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Yodha Yudhistra / Thesis Summary (2009)

The Long Run Marginal Cost Analysis for Deriving Electricity Energy Mix Scene: Case Study in Southern Sumatera
Yodha Yudhistra N.
UGM ITB Joint Masters, Natural Resources Management, Faculty of Mining and Petroleum Engineering ITB 2009

Abstract
Continuous growth of electricity demand in Indonesia is a major challenge for electric utilities trying to ensure adequate supply. Tendency of coal for supplying electricity demand for next decade and given abundant geothermal resources expose the country to mix energy considering lowest cost, security of supply, and environmental protection concerns. To find optimal solution to these triple challenges, this thesis assessed two main models of energy mixes for southern Sumatera system as the case study for the period of between 2009 and 2018. The first is base model which observed base case without and with geothermal plant candidate. Second is policy model which examined Clean Development Mechanism (CDM), externality, and natural gas subsidy policies impact to the base model. It is found that the lower cost of generation and environmental emissions are obtained from the scenario where geothermal power plant is occupied to the base load accompanying coal-fired power plant. In supply security point of view, under this scene, coal requirement is 28.75% lower than that on the base case (without geothermal) which can be stored as reserve. This coal reserve will assist Domestic Market Obligation (DMO) of coal policy, as it can be either used for supplying existing coal-fired power plants outside southern Sumatera or exported. This scene proposes new build energy mix comprises 55% of coal, 43.5% of geothermal, and 1.5% of natural gas. For promoting geothermal candidate, CDM policy can effectively support financing due to geothermal investment uncertainties. In particular, the results show that externality and natural gas subsidy are not effective to mitigate the challenges. Keywords: Long run marginal cost; electricity energy mix; southern Sumatera

1.

Introduction

Electricity, an essential source of energy for many activities, is one of the important capitals for development in both developed and developing countries. Generally, economic growth brings a growth of electricity demand in the country. In Indonesia, the average annual growth rate of peak electricity demand (MW) between 2000 and 2008 was significantly high at 11% (PLN, 2009). Indonesia has expanded its electricity capacity to meet its increasing demand. Although diversification was taken into account, fossil fuel power generation ratio is remaining high. Coal plays dominant role, approximately 70% of coal domestic productions was used for generating electricity (Indonesia Mineral and Coal Statistics, ESDM, 2005). Moreover, oil is still hold significant share and spend almost a half of electricity generation operational cost due to its hike price (PLN, 2008). This fact brings up to national sustainability problem such fossil fuels which roles as the main electricity energy sources are exhaustible and still being needed as national income sources. Moreover, implementation role of these energies is widely spread, not only for generating electricity but also for chemical, agriculture, or manufacture purposes. By these reasons, the use of fossil fuels in Indonesia must be wisely considered in order to obtain public wealth of the country. Electricity energy mix planning should consider of following concerns, namely lowest cost, security of supply, and environmental protection. This thesis focuses on the new build generation costs on how to mix primary energy supplying the incremental electricity demand with

the lowest cost considering those. The questions that may arise from the implementation are what appropriate new power generation sources could be applied? How to obtain the optimal (lowest cost) new build generation mix related to sustainability role and climate change protection? And then what policies needed to obtain that? Such questions are becoming objectives in this work. Southern Sumatera interconnected grid system has been chosen as study case. Why southern Sumatera is chosen? Southern Sumatera is well known by its abundant energy resources, such as coal, geothermal, natural gas, oil, and hydro. In addition, southern Sumatera is connected by one interconnection system. The thesis organized by the following. The concept of long-run marginal cost and how it can facilitate optimization are discussed in Section 2. Section 3 will be then discussing electricity demand and energy resources available to supply electricity demand on southern Sumatera system, by dividing it into two main aspects: demand and supply assessment. Meanwhile, Section 4 approaches the development of model for simulating optimal mix of electricity energy. Section 5 discusses the policy simulation by analyzing impact of sustainable development and its policies. Finally, conclusion of the argument as well as recommendation for further research is presented on the final section.

2.

