# Presentation: 066134

## 
Training Workshop on
Domestic Energy Pricing Models: Overview 

- Training Workshop on
- Domestic Energy Pricing Models: Overview

**Mark Rodekohr, EIA**
**June, 2004**
**Bangkok, Thailand**

**Philippine Department of Energy (PDOE)****Energy Pricing Model Project**

**This presentation was adapted from an earlier**
**presentation given by the PDOE in January 2004**

## Presentation Outline

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

## OVERVIEW OF ENERGY PRICING MODELS

**OVERVIEW OF ENERGY PRICING MODELS**

**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 for over one month.  Due to time constraints the present workshops will not be as detailed.**

## 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) (Not discussed)**
**  ****Geothermal Tools (GeoMod) (Not discussed)**
**    ****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**

**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.**

## 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**

**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

**  ****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**

**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)**

**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*****.”**** This version of the module is not designed to evaluate microhydro projects.**
** ***** ******Financial and economic indicators***
** ****Net Present Value (NPV)**
** ****Internal Rate of Return**
** ****Average Incremental Cost**
** ****Maximum Investment cost**

## HydroMod Worksheets

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

## 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.**
**	**

**Notes:**
xxxx

## NATURAL GAS MODEL

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

**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. **

**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. 

## Natural Gas Industry Structure

***Source: Australian Gas Association***

**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****	**

## 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**

## 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**

## GasMod Sub-models

**GasCost**
**	****-****	****facilitates financial analysis, supply-demand ****	****analysis, economic price/netback analysis ****	****and ****	****gas requirement analysis of gas-fired  ****	****power plants**
**PipeMod (not discussed in this workshop)**
- 	-	**facilitates transmission pipeline sizing and ****	****      ****	****costing analysis**
**LNGMod (not discussed in this workshop)**
- 	-	**an LNG Receiving Facility Costing sub-model**
**	**

## 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 |

## Philippine Gas Industry Structure  

## 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**

## 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**

## 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**

## 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**

## Malampaya Gas-to-Power Project

**Malampaya Gas-to-Power Project**

## 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**

## POWER SECTOR MODEL

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

**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**

**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**

**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**

## 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 **

## MACROECONOMIC MODEL

**MACROECONOMIC MODEL**

**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.**

## Econometric Analysis

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

## 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**

## 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 **
**	**

## Output and Employment

- GDP

- Labor

- Capital

- Energy

- Price of Labor
- (Wage)

- Price of Capital
- (Interest rate)

- Price of Energy
- (Fuel import price)