# Presentation: 658345

## 
Training Workshop on
Domestic Energy Pricing Models 

- Training Workshop on
- Domestic Energy Pricing Models

*A project  under the Memorandum of Agreement**on the Exchange of Energy Information between the Department of Energy*
*of the United States of America**and the Department of Energy*
*of the Republic of the Philippines*

**January 12-15, 2004**
**The Peninsula Manila Hotel**
**Makati City, Philippines**

**Philippine DOE – USDOE EIA****Energy Pricing Model Project**

## Presentation Outline

**Overview of Energy Pricing Models**
**Natural Gas Model (GASMOD)**
**Hydropower Model (HYDROMOD)**
**Power Sector Model (PRICEMOD)**
**Macroeconomic Implications Model (MACROMOD)**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## OVERVIEW OF ENERGY PRICING MODELS

**OVERVIEW OF ENERGY PRICING MODELS**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
The natural gas model developed in the study was intended to aid decision-making in the pricing of natural gas from the Camago-Malampaya gasfield just discovered at the time. The results, however, does not represent the price of natural gas because it was not based on accurate cost information on the economics of the Camago-Malampaya gasfield, and the exact risk versus return assumptions of the developer was not known.

The specific objective of the natural gas analytical model is to provide a consistent means for assessing various gas supply-demand strategies for the Phil. Government. For a given set of assumptions, the spreadsheet modules produce the economic cost and netback value of gas. 

## Background

**The six (6) energy pricing models were developed between the Philippine DOE and consultants from the East West Center (EWC) through the assistance of the USAID/Manila in 1996.**
**Philippine DOE staff were trained on the development and use of the models at the EWC in Hawaii. **
**As part of the existing Memorandum of Agreement on Exchange of Energy Information between the PDOE and the USDOE, the PDOE staff would now share their knowledge and skills on the use of the models with EIA staff in this workshop.**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Energy Pricing Models

**   ****Resource Costing Models**
**-  Excel-based spreadsheet modules designed to perform the calculation of production costs and netback values, which form the basis for pricing analysis**
**  ****Natural Gas Tools (GasMod)**
**  ****Hydropower (HydroMod)**
**  ****Coal Tools (CoalMod)**
**  ****Geothermal Tools (GeoMod)**
**    ****Power Sector Model (Price Mod)**
**  ****LP based optimization model used to compare the economics of power expansion, given the costs of different fuels and different technologies**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
Optimization allows comparison of resources with different  characteristics, e.g., the same unit of energy generated from a steam power plant, the value of coal and (its equivalent heating value of) natural gas, as the fuel used in the power plant, may vary depending on the environmental regulation that is imposed on the system.

## Energy Pricing Models

**   ****Macroeconomic **
**  ****Econometrics-based model using a statistical software package, e.g., Micro TSP or EViews, that can estimate the impacts of energy price on the economy and on government revenues**
**-  Model traces and constructs the link of changes in fuel mix and pricing to macroeconomic parameters such as balance of payments, national income and employment, GDP and output of key sectors, general price trends and inflation**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Theory and Analytical Framework

**  ****Resource Costing Models**** **
**The optimal economic price range for a unit of energy lies between:**
**   ****Base cost – ****or minimum economic price that will fully account for the costs of supplying a resource, and**
**   “****Netback value” ****- or the highest price that the consumer is willing to pay for the energy resource**
**Base cost ****= long-run marginal cost (LRMC) of production (and transmission/distribution, if applicable) + depletion premium for nonrenewable resources + externality costs**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
Hotelling’s theory:
Economic price of a depletable resource = extraction cost + depletion premium which rises over time at the discount rate
If gas reserves >> demand, depletion premium insignificant,  price = price of marginal replacement fuel
Financial price can be distorted by market power or government policy

## Theory and Analytical Framework

**where price/quantity controls exist, LRMC is difficult to measure thus the *****average incremental cost***** or AIC is used instead; **
**AIC**** ****= **_**NPV of investment and annual operating costs**_**	****NPV of  annual  production**

**Theory and Analytical Framework**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
AIC is equal to the discounted sum of additional investment and operating costs divided by the discounted volume of additional production

## Theory and Analytical Framework

**DV = **_**EPP of backstop fuel in year of economic depletion**_
**	****(1 + discount rate) ****(year of economic depletion –year n)**
**  ****Externality cost ****– indirect cost to society of energy production and consumption, e.g., cost of new infrastructure or environmental degradation; data on such costs rarely available in developing countries and has to draw on international experience****  **

**Theory and Analytical Framework**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Theory and Analytical Framework

**  ****an alternative to LRMC-netback value methods which can be used to compare the value of different energy resources which are used as an input factor to generate final energy used by the end-user, e.g., electricity generation**
**   ****Macroeconomic Model**
**  ****assumes that there exists an energy demand that can be satisfied via a mix of energy sources which implies some average price of energy in the country**

**Theory and Analytical Framework**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
Optimization allows comparison of resources with different  characteristics, e.g., the same unit of energy generated from a steam power plant, the value of coal and (its equivalent heating value of) natural gas, as the fuel used in the power plant, may vary depending on the environmental regulation that is imposed on the system. 