Methodology

The analysis presented in this study employs the principle of traditional electric capacity planning, which is

Yodha Yudhistra / Thesis Summary (2009)

supply oriented. The basic objective of this planning is to determine the optimal mix of generation technologies that meet anticipated electricity demand while fulfilling all specified constraints (Stoll, 1989). Linear programming (LP) and dynamic programming (DP) approaches are used to solve the optimization problem in this study. There are two LP tools used which are spreadsheet (excel) linear programming and dynamic programming (WASP-IV package). Spreadsheet linear programming is used for understanding the behavior of energy mix regarding to costs variation. For simplicity, the spreadsheet one is not presented in this thesis summary. WASP-IV will deeply used as optimization tool. The Wien Automatic System Planning version IV (WASP-IV) package is developed by International Atomic Energy Agency (IAEA). WASP is widely used tool that has become the standard approach to electricity investment planning around the world (Hertzmark, 2007).

WASP utilizes dynamic programming optimization method to find optimal solution. Figure 1 illustrates general framework of the research.

3.

Supply and demand of electricity

3.1 Electricity demand forecast The demand forecast carried out by Pusat Pengaturan dan Pengendalian Beban Sumatera (P3BS) (P3BS, 2009) was retained for the period up to 2020. The data used is 2009 2018 data based on years of study period and assumed to have the same load pattern. During study period electricity demand in southern Sumatera grid system is expected to growth on average 8% per year (see Table 1). Load pattern is assumed to be same each year as shown in Figure 2.

Research problem
How to provide electricity demand growth optimally by mixing various generation sources considering sustainability and climate change protection.

Research objectives
- To define new appropriate generation sources - To define optimal electrical energy mix/plant capacity mix - To define supporting policies needed

Impact of barriers
Barriers on generation implementation

Supply - Demand Assessment


Generation resources potential Generation costs: + Capital cost + Fixed O&M cost + Variable O&M cost Electricity demand + Peak load growth + Load pattern (LDC)

Fossil fuel prices forecast

Fuel cost

Modeling
Base model

Impact by policy
Policy simulation Externalities, CDM, subsidies

Research Results
Recommended electrical energy mix, plant capacity mix and supporting policies

Figure 1 General framework of the research Table 1 Electricity demand forecast from 2009 2018
1 x Peak Load [MW]

Year

Peak demand (MW) 1,736 1,907 2,084 2,283 2,491 2,710 2,944 3,208 3,495 3,779

Energy (GWh) 9,798 10,755 11,804 13,031 14,240 15,561 17,004 18,596 20,351 21,719

Load factor (%) 64.4 64.4 64.7 65.2 65.2 65.6 65.9 66.2 66.5 65.6

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: P3BS PLN (2009)

0.8 0.6 0.4 0.2 0 0% 20% 40% 60% % of a Year 80% 100%

Figure 2 Yearly load pattern

Yodha Yudhistra / Thesis Summary (2009)

3.2 Available energy resources Southern Sumatera has almost of recent developed energy sources. Figure 3 shows the energy candidates for supplying the demand.
Coal Natural gas Geothermal Hydro

value of 8.25 %, and Equity Market Risk Return (km) which describes return reflected to investment in the stock market. This value is defined based on average rate of return in the stock market, which is 16%, (km kRF) value will be generated as 7.75%. WACC is needed for analyzing generating electricity cost of each generation option. WACC is then calculated by the following assumptions Market Value of Equity is assumed to be 10% based on government obligation yield period Pre-Tax Cost of Debt is planned to be 11% in case of recent credit investment interest rate (2009) is around 11% Guarantee institution cost is assumed to be 2% Applied tax is assumed to be 30% Beta (), stock price volatility in such industry (electricity generation) = 0.6 Risk-free Rate as described in the previous is defined by SBI-rate which has value of 8.25% Expected Equity Market Return is assumed to be 16%

