# Presentation: 661709

## Philippines Department of Energy Pricing Models

- PriceMod: The Power Sector Model
- South Asia Regional Initiative – Energy
- Delhi, India
- Susan H. Holte
- Energy Information Administration
- U.S. Department of Energy
- January 2005

## Philippines Pricing Models

- Developed by the East-West Center in 1996 for the Philippines Department of Energy
- Resource costing models to calculate production costs, or long-run marginal costs, and netback values for natural gas, coal, geothermal, and hydropower projects
- Power sector model - PriceMod
- Macroeconomic model for impacts on the economy and government revenues of energy prices

- April 1, 2004

**Notes:**
Resource models calculate the financial viability of projects taking into account the long-run marginal costs, depletion impacts, transportation as appropriate, and the expenditures required to use the fuels.
Long-run marginal costs approximated by average incremental costs (AIC), the sum of discounted incremental production costs divided by the sum of discounted incremental production.
AIC=Sumj [(Ij+(Rj-R0))/(1+i)j] / Sumj (Qj-Q0)/(1+i)j
Depletion costs added for nonrenewable resources.
DVn=Economic Price in Year of Depletion/(1+i)(Year-n)
We did not focus on the coal and geothermal models. They are of less interest to the South Asian countries who are participating in the next workshop.
Natural gas model includes resource pricing, pipeline transportation, and LNG.
Hydro includes site-specific information on large hydro resources.
Power sector model, or PriceMod, is a linear program designed to give information about the optimal fuel and plant mix for one year.
Macro impacts include production, inflation, government budget, and trade balance.
A number of members of the Philippines Department of Energy received extensive training on the models in a 3-week training workshop.

## PriceMod Purpose

- Compare economics of power sector investments in generation capacity, given
- Regional demand for 3 regions, including peak demand
- Characteristics of existing generation capacity
- Fuel prices
- Costs and characteristics of new power technologies
- Emissions controls for SO2 and NOx
- Limits or costs on emissions of SO2, NOx, and CO2

- April 1, 2004

## PriceMod Characteristics I

- PriceMod was built to PDOE specifications:
- Database of existing generation facilities
- 3-region structure with possibility of power transfer between regions
- Ability to limit emissions or assign a cost to emissions
- Ability to cost emissions in the Philippines only or also cost emissions from imported fuel sources

- April 1, 2004

## PriceMod Characteristics II

- Ability to use a variety of fuel price forecasts
- Ability to specify a minimum percentage of energy that needs to be supplied from indigenous energy
- A number of options for entering data and assumptions
- All of these characteristics were specified to address issues of interest to PDOE at the time

- April 1, 2004

## Features of Philippines Power System

- 3-grid system: Luzon, Visayas, and Mindanao, with a goal to link these grids
- Expecting rapid demand growth
- Goal to electrify rural areas, linking to regional grids where practical, otherwise building localized systems
- New trading market, Wholesale Electricity Spot Market (WESM)

- April 1, 2004

**Notes:**
Small island systems included in model as part of regional grids.
Can “build” Visayas-Luzon and Visayas-Mindanao linkage.
About 83 percent of villages have access to supply, either grid or off-grid, and about 60 percent of households.

## Electricity Fuel Mix

- Geothermal is the largest indigenous energy production, followed by hydropower
- Coal industry has been heavily subsidized and is declining
- Reduction in oil imports is a major goal
- Natural gas production is a relatively new industry
- Increasing natural gas generation is a major goal
- Reduction in emissions, including CO2, is important

| 2000 | Thermal | Hydropower | Geothermal/Other | Total |
| --- | --- | --- | --- | --- |
| Generation (billion kilowatthours) | 24.3 | 7.7 | 11.0 | 43.1 |
| Capacity (million kilowatts) | 9 | 2 | 2 | 11 |

- April 1, 2004

**Notes:**
Room for dispersed renewables in rural areas.
Of the thermal generation, oil outweighs coal by more than 10 times.