## HYDROPOWER MODEL

**HYDROPOWER MODEL**
**(HYDROMOD)**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
The natural gas model developed in the study was intended to aid decision-making in the pricing of natural gas from the Camago-Malampaya gasfield just discovered at the time. The results, however, does not represent the price of natural gas because it was not based on accurate cost information on the economics of the Camago-Malampaya gasfield, and the exact risk versus return assumptions of the developer was not known.

The specific objective of the natural gas analytical model is to provide a consistent means for assessing various gas supply-demand strategies for the Phil. Government. For a given set of assumptions, the spreadsheet modules produce the economic cost and netback value of gas. 

## HydroMod

**   ****“****HydroMod is an excel-based model used to determine        the financial and *****economic  viability***** of *****various hydropower plants project*****.”**** **
** ***** ******financial and economic indicators***
** ****Net Present Value (NPV)**
** ****Internal Rate of Return**
** ****Average Incremental Cost**
** ****Maximum Investment cost**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## HydroMod Worksheets

**   ****Main-Input**
- 	-  **model assumptions and input data worksheet**
**   ****InvestPlan**
**	**-  **investment schedule worksheet** ** **
**   ****Invest_Entry**
**-  manual investment input worksheet **

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## HydroMod Worksheets

**FinancialCalc**
**	****- ****	****main model worksheet provides a detailed breakdown of the plant’s output, revenue, costs, and corresponding NPV, IRR and AIC.**
**InvestComp**
- 	-  ** calculates the AIC’s and the maximum investment cost of hydropower plant with respect to the alternative power source.**
**Summary**
- 	-	**project summary worksheet showing projects capacity, construction period, AIC, NPV and IRR.**
**	**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
xxxx

## Review of Hydropower Concepts

***Plant Capacity (C) is a function of Hydraulic head (H) and Discharge (Q)***
***	******C****** ******(MW)****** ************ ******k****** x ******H****** ******(m)****** x ******Q****** ******(m3/sec)***
- 	    **Where; *****k***** ********  efficiency x 9.81 m/sec****2**** x 10****-6**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Types of Hydropower Development

*** ******run-of-river hydropower****** - ******utilize the flow of water of the river requiring little or no impoundment to generate electricity***
*** ******impoundment hydropower****** - ******uses a dam to store water. Water may be released to meet the changes of energy demand or use to maintain water level.***
*** ******pumped storage hydropower****** – ******water is pumped from lower reservoir to a higher reservoir during periods of low energy demand. The water is then run down through the turbines to generate electricity to meet peak demand.***

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Flow Duration Curve (FDC)

_***FDC***_** –  a cummulative frequency curve that shows the percentage of          ****	****time that specified flows are equaled or exceeded**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Role of Hydropower in Energy Mix

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Financial and Economic Indicators

**Financial and Economic Indicators**

- 1

- 0

- 2

- 3

- 4

- n

- 6

- 7

- 9

- 5

- 8

- 10

- ......

- Fn

- P

- F1

- F2

- F3

- Future Value (Fi):				Present Value (P):
-       *let i = interest rate, then*
- 	F1 = P (1+i)			P = F1 (1+i) -1
- 	F2 = F1(1+i) = P (1+i)2		P = F2 (1+i) -2
- 	F3 = F2 (1+i) = P (1+i)3		P = F3 (1+i) -3
- 	thus,
- 	Fn = P(1+i)n			P = Fn (1+i) -n

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Financial and Economic Indicators

- t (year)

***Net Present Value (NPV)***

- Cost        Benefit

- F1

- F2

- F3

- 1

- 0

- 2

- 3

- 4

- n

- 6

- 7

- 9

- 5

- 8

- 10

- ......

- F4

- F5

- F7

- F6

- F9

- F8

- Fn

- F10

- +

- -

- Eq. 1

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Financial and Economic Indicators

**Financial and Economic Indicators**

***Internal Rate of Return (IRR)***
***    *****IRR = interest rate when NPV = 0**
**     *****from eq.1***

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Basis for Plant Output Function

*Otherwise,*
* ***y = a (8760)     ****(x)****         ****d - (d – f) (x – e)**

***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 31 32 33 34 35***

*60 %*

*80 %*

***c***

***e***

***d***

***f***

***b***

***(d-f)***

***(b-e)***

***IF(AND(x>0, x<=e),***

***x***

*(*x-e*)*

*∆**y*

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Basis for Investment Allocation

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## NATURAL GAS MODEL

**NATURAL GAS MODEL**
**(GASMOD)**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
The natural gas model developed in the study was intended to aid decision-making in the pricing of natural gas from the Camago-Malampaya gasfield just discovered at the time. The results, however, does not represent the price of natural gas because it was not based on accurate cost information on the economics of the Camago-Malampaya gasfield, and the exact risk versus return assumptions of the developer was not known.

The specific objective of the natural gas analytical model is to provide a consistent means for assessing various gas supply-demand strategies for the Phil. Government. For a given set of assumptions, the spreadsheet modules produce the economic cost and netback value of gas. 