Figure 3 Electricity energy sources

Because of its low reliability of supply and environmental restrictions, large hydro plant will not be priority in the expansion-mix plan. However, small hydro is still good to develop in decentralized system due to its small capacity. 3.3 Power generation costs 3.3.1 Weight Average Cost of Capital (WACC) WACC is used in this study as discount rate for discounting all costs in study period to the discounting date. Generally, cost of debt (kd) used in Indonesia is defined as the same level with the credit investment interest rate which is granted in the national banking (i loan), while cost of equity (ke) is calculated by using CAPM (Capital Asset Pricing Model) approach which can be defined as

The results of WACC calculation then derived with three alternatives of capital structure (debt/equity composition) of 65/35, 70/30, and 75/25. Thus, from calculation WACC resulted is 12%.

3.3.2 Fuel price It has been considered three different fuel price assumptions for each case: low, reference (ref.), and high.
Table 2 Fuel price assumptions Fuel Initial price [US$/MBtu] 2.1 Gain per year Low Reference High Low Reference High 1.9% 2.1% 2.5% 2.4% 2.9% 3.2% Levelized price [US$/MBtu] 2.5 2.7 2.8 6.6 7.0 7.3

where, ke kRF (km-kRF)

Cost of Equity [%] Risk-Free Rate [%] Equity Market Risk Premium Company stock reaction to stock indices volatility in the stock market [%] Risk-Free Rate (kRF) in Indonesia can be derived from Suku Bunga Bank Indonesia (SBI-rate) which has
High

Coal

Natural gas

5.0

Reference

Low

25 Natural gas 20

[$/MBtu]

15

10

Coal

0 2007 '12 '17 '22 '27 '32 '37 '42 2047


Figure 4 Fuel price assumptions from 2009 2050 (Net Calorific Value)

Yodha Yudhistra / Thesis Summary (2009)

3.3.3 Candidate power plants cost The economic parameters for each of the candidate power generation technology are shown in Table 3 and 4. Geothermal projects are assessed as 55 and 110 MW

power plant units. Thus, the make-up well cost is assumed on average of US$ 24/kW and O&M cost of US$ 18.2/MWh (Sanyal, S. K., 2005).

Table 3 Candidate thermal plants economic parameters

Fuel

Technology

Size [Mwe]

Heat rate at maximum load [kcal/kWh] 2263 2457 2388 2606 1153

Capital cost [US$/kW] 925 1180 520 610 750

Fuel cost US$/t 45.3 45.3 401.2 401.2 401.2

(base case) US$/MBtu 2.7 2.7 7.0 7.0 7.0

Fixed O&M cost [US$/kW-month] 4.2 4.2 1.7 1.7 3.1

Variable O&M cost [US$/MWh] 0.8 0.8 1.2 1.2 0.9

Coal Coal Natural gas Natural gas Natural gas

Steam Turbine Steam Turbine OCGT OCGT CCGT

150 65 60 30 150

Source: Indonesian Electrical Power Society (2009), P3BS PLN (2009), World Gas Turbine (2008)
Table 4 Candidate geothermal plants economic parameters (Fixed O&M 12.00 $/kW-month)

Field name

No. of units 2 3 3 3

Size [Mwe] 110; 110 55; 110; 110 55; 55; 55 110; 55; 55

Available year [20..] '12; '15 '12; '15; '18 '12; '15; '18 '12; '15; '18

Capital cost [US$/kW] 1798 1820 1834 1954

Field name

No. of units 1 1 2 1

Size [Mwe] 110 110 55; 55 55

Available year [20..] '15 '12 '15; '18 '18

Capital cost [US$/kW] 1906 2042 2042 2261

Ulubelu Lumut Balai Sungai Penuh Hululais

S. Antatai Rajabasa Wai Ratai G. Sekincau

Source: JICA (2007) and our assumptions

In order to adapt with the model, make-up well cost is added to the investment cost and by assuming capacity factor of 0.9, O&M is converted to US$ 12/kW-month.

4.

Development of the model

where Bj is the objective function attached to the expansion-mix plan j. t is the time in years (1,2,, T) and T is the length of the study (10 years, 2009 2018). All costs are discounted to the reference date (2009) at a given discount rate (WACC, 12%). The optimum expansion-mix plan is the minimum Bj among all j. These costs calculation is illustrated in Figure 5.

