Whole Electricity System Costs (Report for Vector)

As New Zealand transitions to a low-carbon economy, the electricity sector will play an important role by allowing other sectors (notably heat and transport) to electrify and reduce carbon emissions.

The Climate Change Commission’s draft advice to the Government has carried out high-level modelling to show which investments in generation may be required. In the future, more detailed modelling of the sector will be required (for example, to feed into the national energy strategy that the Commission recommends is developed). It is important that this work:

• accounts for actions on the demand side (such as demand-side response, energy efficiency, and storage) which may reduce the need for investments in generation; and
• adopts a whole-system approach which accounts for the way different forms of generation of demand-side action can affect the costs of building and running the entire power system.

Frontier Economics previously carried out work for the UK Government to produce a “Whole Electricity System Cost” (WESC) metric. This extends the commonly used Levelized Cost of Electricity (LCOE) measure to incorporate wider impacts on the system, and can allow demand-side technologies to be compared alongside generation.

Vector has engaged Frontier Economics to produce an illustrative WESC for different technologies in New Zealand. Unlike the work carried out in the UK (which used a complex power system model), this analysis has built up an estimate of WESC from a few simple assumptions. This approach means that the methodology can be more readily understood, but at the expense of accuracy: these results should not be read as a definitive summary of the value of different technologies, but as an illustration of how demand-side and generation technologies can be compared alongside one another.

Figure 1 summarises the results. Each column relates to a different technology (whether generation or demand side). The coloured bars show the additional costs (or, if negative, reduced costs) that the technology imposes on different parts of the power system:

• Technology own fixed and variable costs reflect the cost of building and running the technology itself;
• capacity adequacy costs relate to the way in which the addition of capacity can mean other capacity can be retired (saving its fixed and variable costs) while maintaining the same security of supply;
• balancing costs refer to the additional costs imposed by technologies which have volatile output (requiring actions to keep electricity demand in line with supply), or the benefits of technologies that can undertake those actions;
• displaced generation costs refer to the reduced costs of running other generators during the periods that the technology is producing power; and
• network costs are the distribution network reinforcement costs that the technology may avert (we have not modelled the transmission network).

All these elements are expressed, like a levelized cost, on a $/MWh basis.

The light blue line, which is the sum of these components, is the overall system impact. It represents the change in the total costs of the electricity system when a technology is added that has a lifetime output of 1 MWh (and the rest of the system adjusts accordingly). When the blue line is below $0/MWh, adding a technology such that it produces 1 MWh over its lifetime reduces total system costs. When the blue line is above $0/MWh, it indicates that adding the technology with a lifetime output of 1 MWh increases total system costs. Technologies with lower figures will add greater benefits to the system for each MWh of energy they produce.

Figure 1: WESC estimates including balancing and distribution network impacts

Source: Frontier Economics
Note: These illustrative figures should not be interpreted as “generic” estimates of the whole system impact of a class of technologies. Whole system impacts are dependent on the wider electricity system and when technologies are assumed to be built.

While illustrative, this analysis demonstrates that:

• Accounting for the wider impacts of technologies on the power system affects their value-for-money. It is therefore important that comparisons between technologies are not made on the narrow basis of LCOE.
• There are many demand-side measures which do have the potential to be more cost effective (on a MWh for MWh basis) than generation technologies). Energy efficiency technologies in particular may offer a particularly compelling alternative to baseload generation, and demand-side response with electric vehicles may be very cost-effective once their significant capacity adequacy benefits are taken into account.

Going forward, policymakers should ensure that demand-side technologies are considered alongside generation. This may require gathering additional data on the costs and capacities of these technologies, and ensuring that all actors in the market have incentives that accord with their overall impact on the system (as shown by metrics such as the WESC).

To download the full report please click here. 

We want to thank Vector for providing this report and for allowing us to use it.