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The Combined Margin The Combined Margin Approach: Issues and OptionsApproach: Issues and OptionsThe Combined Margin The Combined Margin Approach: Issues and OptionsApproach: Issues and Options

Michael Lazarus, SEI/Tellus

World Bank Power Sector Workshop

Caesar Park Hotel, Buenos Aires

December 8, 2004

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Overview of PresentationOverview of PresentationOverview of PresentationOverview of Presentation

The problem The options The combined margin approach

– Underlying rationale and practical considerations – Strengths and weaknesses

Next steps and new directions

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What’s the problem?What’s the problem?What’s the problem?What’s the problem?

Power sector projects and CERs depend on an unknowable counterfactual baseline

CERs = MWhproject x (tCO2/MWhbaseline - tCO2/MWhproject)

Baseline methodologies should balance – Accuracy– Feasibility (cost and data availability)– Transparency – Consistency (over time and space)– Credibility

Standardize or proliferate? Rely on simple or complex models?

0 1tCO2/MWh

MW

h

Multi-ProjectBaselines

PowerPlants

Distribution of CO2 intensity in a power system

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A CDM electricity project might affect: A CDM electricity project might affect: A CDM electricity project might affect: A CDM electricity project might affect:

The choice and/or timing of new power plants (or life extension of existing ones), i.e. the build margin, and/or

The operation of existing power plants, i.e. the operating margin,

Depending on– Context: excess capacity, suppressed demand, fixed investments – Project characteristics: peak vs. baseload, load-following vs.

resource-driven (firm vs. non-firm)– Market behavior: plans, intuition, and time-scale of interest (short-

term vs. long-term)– Project size: Cumulative effects of small projects, delay vs. displace

new capacity additions

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Simplified representationSimplified representationSimplified representationSimplified representationSystem Expansion (prior to CDM project)

3000

3500

4000

4500

2007 2008 2009 2010

Sy

ste

m C

ap

ac

ity

(M

W)

Total New Capacity (absent CDM project)

Existing Capacity

300MW new capacity added each year to meet

projected needs

Projected Needs

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Potential impact of a small CDM projectPotential impact of a small CDM projectPotential impact of a small CDM projectPotential impact of a small CDM project

The maroon area shown above may represent delayed (i.e. avoided) new generation capacity.

Effect of CDM project (simplified)

3000

3500

4000

4500

2007 2008 2009 2010

Sy

ste

m C

ap

ac

ity

(M

W)

Total New Capacity (absent CDM project)

Total New Capacity (with CDM project)

Existing Capacity

25 MW CDM project online

Other new capacity can be delayed (less likely for projects

already in pipeline)

Projected Needs

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What are the methodological options…What are the methodological options…What are the methodological options…What are the methodological options…

…assuming that a CDM project has a mix of build and operating margin effects?

Use a model capable of reflecting all effects– full simulation or optimization models (not just dispatch)

Use models or algorithms to estimate each effect separately, and then combine them:– E.g. consolidated/small-scale CDM methodology, “CERUPT”

methodology, consolidated CDM (ACM0002)

Decide which effect predominates and ignore the other

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ACM0002 combined margin approachACM0002 combined margin approachACM0002 combined margin approachACM0002 combined margin approach

Calculate a baseline emission factor EFy as the weighted average of the Operating Margin emission factor (EF_OMy ) and the Build Margin emission factor (EF_BMy,):

EFy = (wOM * EF_OMy) + (wBM * EF_BMy)

where the weights wOM and wBM, by default, are 50% (i.e., wOM = wBM = 0.5)

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OM and BM methodsOM and BM methodsOM and BM methodsOM and BM methods

CDM Consolidated methodology (ACM002) currently contains:

4 options for calculating the operating margin:– Simple OM: Weighted-average emission rate excluding

low-operating cost and must-run power plants– Simple Adjusted OM: Including some must-run/low-cost

resources (e.g. hydro) where they dominate a grid– Dispatch data analysis OM– Average OM

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And 1 option for calculating the build margin:And 1 option for calculating the build margin:And 1 option for calculating the build margin:And 1 option for calculating the build margin:

…the generation-weighted average emission factor of a sample of power plants m, as follows,

EF_BMy = FUEL USE * EMISSION COEFF/GENERATION

where the sample group m consists of either the 5 most recent or the most recent 20% of power plants built or under construction, whichever group’s average annual generation is greater (in MWh);

Option of ex ante or ex post analysis for either OM or BM

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Combined margin results: Combined margin results: CERUPT exampleCERUPT exampleCombined margin results: Combined margin results: CERUPT exampleCERUPT example

Note CERUPT (2002) methodology shown here differs from ACM0002

(CERUPT) Baseline Emission Rates by Country

0

0.2

0.4

0.6

0.8

1

1.2

1.4

tCO

2/M

Wh

coal

oil

gas

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Potential applications of the combined Potential applications of the combined margin methodmargin methodPotential applications of the combined Potential applications of the combined margin methodmargin method Zero or near-zero emission sources

– renewable energy – energy efficiency? – several AMs and ACM0002

Lower-emission sources– Combined heat-and-power – New natural gas plants?– Added production from plant upgrade or repowering?