4.1 Model structure There are five steps in generating the model, that are problem defining, parameters determination, base model simulation, model verification, and policy simulation. First stage is problem defining. As mentioned before, the problem is how to address optimal mix of generationenergies to meet the incremental demand. Dynamic programming approach is used to model the problem. Each possible sequence of power units added to the system (expansion-mix plan) meeting the constraints is evaluated by means of a cost function (the objective function), which is composed of (a) capital investment costs, I, (b) salvage value of investment costs, S, (c) fuel costs, F, (d) Operation and maintenance costs, M, and (e) cost of energy not served, . The cost of energy not served, , reflects the expected damages to the economy of the country or region under study when a certain amount of electric energy is not supplied. Thus, [ ]

Figure 5 Economic evaluation scheme of the model

Next stages that are parameters determination, base model simulation, and model verification will be derived on subsection 4.2, 4.3, and 4.4. Afterward, policy simulation will be presented on section 5.

Yodha Yudhistra / Thesis Summary (2009)

4.2 Model building 4.2.1 Input parameters Input of the model is divided into two main parameters which are demand and supply side. The demand side is fulfilled by assumed load pattern each year and peak load growth during years of study (2009 2018). Meanwhile, the supply side is satisfied by each energy generation technologies and they costs. 4.2.2 Population of the model Generally, WASP-IV package has 6 modules to run, namely LOADSYS, FIXSYS, VARSYS, CONGEN, MERSIM, and DYNPRO. The two additional modules, REMERSIM and REPROBAT are only used when detailed reporting needed. For generating the model, input parameters should be written on the first three modules: LOADSYS for demand side, FIXSYS and VARSYS for supply side (see Figure 6).

4.3 Base model 4.3.1 Base case (ref.) without geothermal and CCGT The base case portrays an electricity energy mix following the current trend of electricity planning in Indonesia where generating system mainly relies on fossil fuels without any policy. Therefore, the first scene includes only coal and natural gas as energy sources. Simulation results suggest that southern Sumatera system would require addition of 3310 MW until 2018. The optimal mix of these new capacities generation comprises 3280 MW of coal-fired power plant and 30 MW of open-cycle gas power plant (OCGT) which will produce energy mix as on Figure 7. Figure 8 shows that total energy mix produced from 2009 to 2018 would reveal 4.53% of hydro, 73.03% of coal, 18.17% of natural gas, and 4.27% of oil.
Coal 16,000 14,000 12,000 [GWh] 10,000 8,000 6,000 4,000 2,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Natural gas

Figure 7 New build energy mix (without geothermal)

Hydro

Coal

Gas

Oil

Figure 6 WASP-IV modules

25,000 20,000 [GWh] 15,000 10,000 5,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

FIXSYS facilitates fix or existing power plants have been established before the study period and new fixed power plants. Meanwhile, VARSYS processes information describing the various generating plants which are to be considered as candidates for expanding the generation system.

4.2.3 Implementation of the model The decision of the optimal expansion plan is made by the use of forward dynamic programming optimization in DYNPRO. The numbers of units for each candidate plant type that may be selected each year, in addition to other practical factors that may constrain the solution are specified. If the solution is limited by any such constrain, the input parameters can be adjusted (CONGEN) and the model re-run (MERSIM-DYNPRO). The dynamic programming optimization is repeated until the unconstrained optimal solution is found.

Figure 8 Overall energy mix (without geothermal)

4.3.2 Base case (ref.) with geothermal and CCGT Generally, Indonesia has been given largest geothermal resources worldwide (Sjafra, 2005). Southern Sumatera has these resources respectively. Since the environmental emissions, such as CO2, NOx, SO2, and particulates are a major concern of conventional coal-fired plants (The World Bank, 1999), these geothermal potentials are available to reduce the environmental consequences. It has been considered that geothermal and combined-cycle gas turbine as the recent possible clean technology to be applied. Therefore, the main objective of base case (with geothermal) scenario is to examine how electricity energy mix scene changes if geothermal and CCGT plant is introduced.