## Model Formulation

- PDOE was interested in minimizing the cost of generating electricity, while meeting electricity demand, reducing imports of energy, and possibly reducing emissions
- This leads to a linear programming (LP) model, an optimization model with an objective function and constraints that are continuous, linear functions
- Decision variables represent generation from various facilities
- Constraints represent, for example, fuel availability

- April 1, 2004

## PriceMod Formulation

- PDOE and the model developer decided that an LP formulation was best suited for the least-cost generation problem
- However, there were operational goals:
- Keep model simple, fast, and small
- Point-and-click methods for building model and entering data
- No need for an expert in LP models

- April 1, 2004

## Single-Year Formulation 1

- A major simplification was to formulate PriceMod as a single-period model
- A multi-period model, for example, solving each year over a 20-year time horizon, would allow consideration of:
- Construction times for new facilities
- Future growth in electricity demand
- Future changes in energy prices
- Funding profile over time

- April 1, 2004

## Single-Year Formulation 2

- Multi-year model brings complexities:
- Uncertainties surrounding future changes in demand, fuel prices, fuel availability, technology, etc.
- Discount rates – how to value the future relative to the present
- Assumptions about capital, for example, interest rates
- More complex to interpret results

- April 1, 2004

## PriceMod Is Not:

- An intertemporal planning model
- A dispatch model
- A grid model
- A fully-integrated energy model with fuel price and demand feedbacks
- A fully-integrated energy-economic model with interactions between the energy industry, the demand for energy, and the general economy

- April 1, 2004

## Strengths and Limits

- Strengths
- Environmental costs and/or limits
- Updateable plant and fuel data
- Ability to add new projects and plants
- Ability to save and load models

- Limits
- Single-year analysis
- Adding new general categories of fuels and plant types requires database manipulation
- New additions are specified by user
- No dual-fueled plants
- Clarification of terminology

- April 1, 2004

## User Selects

- Fuel prices and characteristics for generation energy sources
- Fuel and/or resource limitations
- Expected demand
- New plants for construction
- Environmental constraints
- Minimum indigenous energy percentage

- April 1, 2004

## Outputs of PriceMod

- Generation mix and fuel consumption
- Electricity costs
- Plant outputs, including new construction
- Fuel imports
- Total emissions

- April 1, 2004

## Mathematical Formulation 1

**Cost = Sum****i**** [CapCost****i****+FixOM****i****+****Output****i*****(VarOM****i****+FuelPrice****i****+EmissionCosts****i****)]**
- Cost = Total Direct Production Cost
- CapCost = Annualized Capital Cost of New Plants
- FixOM, VarOM = Fixed and Variable O & M Costs, All Plants
- Output = Power Plant Output, All Plants
- FuelPrice = Price of Fuel
- EmissionCosts = “Cost” of Emissions, If Any

- April 1, 2004

## Mathematical Formulation 2

- Subject to:
- Sum Outputi >= Total Electricity Demand
- 		for PriceMod there are six equations: three 	regions, base and peak electricity
- Sum Fuel Consumption <= Availability of Fuels
- 		one equation for each general type of fuel
- Sum Emissions <= Emission Limits, If Any
- 		one equation for each emissions type
- Sum Indigenous Supply Level >= Target Level

- April 1, 2004

## Model Setup and Execution

- Unlike the other Philippines models, PriceMod relies on a menu-driven, point-and-click interface to enter data and specify options
- Equations and computations are “hidden” in the program

- April 1, 2004

## Key Inputs

- April 1, 2004

## Data Requirements –Electricity Demand

- Solution year
- Annual electricity demand for up to three distinct regions in thousand gigawatthours
- Peak demand for electricity as percent of total
- Minimum percent power from indigenous energy - optional
- Transmission capacity between pairs of regions in megawatts
- Not necessary if modeling only one region or if regions are disconnected

- April 1, 2004

## Data Requirements –Emissions Controls

- Pollutant Costing/Explicit Cost
- Optional costs of SO2, NOx, and/or CO2 emissions
- Dollars per tonne
- Pollutant Costing/Max Bounds
- Optional limits on SO2, NOx, and/or CO2 emissions
- Thousand tonnes per year
- National vs. Global
- National – accounts for combustion emissions
- Global – also accounts for noncombustion emissions even if outside the country