## Gas Sector Model (GASMOD)

**  ****GASMOD is a customized group of Excel spreadsheets that serve to determine the economic and financial costs of developing and utilizing the Philippine’s natural gas resources versus other fuel options.  **
**  ****The model was used to perform the analysis needed to determine the price of the Malampaya gas which was newly discovered at the time (1996).**
**  ****However, the results of the calculations do not suggest the price of the Malampaya gas as they were not based on accurate cost information on the economics of the gasfield and the risk and return assumptions of the developer. **

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
The natural gas model developed in the study was intended to aid decision-making in the pricing of natural gas from the Camago-Malampaya gasfield just discovered at the time. The results, however, does not represent the price of natural gas because it was not based on accurate cost information on the economics of the Camago-Malampaya gasfield, and the exact risk versus return assumptions of the developer was not known.

The specific objective of the natural gas analytical model is to provide a consistent means for assessing various gas supply-demand strategies for the Phil. Government. For a given set of assumptions, the spreadsheet modules produce the economic cost and netback value of gas. 

## GASMOD Applications 

**Gas price determination given a target IRR, the economic price (min value) and the netback value (max value)**
**Cost (AIC) determination of putting up a natural gas facility both for upstream and transmission segment**
**Cost (AIC) determination of putting up an LNG receiving facility **
**Revenue determination for the company and the government**
**IRR sensitivity analysis to gas price, production volumes, revenue sharing, fiscal incentives, and gestation period for policy analysis and formulation**
**Gas project evaluation through the economic price path under different supply and demand scenarios**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GasMod Sub-models

**GasCost**
**	****-****	****facilitates financial analysis, supply-demand ****	****analysis, economic price/netback analysis ****	****and ****	****gas requirement analysis of gas-fired  ****	****power plants**
**PipeMod**
- 	-	**facilitates transmission pipeline sizing and ****	****      ****	****costing analysis**
**LNGMod**
- 	-	**an LNG Receiving Facility Costing sub-model**
**	**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Natural Gas Industry Structure

***Source: Australian Gas Association***

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
Parts of the Gas Industry Chain
Production and first sales – encompasses natural gas exploration, commercial development, and production gathering and processing for ‘first sale’ or wellhead sale of gas from the geological deposit or reservoir;
Transmission – transportation from producing to consuming centers through large-diameter, high-pressure pipelines;
Distribution – delivery to final consumers through small-diameter low-pressure gas pipelines
Supply – marketing, aggregation and reselling of gas by companies who do not own pipelines

## Components of Gas Systems

**Exploration**
**	****-****	****aims at discovering whether oil or gas fields are present in a particular area and, if present, whether they are worth developing**
**Development and Production **
- 	-	**covers development, drilling, field preparation, field gathering, compression, separation of natural gas liquids and treatment of the gas; aim is to produce pipeline quality gas to meet contract volume, quality and pressure requirements**
**Transmission**
- 	-	**transport of the gas thru high-pressure pipelines from the field or treatment plant to the city gate****	**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Components of Gas Supply Systems

**Distribution**
**	****-****	****transport of the gas through low-pressure pipelines from the city gate to premises of end-users**
**Supply**
- 	-	**marketing or actual delivery of gas to end-users**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Philippine Gas Industry Structure  

|  | San Antonio Gasfield (SC 37) | Malampaya Gasfield 
(SC 38) |
| --- | --- | --- |
| Producers/ Proven Reserves  | PNOC-EC 
– 2.7 BCF | SC 38 Consortium (SPEX-Chevron/Texaco-PNOC-EC) - 3.7 TCF |
| Transmission/ Distribution | PNOC-EC
 | SPEX, NPC |
| Gas 
End-Users | PNOC-EC/San Antonio Power Plant - 3 MW  | NPC/Ilijan Power Plant – 1200 MW |
|  |  | FGHC/Sta. Rita Power Plant - 1000 MW |
|  |  | FGHC/San Lorenzo Power Plant - 500 MW |

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Philippine Gas Industry Structure  

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Natural Gas Pricing

**	****AIC = **_**NPV of annual investment and operating costs**_
**	****          ****NPV of production (or transmission/distribution)**
**Total AIC = AIC (production + transmission + distribution)**
**Depletion value (DV)****- opportunity cost or future value of gas consumed today; difference between the present value of the backstop fuel price in the future year in which it will be needed and the cost of the fuel under analysis.  **
**DV = **_**EPP of backstop fuel in year of economic depletion**_
**	****(1 + discount rate) ****(year of economic depletion –year n)**
**Scarcity rent is the shadow price of the supply constraint  and is added only when demand for gas exceeds supply**

**Natural Gas Pricing**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Natural Gas Pricing

**Fuel Netback Value for Power Plants **
**The market value and distribution and transmission costs are often difficult to generalize, hence an alternative method is used:**
**  ****Evaluate the cost of a plant (TARGET PLANT) next best to your plant (FUEL PLANT) using your fuel and to deem the cost of electricity of the next best plant as the value of the output of your plant**** **
**  ****The netback value of your fuel is then determined as the value of output minus costs of your plant other than the fuel cost****. **