Yodha Yudhistra / Thesis Summary (2009)

The results indicate that under this scene, the new required additional capacities until 2018 will be 3010 MW comprising 1650 MW of coal-fired power plant, 1210 MW of geothermal power plant, 150 MW of OCGT power plant and no CCGT added. Figure 9 described energy mix produced from the new capacities added .Total energy mix produced from 2009 to 2018 would carry out 4.53% of hydro, 51.71% of coal, 22.18% of geothermal, 18.58% of natural gas, and 3.01% of oil (see Figure 10).
Coal Geothermal Natural gas

+10% +5% Reference -6% -10% 0.0 0.2 0.4 0.6 0.8 Percentage to total production [1], 2009 - 2018 1.0

Figure 11 Coal price sensitivity chart (base case)

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

+10% +4% Reference -6% -10% 0.0 0.2 0.4 0.6 0.8 1.0

[GWh]

Percentage to total production [1], 2009 - 2018

Figure 9 New build energy mix (with geothermal)

Figure 12 Gas price sensitivity chart (base case)

Hydro 25,000 20,000 [GWh] 15,000 10,000

Coal

Geothermal

Gas

Oil

(Default) 12% 10% 8% 0.0 0.2 0.4 0.6 0.8 Percentage to total production [1], 2009 - 2018 1.0

Figure 13 WACC sensitivity chart (base case)


5,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4.4 Model verification Verification of base model is through by comparing it to new build Indonesian and non-JAMALI systems energy mixes 2009 2018 (RUPTL 2009 2018). Figure 15 shows new build energy mix portfolio of Indonesia [a] and non-JAMALI system [b], respectively. By observing those two figures, it can be seen that each study case with its condition and assumption leads to different new build energy mix. Thus, comparing between portfolios will yield no matching criteria. However, for this study purposes, what should be verified is the trend of energy share in the mix scene, not the exact. Figure 14 presents base models new build energy mix. By comparing this to PLNs new build energy mix, it is found that each energy trend from both base model and official data are quite identical, especially compared to the non-JAMALI ones. Coal dominantly takes share, followed by geothermal and hydro, whether natural gas serves. Geothermal and hydro are assumed to be one type of energy (renewable) which represented only by geothermal on the base model. The reason is that they have same cost characteristic, though hydro is less reliability of supply. Another parameter that should be verified is yearly amount of energy produced. Energy production forecast

Figure 10 Overall energy mix (with geothermal)

4.3.3 Base models sensitivity analysis Volatility on fuel prices brings to fuel cost uncertainties. In addition, unfixed WACC gives capital cost uncertainties. Therefore, sensitivity analysis should be done by changing fuel prices and discount rate used. Coal price is changed to low (-6%) and high (+5%) cases whether gas prices is changed to low (-6%) and high (+4%) cases as assumed on previous section (3.3.2). Upper and lower bound of 10% change from the reference fuel prices is also carried out. Meanwhile, discount rate (WACC) is simulated to vary between 8% and 10%, and 12% (base case), respectively. From Figure 11 and 12, it is obvious that the optimal energy mix will remain same. Slightly volatile fuel prices do not significantly affect the energy mix portfolio. Figure 13 shows that there is small increase on geothermal employment at 8% discount rate scenario. However, the energy mix portfolio is not significantly change. It can be concluded from this sensitivity analysis that energy mix portfolio remains same under assumed fuel prices and it does not affected by discount rate changes.

Yodha Yudhistra / Thesis Summary (2009)

data was retained from P3BS, PLN. It yields that in 2009, 10,206.3 GWh will be produced from southern Sumatera system (P3BS, 2009). From base model result, energy produced in 2009 is 10,535.8 GWh, only 3.23% higher than official forecast data. Thus, it can be derived that initial year energy production of the base model is suitable with PLNs requirement. From this verification process, therefore, base model is considered to be proper and can be used to forecast electricity energy mix scene in southern Sumatera generation system.