0 1tCO2/MWh

MW

h

Multi-ProjectBaselines

PowerPlants

Distribution of CO2 intensity in a power system Uncertainties or errors have a

much larger relative impact on lower-emission sources– Difference between project and

baseline emission rates (tCO2/MWh) may be quite small

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What are its strengths and weaknesses?What are its strengths and weaknesses?What are its strengths and weaknesses?What are its strengths and weaknesses?

Strengths– Relative simplicity and

feasibility: low-cost, manageable data and skill requirements

– Incorporation of both OM and BM effects

– Consistent and comparable across regions and projects

– Relatively transparent and credible: data verifiable

Weaknesses/challenges– Applicability to larger

investments, lower-emission (e.g. natural gas) projects

– Justification of OM/BM weights (50/50 or other)

– Dependence on lumpy, historical data for build margin

– Application of dispatch analysis – Reflection of local market and

operational conditions

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Next steps and new directionsNext steps and new directionsNext steps and new directionsNext steps and new directions

Enhancing the consolidated CDM methodology– More forward-looking, less volatile build margin methods– Weighting the operating and build margins based on project, context,

and other factors– Standardized methods to fill “data gaps”– Applying/extending dispatch analysis and hydro-based system

methods

Developing other methods– Model-based methodologies that are transparent and credible

Cross-country, cross-context comparisons Complementary mechanisms to support low-GHG power

sector investments and strategies?

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SummarySummarySummarySummary Combined margin is an umbrella term for any

method that accounts for a project’s effects on both what is built and what operates in the future.

Simplified CM approaches can balance many competing objectives (accuracy, feasibility, consistency, transparency, credibility)

Considerable scope for improvement and new approaches

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EXTRA SLIDES FOLLOW

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Electricity Imports in ACM0002Electricity Imports in ACM0002Electricity Imports in ACM0002Electricity Imports in ACM0002

For the purpose of determining the Operating Margin (OM) emission factor, as described below, use one of the following options to determine the CO2 emission factor(s) for net electricity imports (COEFi,j,imports) from a connected electricity system within the same host country(ies):

(a) 0 tCO2/MWh, or (b) the emission factor(s) of the specific power plant(s) from which electricity

is imported, if and only if the specific plants are clearly known, or (c) the average emission rate of the exporting grid, if and only if net imports

do not exceed 20% of total generation in the project electricity system, or (d) the emission factor of the exporting grid, determined as described in

steps 1,2 and 3 below, if net imports exceed 20% of the total generation in the project electricity system.

For imports from connected electricity system located in another country, the

emission factor is 0 tons CO2 per MWh.

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Simple, adjusted OM (hydro-dominated)Simple, adjusted OM (hydro-dominated)Simple, adjusted OM (hydro-dominated)Simple, adjusted OM (hydro-dominated)

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Historical build margin (US)Historical build margin (US)Historical build margin (US)Historical build margin (US)

Capacity additions, recent and projected,–United States

060

,000

,000

120,

000,

000

180,

000,

000

1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 under cons planned

Ca

pa

cit

y In

sta

lled

Pla

nn

ed

, or

Un

de

r C

on

str

uc

tio

n (

MW

)

0

0.2

0.4

0.6

0.8

1

1.2

Coal, steam Gas, steam Oil, steam

Gas, CT Oil, CT Gas, CC

Oil, CC Sun/Wind/Geo/Bio Hydro

Nuclear Other

Carbon Intensity

All

Carbon Intensity

Fossil

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GWh/h

0

5,000

10,000

15,000

20,000

25,000

30,000

Nuclear Geotérmica Eólica

Carbón Ciclo Combinado Dual

Vapor Hidráulica Turbogás

1 6 12 18 24 6 12 18 24 6 12 18 24 6 12 18 24 6 12 18 24 6 12 18 24 6 12 18 24

Domingo Lunes Martes Miércoles Jueves Viernes Sábado

Example of weekly dispatch 5 al 12 de diciembre de 1999

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