**Natural Gas Pricing**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Gas Netback Value Based on Market Prices 

**Malampaya Gas price at Tabangao**

**Crude Oil Price = US$ 25; Forex= P40/US$ **
**Gas price = US$4.63/MMBtu**

***Source of basic data: DOE-ADB, 2000***

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Gas Economic Netback Value Based on Cost of Importation 

**Malampaya Gas price at Tabangao**

**Crude Oil Price = US$ 25; Forex = $40/US$**
**Gas price = US$1.3 to $2/MMBtu**

***Source of basic data: DOE-ADB, 2000***

**Gas Economic Netback Value ****Based on Cost of Importation**** **

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Philippine Service Contract System

**Concept**** - ****contractor furnishes service and technology and paid a service fee out of the proceeds of sale of petroleum produced**
**Terms ****- Maximum 10-year exploration period; Maximum 40  years development and production (25 years initial, renewable for another 15 years)**
**Cost Recovery ****-  full recovery of costs but only up to 70% of gross production for any given year with carry forward provision for unclaimed expenses**
**Depreciation ****– straight line over 10 years**** ****(5 years for deepwater areas)**
**Contractor Service Fee ****-  40% of net production**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Philippine Service Contract System

**	****Gross proceeds****	****	****	****	****100.00 %**
**	****	****less cost recovery**
**                               ****(70% of gross proceeds**
**	****	****        ****or actual expenses whichever**
**	****	****        ****is lower)****	****	****	****   ****	****  **_**70.00**_
**	****Net proceeds****	****	****	****	****    ****	****  30.00**
**	****	****less contractor share (40%)****	****    ****	****  **_**12.00**_
**	****Total gov’t share****	****	****	****  ****	****  18.00**
**	****	****less income tax (35%)****	****	**_**    6.46**_
**	****Gov’t share net of income tax****	****	****  11.54**
**	****	****less LGU share (40%)****	****	**_**    4.62**_
**	****Net national gov’t share  (60%)****	****         ****	****    6.92 % of ****	****	****	****	****	****	****                  gross proceeds**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GasCost Sub-model

**  ****Financial Analysis**
**Financial Inputs**
**IRR & NPV**
**Field Costs**
**Production Investment**
**Production Volumes**
**Adjusted Prices**
**Financial Calculation**
**Depreciation**

**Supply-Demand Database**** **
**Area Supplies**
**Area Demands**
**Supply Allocation**
**Supply-Demand Summary**
**Supply-Demand Balance**

**GasCost consists of 25 worksheets that can be categorized into 4 sub-menus**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GasCost Sub-Menus

**Economic Price/ Netback Analysis**
**Default Fuels**
**EPP Fuels & Commodities**
**EPP Calculation**
**Netback Value Summary**
**Netback Calculations**

**Reference Data**
**Power Plant Fuel  **
**      ****Consumption**
**Conversion factors**
**Nelson Farrar**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST Sub-model Worksheets

**Main**** ****- startup screen**
**Financial Inputs**** ****- contains the financial/ economic parameters used and gas field information necessary for financial calculation**
**IRR & NPV**** ****- summary table of the results of the financial calculations i.e. the IRR and NPV and revenues of both the gov’t and the contractor**
**Field Costs**** - ****calculates average incremental cost (AIC) of producing gas from a specific field **
**Production Investment**** - ****summarizes the investment schedule for natural gas field development**

**GASCOST Sub-model Worksheets**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST Sub-model Worksheets

**Production Volumes**** - ****summarizes production of gas from each of the fields.**
**Adjusted Prices****  ****- summarizes the effective gas price trend throughout the contract period**
**Financial Calculation**** ****– tests sensitivity of various financial indicators considering the provisions of the production sharing agreement or Service Contract**
**Depreciation**** ****– calculates the allowed depreciation per year based on the depreciation schedule of the tangible field development and production investments in the project, that is, 10 years (5 years) reckoned from the first year the expense was incurred + operating cost**

**GASCOST Sub-model Worksheets**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST Sub-modelWorksheet Correlation – Financial Analysis

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Financial Calculation

**  ****Gross revenues **
**    ****=  production x sales price****	****	**
**  ****Net Operating profit **
**    ****= gross revenue – expense claimed**
**    ****where expense claimed **
**    ****= claimable expense up to 70% of gross revenues **
**    ****= depreciation charge + op cost + carry forward or           ****	****unclaimed expense from previous year**
**  ****Net operating profit **
**   ****= 60% government share + 40% company share**
**  ****Company net revenue **
**    ****= company share + expense ****	****claimed – operating ****	****costs ****	****– capex**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Financial Calculation

**Effective gas price (all gas basis)**
**    ****= (gross gas revenue – gov’t take)/gas production**
**  ****Effective gas price (pro-rata basis)**
**    ****= (gross gas revenue - (gas revenue/total revenue   ****	****from gas, oil & condensate x  gov't share))/ gas ****	****production**
**   ****Government pro rata gas revenue**** **
**    ****= (gas revenue /total revenue)  x  gov't share**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST SubmodelFinancial Analysis