Geothermal

Coal

Natural gas

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

[GWh]

Figure 14 St. Sumatera new build energy mix (base case)

[a]

[b]

Figure 15 New build energy mix 2009 - 2018 [a] Indonesia; [b] Non-JAMALI system (PLN, 2008)

5.

Policy simulation and comparison analysis

5.1 Introduction From the Earth Summit (Rio, 1992) to the Johannesburg conference (2002), a large step has been taken towards the implementation of sustainable development. Sustainable energy supply and utilization system as a consequence has been important agenda to address. To obtain these, optimization of energy utilization should be done so called Green Energy implemented in National Energy and Mineral Resources Minister Decree No. 0002/2004. This section focuses on how those policies will affect the mix of electricity energy scene.

5.2 Externality model 5.2.1 Externality cost of electricity generation An externality, also known as an external cost, arises when the social or economic activities of one group of

persons have an impact on another group and when that impact is not fully accounted, or compensated for, by the first group. In this case of study, fossil-fuels combustion causes human health risk, risk of climate change, imposes an external cost. There are several ways of taking account of the cost to the environment and health, as economist says to monetize or internalize the externalities (Friedrich and Voss, 1993). One possibility would be via carbon tax by taxing damaging fuels and technologies according to the external costs caused. For example, weighing electricity cost of fossil-fuel power plant by additional cost per kWh. Table gives external cost as estimated by European Community in 1991 and Public Service Commission of Nevada, United States of America. EC proposed a tax of US $ 0.1 per kg of carbon, equivalent to US $ 0.027 per kg of CO2. Using average marginal emission of regardless fuel by New Zealand Authority (2001) ECs proposed external cost then can be derived. The proposed external costs of candidate plants are tabulated on Table 5 below

Table 5 Proposed external cost of candidate plants

Fuel Coal Coal Natural gas Natural gas Natural gas

Technology Steam Turbine Steam Turbine OCGT OCGT CCGT

Size [Mwe] 150 65 60 30 150

Efficiency 38% 35% 36% 33% 56%

CO2 emissions [kg/MWh] 843 915 527 575 339

External cost [US$/MWh] 22.8 24.7 14.2 15.5 9.1

Source: Murphy, H. and Niitsuma H., 1999 and our assumptions

Yodha Yudhistra / Thesis Summary (2009)

Meant for fairness, although it is small, external cost of geothermal power plant should be included in the model. It is derived from EC proposed tax US $ 0.027 per kg CO2 eq. and using IGA (2001) average geothermal emission of 0.1 kg CO2e per kWh would yield of US$ 2.7/MWh.

5.3 Clean Development Mechanism (CDM) model 5.3.1 Carbon Emission Credit (CER) revenue In this section, impact of CDM policy on unattractive geothermal investment is examined. Thus, additional revenue from CER (Carbon Emission Credit) should be assessed in the preliminary. Market price for CER as shown in Figure is fluctuating. Based on 28 of February 2008 data CER price has valued at 19.4 per tonne CO2 equivalent emissions. Nowadays, in the Figure can be carried out CER price is valued at 13.4 per tonne CO2 equivalent emissions which 1.0 ton CO2 is equal with 1.0 CER. Average CO2 emission of a geothermal power plant worldwide is estimated less than 100 gram CO 2/kWh (IGA, 2001). In Indonesia, this average value is lower, 69.2 gram CO2/kWh (IGA, 2001). For purpose of this study, the more general value was used that is 100 gram CO2/kWh. Thus, CO2 emission factor of a geothermal projected to be approximately 0.1 t CO2e /MWh. In Sumatera electricity system, baseline emission factor of 0.743 tCO2e /MWh (Directorate General of Electricity and Energy Utilization, 2008). Therefore CO2 emission reduction generated can be calculated as follows ( ) t CO2e/MWh

