Risks & Cost ofRisks & Cost ofWind EnergyWind Energy

Global Challenges and OpportunitiesGlobal Challenges and OpportunitiesEuropean Wind Energy ConferenceEuropean Wind Energy Conference

Milan, Italy 9 May, 2007Milan, Italy 9 May, 2007

Soren Krohn, World Bank Group, ESMAP,Soren Krohn, World Bank Group, ESMAP,Energy Sector Management Assistance Program Energy Sector Management Assistance Program

SummarySummary

Global Risk & Cost:Global Risk & Cost:Climate Change & Mitigation CostClimate Change & Mitigation Cost

National Risk & Cost:National Risk & Cost:Optimal Generation PortfolioOptimal Generation Portfolio

Project Risk & Cost:Project Risk & Cost:Optimal Risk Sharing Buyer / SellerOptimal Risk Sharing Buyer / Seller

Global Risk & CostGlobal Risk & Cost Climate change debate (Stern)Climate change debate (Stern)

driving policy planningdriving policy planning

Key Variables for Economists:Key Variables for Economists:• Temperature = f(greenhouse gas concentration)Temperature = f(greenhouse gas concentration)

• Mitigation cost / ton COMitigation cost / ton CO22 equivalent equivalent...and development over time...and development over time

• Baseline energy consumption pathBaseline energy consumption path• GDP / Capita developmentGDP / Capita development• Elasticity of marginal utility of incomeElasticity of marginal utility of income• Pure rate of time preferencePure rate of time preference

Global Risk & CostGlobal Risk & Cost Concern that wind turbine prices have Concern that wind turbine prices have

grown as much as oil pricesgrown as much as oil prices• Could lead to wind being left outCould lead to wind being left out

in favor ofin favor of Energy EfficiencyEnergy Efficiency Other Renewables (Solar PV case)Other Renewables (Solar PV case) NuclearNuclear "Clean" coal"Clean" coal Adaptation to climate changeAdaptation to climate change Doing nothingDoing nothing

Concern about uncertainty of COConcern about uncertainty of CO22 prices prices• Global carbon price neededGlobal carbon price needed

(National) Economic Risk & Cost(National) Economic Risk & Cost WBG Guideline:WBG Guideline:

Neither risk aversion nor risk seeking Neither risk aversion nor risk seeking at at projectproject level level

Exception:Exception:Population welfare at stakePopulation welfare at stake(oil-GDP effect)(oil-GDP effect)

(National) Economic Risk & Cost(National) Economic Risk & Cost Traditional method, China:Traditional method, China:

• Find least cost technology solutionFind least cost technology solution

China Renewable Energy Supply Curve

0

10

20

30

40

50

60

0 10 20 30 40 50 60 70 80 90 100 110 120

TWh

fen/kWh

BAU=36 TWh

ECON=79 TWh

ENV=89 TWh

Coal 32 f/kWh

Coal+Env 36 f/kWh

(National) Economic Risk & Cost(National) Economic Risk & Cost Systematic resource riskSystematic resource risk

(bad hydro experience) =>(bad hydro experience) =>diversification away from hydrodiversification away from hydro

Fuel price volatility =>Fuel price volatility =>Weighing cost against riskWeighing cost against risk(not happening at present)(not happening at present)

Models inadequateModels inadequate

Accounting forAccounting forfuel price risk in fuel price risk in power systems power systems planningplanning

Economic Economic methodology methodology development development withwithmore to come…more to come…

MadnessMadnessororMethod?Method?

Risk in Power Systems PlanningRisk in Power Systems Planning Develop quantitative model based on:Develop quantitative model based on:

• National fuel prices (large uncertainty)National fuel prices (large uncertainty)• O&M costs (some uncertainty)O&M costs (some uncertainty)• Capital costs (no uncertainty)Capital costs (no uncertainty)• Other risks, e.g. COOther risks, e.g. CO22 value (large uncertainty) value (large uncertainty)• Risk preferencesRisk preferences

Develop recommendations on dataDevelop recommendations on data

Test model on 2 countries (backcasting), Test model on 2 countries (backcasting), discuss, upgradediscuss, upgrade

Plug-in for WASP, train users & use it!Plug-in for WASP, train users & use it!

Project Risk & CostProject Risk & Cost Develop tool for energy regulators for Develop tool for energy regulators for

optimal risk sharing between buyer and optimal risk sharing between buyer and sellerseller

Exogenous risksExogenous risks• Oil prices, exchange rate, interest rate, ...Oil prices, exchange rate, interest rate, ...

Endogenous riskEndogenous risk• Seller controlledSeller controlled

Project cost overrun, generator availability, Project cost overrun, generator availability, mean wind,...mean wind,...

• Buyer controlledBuyer controlledGrid availability, nationalization, ...Grid availability, nationalization, ...

WBG Wind Energy ProjectsWBG Wind Energy Projects ArgentinaArgentina, , BoliviaBolivia, Brazil, Bulgaria, , Brazil, Bulgaria, Cap VerdeCap Verde, Chile, China, , Chile, China, ColombiaColombia, , Costa Rica, Croatia, Costa Rica, Croatia, DjiboutiDjibouti, , Dominican Republic, Ecuador, Egypt, Dominican Republic, Ecuador, Egypt, Estonia, Ghana, Honduras, Hungary, Estonia, Ghana, Honduras, Hungary, IndiaIndia, , JordanJordan, Kazakhstan, Latvia, , Kazakhstan, Latvia, Malaysia, Mexico, Kenya, Malaysia, Mexico, Kenya, MoroccoMorocco, , Nicaragua, Nicaragua, Outer MongoliaOuter Mongolia, Pakistan, , Pakistan, Panama, Philippines, Poland, Romania, Panama, Philippines, Poland, Romania, Russia, South Africa, Russia, South Africa, SlovakiaSlovakia, Sri Lanka, , Sri Lanka, TanzaniaTanzania, Tunisia, Turkey, Ukraine, , Tunisia, Turkey, Ukraine, Uruguay, Uruguay, Western BalkansWestern Balkans, , YemenYemen

Thank You !Thank You !

ContactContact

• Soren Krohn,World BankSoren Krohn,World Bankskrohnskrohn@@worldbankworldbank.org.org

worldbank.orgworldbank.orgESMAP.orgESMAP.orgworldbank.org/retoolkitworldbank.org/retoolkit