**From the financial analysis worksheets, the following may be determined:**
**The marginal price of gas which is equal to the AIC**
**Gas price for a certain target IRR**
**Revenue for the company and the government**
**IRR sensitivity to gas price, production volumes, revenue sharing, fiscal incentives and gestation period for policy analysis and formulation**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST Sub-model Worksheets

**Area Supplies**** ****– summary table of production volumes from each producing field plus a proposed LNG delivery schedule.**
**Area Demands**** ****– presents demand assumptions by sector for the major consuming areas**
**Supply Allocation**** ****– allows for balancing of natural gas supply allocation to each of the demand areas, I.e., Batangas, Bataan and Metro Manila**
**Supply-Demand Summary**** ****– summarizes the supply and demand situation for natural gas in demand areas**
**S-D Balance**** ****– graphical presentation of information in Supply-Demand Summary for each of the major demand areas**

**GASCOST Sub-model Worksheets**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST SubmodelWorksheet Correlation – Supply-Demand Database

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST SubmodelSupply-Demand Database

**From the supply-demand database, the following may be facilitated:**
**Monitoring of natural gas supply and demand**
**Allocation of gas supply**
**Determination of the depletion year which will be an input data to the EPP Calculation worksheet**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST Sub-model Worksheets

**Default Fuels**** ****– sets the choice of next preferred fuel per industrial application for the netback calculation**
**EPP Fuels and Commodities**** ****– list of border prices (economic prices) of fuels and commodities used for economic price path and netback calculation**
**EPP Calculation**** ****– calculates the economic price path for natural gas for a specific field or a combination of fields**

**GASCOST Sub-model Worksheets**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST SubmodelWorksheet Correlation – EPP Analysis

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST SubmodelEPP Analysis

**The output of the EPP worksheets:**
**	****-  the economic price of gas at any given project year   ****	****considering that:**
**If supply <=demand, **
**EPP= AIC (of production and transmission) + depletion value + scarcity rent**
**If supply > demand, **
**EPP= AIC (of production and transmission) + depletion value**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST Sub-model Worksheets

**Netback Value Summary**** ****– presents netback values of natural gas in various end-use applications**
**Netback Calculations**** ****– calculates netback values of gas in various industrial and power generation end-use applications based on a selected default or alternative fuel**

**GASCOST Sub-model Worksheets**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST SubmodelWorksheet Correlation – Netback Analysis

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST SubmodelWorksheet Correlation – Stand alones

**Conversion Factors**** ****– table of conversion factors to facilitate computations in the model**
**Nelson-Farrar**** ****– shows the Nelson-Farrar refinery inflation indices used to update historical costs to late 1995 values**

**GASCOST Submodel****Worksheet Correlation – Stand alones**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## GASCOST SubmodelStand-alone Worksheets

- Gas-Fired Plant Fuel Consumption

-   Gas requirement analysis

-   References

- Conversion Factors

- Nelson-Farrar

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## PIPEMOD Sub-model Worksheets

**Main**** – startup screen**
**Pipeline Summary**** – shows parameters used for the pipeline model; inputs coming from the P-L Node Data and P-L Flow Diagram**
**Pipeline Investment**** – summary of onshore and offshore pipeline installation and compression costs**
**P-L Node Data**** – input facility for pipeline design**
**P-L Flow Diagram**** – summary of pipeline design from P-L Node Data and P-L Flow Model**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## PIPEMOD Sub-model Worksheets

**P-L Flow Model**** – contains algorithms for calculating pipe pressures**
**Pipeline Costing Model**** – calculates costs of constructing onshore and offshore pipeline segments**
**Transport AIC**** – calculates the AIC for pipeline transmission of the specified volume of gas**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## PIPEMOD SubmodelWorksheet Correlation

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Malampaya Gas-to-Power Project

**Malampaya Gas-to-Power Project**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Gas AIC Summary

**  ****Overall  AIC  -  wellhead AIC + Offshore AIC **
**	****	****	**** ****+ onshore AIC**
**  ****Wellhead AIC – unit cost of exploration and ****	****	****	****   production **
**Offshore AIC – offshore transport cost from**
**	****	****	**** ****wellhead to beach**
**  ****Onshore AIC – onshore transport cost from**
**	****	****	**** ****beach to gas-fired power plants**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## LNGMod Sub-model Worksheets

**Main**** – startup screen**
**LNG Receiving Investment**** – shows LNG terminal investment cost buildup**
**LNG AIC Calculation**** – calculates AIC of the vaporized LNG at the plant outlet**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## LNGMOD Worksheet Correlation

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## LNG Facility

**LNG Facility**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## POWER SECTOR MODEL

**POWER SECTOR MODEL**
**(PRICEMOD)**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
The natural gas model developed in the study was intended to aid decision-making in the pricing of natural gas from the Camago-Malampaya gasfield just discovered at the time. The results, however, does not represent the price of natural gas because it was not based on accurate cost information on the economics of the Camago-Malampaya gasfield, and the exact risk versus return assumptions of the developer was not known.

The specific objective of the natural gas analytical model is to provide a consistent means for assessing various gas supply-demand strategies for the Phil. Government. For a given set of assumptions, the spreadsheet modules produce the economic cost and netback value of gas. 

