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Combined Heat and Power in Commercial Buildings: Investment and Risk Analysis

Karl Magnus Maribu and Stein-Erik Fleten

Year: 2008
Volume: Volume 29
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-7
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Combined heat and power (CHP) systems can generate electricity locally while they recover heat to satisfy heating loads in buildings, which means they provide efficient energy. On-site generators may reduce both the expected energy costs and cost risk exposure for developers. With volatile energy prices, a deterministic modeling framework will not yield a fair value of CHP systems because flexibility in the operational response to price changes is not taken into account. In this paper, we present a Monte Carlo simulation model that is used to find the CHP value under uncertain future wholesale electricity and natural gas prices. When considering investing in a CHP system on should consider both return and risk. Clearly, both investment return and risk depend on local energy tariffs and energy loads. We highlight an example where CHP is marginally profitable and the investment decision is not straightforward. Interestingly, CHP systems were found particularly attractive with volatile electricity prices because their ability to respond to high prices provides efficient hedges to energy cost risk. Therefore, developers should not be discouraged but rather embrace on-site generation in markets with volatile prices. From the analysis, it can also be concluded that sizing of CHP systems can be related to the energy tariff structure and cost risk preferences as well as to energy loads.

The Spatial Deployment of Renewable Energy Based on China's Coal-heavy Generation Mix and Inter-regional Transmission Grid

Bo-Wen Yi, Wolfgang Eichhammer, Benjamin Pfluger, Ying Fan, and Jin-Hua Xu

Year: 2019
Volume: Volume 40
Number: Number 4
DOI: 10.5547/01956574.40.4.bwyi
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China has set a goal of 20% non-fossil energy in total primary energy consumption by 2030. The decision of where to invest in renewable energy, and to what extent, needs to be considered from a forward-looking perspective. This article presents a power sector optimization model that integrates unit commitment with long-term generation expansion planning framework. Power dispatches at an hourly level are combined with yearly investment decisions. Based on the model, this article analyzes the optimal spatial deployment of renewable energy. The results show that regional differences in non-hydro renewable energy are significant. Approximately 75% should be deployed in the north of China. With the increase of combined heat and power, more renewable energy facilities, especially solar photovoltaic, should be located in the south of China. Inter-regional power transmission is beneficial to onshore wind in resource-rich areas, and could mitigate the conflict between coal-heavy generation mix and renewable energy.

Strategic Cost shifting in the Swedish District Heating and Electricity Markets

Magnus Söderberg

Year: 2020
Volume: Volume 41
Number: Number 5
DOI: 10.5547/01956574.41.5.msod
View Abstract

Firms that operate combined heat and power (CHP) plants in Sweden face strong incentives to let their district heating (DH) customers subsidize the sales of electricity. This study investigates whether firms exploit the variation in competitive intensity across the two markets and 1) shift costs from electricity to DH, and 2) pass on any cost increase to consumers. A major empirical challenge is that firms endogenously decide whether to operate a CHP plant or not. Two different matching procedures are used to circumvent this problem. The results show that 1) compared with a similar non-CHP firm, the average CHP firm reports a DH cost that is 20�25% higher, 2) the extra cost that CHP firms report is fully passed on to consumers and 3) with reported costs, the price-cost margin is 8% for both groups and with imputed costs the margin increases to 30�35% for the CHP firms. The results are consistent with the presence of strategic cost shifting, which can be tackled through either stricter accounting rules or DH price regulation.

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