiving that annuity for a given length of time.

\(CRF = \frac{i(1+i)^n}{(1+i)^n - 1}\)

Discounting

\(discount\ rate (r) = interest\ rate (i) + inflation\)

The power of discounting

Declining discounting

LCOE

\(LCOE=\frac{\text{sum of costs over lifetime}}{\text{sum of electricity produced over life time}}=\frac{\sum_{t=1}^{n}{\frac{I_t+M_t+F_t}{(1+r)^t}}}{\sum_{t=1}^{n}{E_t}}\)

I: Investment costs
M: Operation and maintaince costs
F: Fuel costs

Comparing LCOE

Limitations of LCOE

Fossil: Do not include other costs (e.g. enviromental, carbon, etc.)
RE: Do not include integraton costs
Focus on economics, do not include social cultural acceptance

Learning curve

Empircial relations between unit costs and cumulative production.

\(Y = aX^b\)

\(Pr=2^{b}\)

\(Lr=1-Pr=1-2^{b}\)

Y: Unit costs
a: Cost of first unit
X: Units
b: Slope of the learning curve
Pr: Progress ratio
Lr: Learing rate

Learning of differrent technologies

Drivers of learning

Source of learning

Learning by doing

Economy of scale
Economy of scope

Learning by researching

How renewables are getting cheap

Why nuclear costs are going up?

Role of global supply chain in PV

Summary

Project economics is useful for basic cost-benefit analysis
Getting the price (discounting) right
Understanding technology dynamics will help to model future projections
Aware of the limitations

References

Arrow, K., M. Cropper, C. Gollier, B. Groom, G. Heal, R. Newell, W. Nordhaus, et al. 2013. “Determining Benefits and Costs for Future Generations.” Science 341 (6144): 349–50. https://doi.org/10.1126/science.1235665.

Fridley, David, Nina Z Khanna, Nan Zhou, and Michael McNeil. 2016. “Impacts of China’s 2010 to 2013 Mandatory Product Energy Efficiency Standards: A Retrospective and Prospective Look.” In. ACEEE. https://www.aceee.org/files/proceedings/2016/data/papers/5_131.pdf.

Grubler, Arnulf. 2010. “The Costs of the French Nuclear Scale-up: A Case of Negative Learning by Doing.” Energy Policy 38 (9): 5174–88. https://doi.org/10.1016/j.enpol.2010.05.003.

Grübler, Arnulf, Nebojša Nakićenović, and David G Victor. 1999. “Dynamics of Energy Technologies and Global Change.” Energy Policy 27 (5): 247–80. https://doi.org/10.1016/S0301-4215(98)00067-6.

Helveston, John, Gang He, and Michael Davidson. 2022. “Quantifying the Cost Savings of Global Solar Photovoltaic Supply Chains.” Nature 612 (7938): 83–87. https://doi.org/10.1038/s41586-022-05316-6.

Hermann, Weston A. 2006. “Quantifying Global Exergy Resources.” Energy 31 (12): 1685–1702. https://www.sciencedirect.com/science/article/abs/pii/S0360544205001805.

Kavlak, Goksin, James McNerney, and Jessika E. Trancik. 2018. “Evaluating the Causes of Cost Reduction in Photovoltaic Modules.” Energy Policy 123 (December): 700–710. https://doi.org/10.1016/j.enpol.2018.08.015.

Koomey, Jonathan, Hashem Akbari, Carl Blumstein, Marilyn Brown, Richard Brown, Chris Calwell, Sheryl Carter, et al. 2010. “Defining a Standard Metric for Electricity Savings.” Environmental Research Letters 5 (1): 014017. https://iopscience.iop.org/article/10.1088/1748-9326/5/1/014017.

Macknick, Jordan. 2011. “Energy and CO2 Emission Data Uncertainties.” Carbon Management 2 (2): 189–205. https://doi.org/10.4155/cmt.11.10.

Weitzman, Martin L. 2001. “Gamma Discounting.” American Economic Review 91 (1): 260–71. https://www.aeaweb.org/articles?id=10.1257/aer.91.1.260.

Yelle, Louis E. 1979. “The Learning Curve: Historical Review and Comprehensive Survey.” Decision Sciences 10 (2): 302–28. https://doi.org/10.1111/j.1540-5915.1979.tb00026.x.