## Outline of Presentation

**The Philippine Power System **
**Overview of the Power Sector Model**** **
**Description**
**Main Strengths**
**The Objective Function and Constraints**
**Main Outputs**
**Model Operation**
**Key Inputs**
**Entering data and editing**
**Compiling**
**Running the Model**
**Viewing the Results**
**Interpretation of results**
**Some Exercises**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
The natural gas model developed in the study was intended to aid decision-making in the pricing of natural gas from the Camago-Malampaya gasfield just discovered at the time. The results, however, does not represent the price of natural gas because it was not based on accurate cost information on the economics of the Camago-Malampaya gasfield, and the exact risk versus return assumptions of the developer was not known.

The specific objective of the natural gas analytical model is to provide a consistent means for assessing various gas supply-demand strategies for the Phil. Government. For a given set of assumptions, the spreadsheet modules produce the economic cost and netback value of gas. 

## Power Sector Model (PriceMod)

**     ****Linear Programming (LP)-based optimization model used to compare the economics of power expansion, given the costs of different fuels and different technologies**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
The natural gas model developed in the study was intended to aid decision-making in the pricing of natural gas from the Camago-Malampaya gasfield just discovered at the time. The results, however, does not represent the price of natural gas because it was not based on accurate cost information on the economics of the Camago-Malampaya gasfield, and the exact risk versus return assumptions of the developer was not known.

The specific objective of the natural gas analytical model is to provide a consistent means for assessing various gas supply-demand strategies for the Phil. Government. For a given set of assumptions, the spreadsheet modules produce the economic cost and netback value of gas. 

## The Model: Basic Description

**  ****Minimizes total costs of power supply given:**
**  ****Existing plants and their characteristics**
**  ****Fuel price forecasts**
**  ****Regional peak and baseload power generation         ****	****demand**
**  ****User’s selection of new plants allowed to be built ****	****in each region**
**  ****Environmental Constraints**
**  ****Minimum indigenous energy constraint**
**  ****Fuel/resource limitations**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## The Model: Basic Description

**  ****Designed as a policy tool to give insights into the pricing of indigenous fuels**
**  ****Not a grid simulation model like WASP, ELFIN, EGEAS, etc. although it shares some of the basic algorithms **

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Main Strengths

**  ****Robust Environmental Costing**** **
**(Local or Global; explicit or bounded; pollution controls)**
**  ****Friendly Database Linkages **
**(Plant, fuel, price and controls kept in updateable, templateable, custom data system)**
**  ****Output Structure not fixed **
**(new fuels and projects can be added and assessed without arbitrary limits)**
**  ****Models can be Saved and Loaded **
**(new runs can be based on past runs)**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Main Results

**  ****Shadow prices on fuels (marginal costs/values)**
**  ****Generation Mix**
**  ****Outputs of every plant**
**  ****Optimum operation of new construction (within user’s assumptions)**
**  ****Total national emissions of SO****2****, NO****x**** and CO****2**** (capable of including “derived” emissions overseas)**
**  ****Shadow prices on SO****2****, NO****x**** and CO****2**** **
**  ****Imports of each fuel**
**  ****Usage level of each indigenous resource**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Objective Function and Constraints

**TotalDCost – Total Direct Production Cost**
**FixOM, VarOM – Fixed and Variable Operation & Maintenance ****	****	****	****         Costs**
**Output – Power Plant Output**
**Subject to: ****	*****S Output******i***** = Total Electricity Generation Demand**
**	****	****Load Factor <= Input Load Factor**
**	****	****Fuel consumption <= Availability of fuels **
**	****and**
**	****	****Emission <= Emission Limits**
**	****	****Self-Sufficiency Level >= Target Level**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Shadow Prices

**  ****Every constraint has a shadow price – it is the amount by which the objective function will change if the constraint is loosened by a unit.**
** ****For example, shadow price shows how much the total direct production cost changes if the CO****2**** emission limit is decreased or increased by one unit.**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Units of Output 

- Units of Output

**Gas – thousand mmscf/year or bcf/year**
**Coal and Oil – thousand tonnes/year**
**Hydro and geothermal – thousand GWh/year**
**Plant Capacity as input – MW**
**Plant output - thousand GWh/year**
**Pollutant output – thousand tonnes/year**
**All cost and prices – thousand of real $**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
Projects in blue fonts are committed projects while those in red have to hurdle some policy issues before implementation.

## The Philippine Power System

**The Philippine Power System**

**  ****Generation and Transmission used to be a state-dominated industry  **
**  ****Distribution by private investor-owned, electric cooperative and LGU operated utilities**
**  ****Electricity rates used to be determined based on return on rate base (RORB) methodology and regulated by the Energy Regulatory Board (now ERC)**
**  ****State thru PNOC develops most of geothermal fields**
**  ****Generation and transmission business unbundled and  undergoing privatization**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
Projects in blue fonts are committed projects while those in red have to hurdle some policy issues before implementation.

## The Philippine Power System

**The Philippine Power System**

- Luzon

- Visayas

- Mindanao

**Manila**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
Projects in blue fonts are committed projects while those in red have to hurdle some policy issues before implementation.