- April 1, 2004

## Data Files

- Six different data files
- Control – emissions control technologies
- Fuel – fuel specifications
- Plant – characteristics of new plants
- Hydro – hydropower facilities
- Existing – existing plant characteristics
- Price Forecasts – projected prices
- Data records can be modified and new records created by modified existing records

- April 1, 2004

## Data Requirements - Control

- Pollutant - SO2 or NOx
- Name - specific technology name
- Percent Removal
- Capital Cost
- Option 1 - capital cost in dollars per kilowatt or per tonne per year, combined with a capital charge rate, percent of cost to apply to first year
- Option 2 - capital charge on a per-unit basis, if chosen, then capital cost entry ignored
- Variable Cost

- April 1, 2004

## Data Requirements - Fuel

- General Category of Fuel
- Specific Fuel Name
- Price Adjuster – optional, additive or multiplicative
- Price projections are specified for the general categories of fuels – coal, geothermal, oil, natural gas, and LNG
- Price Adjuster is used to modify the price of a specific fuel type relative to the reference price for that fuel
- Price Adjuster can also be used for other fuel-specific costs, special delivery costs or tariffs

- April 1, 2004

## Data Requirements - Fuel

- Heat Content
- Minimum and Maximum – optional annual limits on fuel use
- Combustion Emissions - emissions of SO2, NOx, and/or CO2 from fuel use
- Non-Combustion Emissions - emissions of SO2, NOx, and/or CO2 from production, if accounting for global emissions

- April 1, 2004

## Data Requirements - Plant

- General Category of Fuel
- Specific Plant or Project Name
- Load Factor – maximum percent of time plant can operate, ignored for a peak plant
- Efficiency – percent, ignored for geothermal and nuclear plants
- Capital Cost – same two options for specifying capital cost or capital charge as control technologies

- April 1, 2004

## Data Requirements - Plant

- Operating and Maintenance Costs
- Add-Ons – optional, can cover items such as transmission investment or tariffs and can be negative for subsidies or credits
- Minimum/Maximum Limits – megawatts
- Base or Peak
- Fuel Selection – specific fuel name
- Indigenous Fuel – yes or no
- SO2 Control Technology – optional
- NOx Control Technology – optional

- April 1, 2004

## Data Requirements - Hydro

- Project Name
- Supply Curve - for hydroelectric potential of the project for up to 10 steps
- Output for each step - gigawatthours per year
- Cost for each step - cents per kilowatthour
- Capacity Type - base or peak

- April 1, 2004

## Data Requirements - Existing

- Name – name of plant, cannot be changed
- Region – region, cannot be changed
- Fuel Type - general category of fuel
- Load Factor – maximum percent of time plant ca operate, ignored for a peak plant
- Efficiency – percent efficiency
- Capital Charge - cents per kilowatthour
- Operating and Maintenance Costs - cents per kilowatthour
- Add-Ons - cents per kilowatthour

- April 1, 2004

## Data Requirements - Existing

- Maximum/Minimum Limits - megawatts
- End Year - year of retirement
- Capacity Type - Base or Peak
- Indigenous Fuel - Local or Import
- Fuel Name - specific fuel name
- SO2 Control Technology – optional
- NOx Control Technology – optional

- April 1, 2004

## Data Requirements –Price Forecasts

- Fuel Prices
- Natural Gas: dollars per thousand cubic feet
- Liquefied Natural Gas: dollars per million Btu
- Coal or Oil: dollars per tonne
- Geothermal: dollars per net gigawatthour
- Model will interpolate for missing years

- April 1, 2004

## Model Execution

- For each region, select plants to add for the region, both existing and new
- Compile to generate the matrix
- Create a unique run name to save the model output
- Displays model status, objective function values, and electricity prices
- More detailed output available, including status of individual plants and projects
- Model can be saved at any time, then reloaded later

- April 1, 2004