Annualization of Renewable Investment Costs for Finite Horizon Electricity Pricing and Cost Recovery

The increasing penetration of renewable electricity generation is complicating the bidding and estimating processes of electricity prices, partly due to the shift of the overall cost sensitivity from operation (fuel) costs to investment costs. However, cost minimization models for capacity expansion...

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Bibliographic Details
Published in:Sustainability 2021-02, Vol.13 (4), p.1993
Main Authors: Campos, Fco. Alberto, Villar, José, Centeno, Efraim
Format: Article
Language:English
Subjects:
Alternative energy sources
Cost recovery
Costs
Electricity
Electricity consumption
Electricity pricing
Energy resources
Guarantees
Horizon
Investments
Life span
Mathematical models
Mathematical programming
Prices
Renewable resources
Sustainability
Variables
Citations: Items that this one cites
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Summary:The increasing penetration of renewable electricity generation is complicating the bidding and estimating processes of electricity prices, partly due to the shift of the overall cost sensitivity from operation (fuel) costs to investment costs. However, cost minimization models for capacity expansion are frequently based on the principle that, for a perfectly adapted system allowing non-served energy, marginal remuneration allows overall operation and investments costs recovery. In addition, these models are usually formulated as finite-horizon problems when they should be theoretically solved for infinite horizons under the assumption of companies’ infinite lifespan, but infinite horizon cannot be dealt with mathematical programming since it requires finite sets. Previous approaches have tried to overcome this drawback with finite horizon models that tend asymptotically to the original infinite ones and, in many cases, the investment costs are annualized based on the plants’ lifespan, sometimes including a cost residual value. This paper proposes a novel approach with a finite horizon that guarantees the investment costs’ recovery. It is also able to obtain the marginal electricity costs of the original infinite horizon model, without the need for residual values or non-served energy. This new approach is especially suited for long-term electricity pricing with investments in renewable assets when non-served demand is banned or when no explicit capacity remuneration mechanisms are considered.
ISSN:2071-1050
2071-1050
DOI:10.3390/su13041993