## Operating the Model

**  ****Built-in data:**
**  ****Fuels data such as heat content, prices and emission factors**
**  ****List of existing power plants in the Philippines with the corresponding operating characteristics**
**  ****Fuel Price forecast in the Philippines**
**  ****Candidate power plant technologies for expansion planning**
**  ****Emission control technologies**
**  ****Data on potential hydro resources**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**Model Tour**

- Start New Model

- Set Key Inputs

- Select Technologies

- Generate Tableau

- Zero Prices

- Run Model

- Start

- Load Saved Model

- Save Model

- Add/Edit Data

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****Loading a previous model**
**  ****Key inputs screen**
**  ****Year**
**  ****Data Files**
**  ****Environmental costing and constraints**
**  ****Regional power demand**
**  ****Percent Peak**
**  ****Percent Indigenous constraint**
**  ****Interregional transmission**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****Database manager**
**  ****Control – emission control technologies**
**  ****Fuels**
**  ****Plant – candidate plant for expansion**
**  ****Hydro – potential hydro resources**
**  ****Existing – database of existing power plants**
**  ****Price forecasts – forecasts **

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****The “Build” Menu**
**  ****Allows user to specify the various power plant  ****	****options for construction of the model**
**  ****Selecting and Removing Plants**
**  ****Regional Checkboxes**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****The “Zero” Menu**
**-  Allows the user to “zero out” or to replace the fuel price in the objective function with a value of zero.**
**  ****The “Compile” Menu**
**-  Causes the model to generate the tableau structure **
**The “Run” Menu**
**-  Executes and solves the linear program that has been set up**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****The Controls Screen**
**-  Allows the user to edit, copy or enter a pollution control technology**
**-  Data required are pollutant to be controlled, % removal of the pollutant, capital and variable cost of the technology**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****The Fuel Screen**
**-  Allows the user to edit, copy or enter fuel data**
**-  Data required are price adjustor, heat content, emission factors and minimum and maximum bounds of the usage of the fuel**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****The Plant Screen**
**-  Allows the user to edit, copy or enter new power plant data**
**-  Data required are fuel type, load factor, efficiency, capital cost/kW, O&M costs, capital charge, capacity type and   minimum and maximum bounds of capacity that could be added**
**-  The user will have to select the fuel and the pollution control technologies from the fuels and controls database, respectively.**
**-  The user also has to identify whether the plant is a baseload or a peak loading plant**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****The Hydro Screen**
**-  Allows the user to edit, copy or enter new potential hydro resource data**
**-  Data required are the annual supply level and cost per kWh**
**-  The user has to identify whether the plant is baseload or peak loading plant**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****The Price Forecast Screen**
**-  Allows the user to edit the price forecast file**
**-  Data required are fuel price forecasts**
**-  The user may input the data in the screen activated by the menu sequence Data-Edit-Price Forecasts or load the existing price file**
**-  The entries under Year should be in increasing order but need not be adjacent.  Price forecasts for intermediate years not specified by the user are interpolated in the model**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Model Tour

**  ****After compiling, zeroing and running the model, the following appears in the screen:**
**-  The value of the objective function;**
**-  The replacement costs;**
**-  The Total inferred costs;**
**-  The direct production cost per kWh; and**
**-  The replacement cost per kWh**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Viewing Results

**  ****The model generates an output file with the name specified by the user in Key Inputs Screen. The following are the model are the contents of the file:**
**  ****The Generation mix,**
**  ****The fuel used**
**  ****Production Costs**
**  ****Outputs of every plant**
**  ****Total national emissions of SO****2****, NO****x**** and CO****2**** **
**  ****Shadow prices on SO****2****, NO****x**** and CO****2**** and the fuels.****  **
**  ****In cases of infeasible solutions, the output file also gives the user the  information on what needs to be done to find a feasible solution**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## MACROECONOMIC MODEL

**MACROECONOMIC MODEL**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

**Notes:**
The natural gas model developed in the study was intended to aid decision-making in the pricing of natural gas from the Camago-Malampaya gasfield just discovered at the time. The results, however, does not represent the price of natural gas because it was not based on accurate cost information on the economics of the Camago-Malampaya gasfield, and the exact risk versus return assumptions of the developer was not known.

The specific objective of the natural gas analytical model is to provide a consistent means for assessing various gas supply-demand strategies for the Phil. Government. For a given set of assumptions, the spreadsheet modules produce the economic cost and netback value of gas. 

## Background

**Basic premise: Energy demand can be satisfied via a mix of energy resources which implies an average energy price. **
**Due to data limitations, the price of energy used in the model was fuel import price and not some average price of energy.**
**Uses econometric analysis which can be done with any statistical package such as Time Series Processor (TSP) or E-Views.**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Econometric Analysis

***Source: Intrilligator, M. Econometric Models and Techniques and Applications. Prentice-Hall. 1980***

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Modeling Approach

**Capable of estimating impacts of changes in energy prices on the economy and on government revenues**
**Consists of four (4) sub-modules**
**Output and employment**
**Consumer prices**
**Trade balance**
**Government budget**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Output and Employment

**Based on Cobb-Douglas production function which describes how much output a given set of inputs (e.g., labor and capital) into a production process make.  **
**	****Q = L****a***** K****b  ****	****if a + b = 1   (constant returns to scale)**
**Estimated model : ****GDP**** = f (T_EMP, K46, T_ENER, TIME)       **
**	****	****- T_EMP is total employment, K46 is capital, T_ENER is ****	****	****	****energy consumption and TIME is time trend**
**	****	****- Output or GDP is a function of its inputs, namely labor, ****	****	****capital and energy **
**	**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Output and Employment

- GDP

- Labor

- Capital

- Energy

- Price of Labor
- (Wage)

- Price of Capital
- (Interest rate)

- Price of Energy
- (Fuel import price)

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Output and Employment

**Estimated factor demand equations**
**T_EMP**** = f (**_**WAGE/PGDP**_**, TBILL/PGDP, PMFUEL/PGDP, GDP, TIME) **
**T_ENER**** = f (WAGE/PGDP, TBILL/PGDP, **_**PMFUEL/PGDP**_**, GDP, TIME)**
**GDCF**** = f (WAGE/PGDP, **_**TBILL/PGDP**_**, PMFUEL/PGDP, GDP, TIME)  **
**  **
**Employment (T_EMP), energy consumption (T_ENER) and additional capital (gross domestic capital formation, GDCF) are influenced by their own prices**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Consumer Prices

**Consumer Price Index (CPI) – an index that traces the relative changes in prices of a basket of goods consumed by a typical household over time**
**Inflation is the phenomenon of rising prices as reflected, for example, in CPI and wholesale price index (WPI); can result from a decrease in aggregate supply due to: ****↑ wage rates and ↑ prices of raw materials**
**Energy price is one of the cost-push factors along with prices of primary inputs such as interest rates and prices of imported intermediate products. **
**	****	**
**	****	**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Consumer Prices

**	**
**	****	****CPI**** = f (WAGE, TBILL, PMFUEL, PMNFUEL, ****	****	****	****	****MS/GDP, CPI(-1))**
**	****	****- where 90-day T-bill rate, price indices of fuel and ****	****	****non-fuel imports and money supply are ****	****	****	****significant determinants of consumer prices**
**Using this relationship, the immediate impact of price changes of imported fuel products on CPI can be determined, assuming all other variables are constant.**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Trade Balance

** ****Use of new domestic energy resource impacts on average energy price as well as on demand for fuel imports. **
**	****	**
**Demand for fuel and total commodity imports are estimated **
**	****	****M1FUEL**** = f (PMFUEL/PGDP, GDP, M1FUEL(-1))**
**	****	****- where fuel import price (PMFUEL/PGDP) and output ****	****	****	****influence demand for fuel imports (M1FUEL)**
**	****	****MGDS**** = f (PMGDS/PGDP, GDP, AR(1))**
**	****	****-****	****where price of commodity imports (PMGDS/PGDP) and output determine its demand level (MGDS)**

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Trade Balance

** ****Export demand is likewise estimated using its own price (PXGDS), GDP and ratio of exports to GDP **
**	****	**
**	****	****XGDS**** = f (PXGDS, GDP, XGDS/GDP)**
**	****	**
**Trade balance is then computed as TB_GDS = XGDS - MGDS **

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Government Budget

** ****Government budget consists of an expenditure program and expected revenues.**
**Revenues are classified as tax revenues (TAXREV) and non-tax revenues (NTAXRE) such as natural gas utilization. **

- Use of natural gas

- Gov’t revenues

- Gov’t expenditures

- Domestic output

- Gov’t revenues due to expansion of tax base

- Immediate impact

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Government Budget

**Model estimates impact of government’s share in domestic energy resource development on the national budget  **
**	****	**
**	****	****TAXREV**** = t * GDP    where t is the average tax rate **
**	****	****NTAXRE**** = ONTXREV + R_ener **
**   ****	****	****- where the other non-tax revenues (ONTXREV) and ****	****	****	****revenues from natural gas utilization (R_ener)  comprise ****	**** ****	****non-tax revenues **
** ****	****	****	****REV**** = TAXREV +NTAXRE  **
**	****	****- where total government income is the sum of its tax and ****	****	****	****non-tax revenues**
**	****	****	****GEXP**** = f (POP, REV)**
**	****	****	****- where government expenditure (GEXP) is a function of ****	****	****	****   population (POP) and revenues (REV) **

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## MACROMOD Demo 

**Impact on consumer prices**
**Set up historical data of relevant variables based on theory**
**	****a.  Create/Open workfile**
**	****b.  Input historical data: WAGE, TBILL, PMFUEL, PMNFUEL, ****	****MS and GDP**
**2.   Generate variables in natural logarithm form as required ****	****by the model **
**3.   Estimate inflation equation using OLS**
**4.   Check statistical tests’ results to verify goodness-of-fit ****	****of model and its variables**
**Forecast exogenous variables using trend equations up to 2000**
**Adjust equation by increasing fuel import price by 10% and run model again **

- Training Workshop on Energy Pricing Models

- January 12-15, 2004

## Thank You!

- Training Workshop on Energy Pricing Models

- January 12-15, 2004