5.2.2 Externality case (reference fuel prices) In addition to conventional technologies for power generation technologies, as described on previous section, externality cost is internalized to the generation cost. The main objective is to reduce environmental emission. Figure 16 and 17 show electricity energy simulation result under this scenario.
Coal 16,000 14,000 12,000 [GWh] 10,000 8,000 6,000 4,000 2,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Geothermal Natural gas

Figure 16 New build energy mix (externality)

Hydro 25,000 20,000 [GWh] 15,000 10,000 5,000

Coal

Geothermal

Gas

Oil

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 17 Overall energy mix (externality)

The CO2 emission reduction, as explained before, is equal with CER produced. In the model, the values of the CERs are projected to range between 7.5 and 10 per tonne CO2 equivalent emissions based on Carbonpositive.net prediction on next recent CER prices (2009-2012 contracts) (see Figure). These projected CER values are conservatively assumed by uniform distribution with 7.5 as the lowest value and 10 as the highest. Crediting period length is at max 7 years for renewable period that can be renewed twice at the same period length (14 and 21 years), and max 10 years for fixed period. These crediting periods are conservatively assumed by Weibull distribution with 3 years (P95), 10 years (P50), and 21 years (P5). Figure 18 [b] presents the marginal CER revenue distribution resulted, respectively. For this study purposes, mean value of US$ 5.1/MWh is taken as geothermal cost reduction into the model.

Projected CER price

[a]

[b] Figure 18 Fluctuated CER price [a]; levelized CER revenue for geothermal energy [b]

Yodha Yudhistra / Thesis Summary (2009)

5.3.2 Sensitivity analysis on geothermal investment Before CDM policy is applied to the model, geothermal investment is raised in order to unable some of geothermal potential to compete with coal. In the reality, this may be happened due to high reservoir risk on geothermal investment. Figure 19 presents results of geothermal investment increase of 10%, 30%, and 50%.
+50% +30% +10%

Coal 16,000 14,000 12,000 [GWh] 10,000 8,000 6,000 4,000 2,000

Geothermal

Natural gas

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 21New build energy mix (subs. gas w/o geo.)


Base case 0.0 0.2 0.4 0.6 0.8 Percentage to total-production [1], 2009 - 2018 1.0

Figure 19 Geothermal investment sensitivity charts

5.3.3 CDM case (reference fuel prices) The worst case of geothermal investment is assumed to be occurred on 50% increase from the base case. Thus, under this scene how CDM affect share of geothermal energy is examined. From the result, CDM increase 11.12% of geothermal share (see Figure 20). This is equivalent to 3,708 GWh of energy produced.

5.4.3 Subsidized-gas case with geothermal Subsidized gas impact to generation scene without geothermal is examined on Figure 22 and 23. It is interesting to observe that under this scenario CCGT power plant candidate is added into the generation system. What can be inferred from these simulations is that under stable gas prices scene, natural gas portion will extremely increase at 5 times of that on the base case.
Coal plant 3,500 3,000 2,500 [MW] 2,000 1,500 1,000 500 Geothermal plant Open-cycle gas plant Combined-Cycle GT

Base case CDM impact + 50% w/o CDM + 50% w/ CDM

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0.0

0.2

0.4

0.6

0.8

1.0 Figure 22 New build capacity mix (subs. gas w/ geo.)

Percentage to total-production [1], 2009 - 2018

Figure 20 CDM impact on 150% geothermal investment


16,000 14,000

Coal

Geothermal

Natural gas

5.4 Subsidized-gas model 5.4.1 Natural gas subsidy Natural gas should be an attractive power generation source in the coming time. The reason is that gas fired generation technologies has environmental appeal, low capital intensiveness, shorter gestation period, and higher efficiency. The main obstacle for the development is its price. Indonesian natural gas, as assumed before, remains higher over years achieving US$ 9/MBtu in 2030. This model is built to observe how stable natural gas price will affect the mix of generation scene. Under this scene, it is assumed that gas prices will be kept constant at US$ 5/MBtu over the study period.
[GWh]

12,000 10,000 8,000 6,000 4,000 2,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 23 New build energy mix (subs. gas w/ geo.)

5.5 Comparison of alternative scenarios 5.5.1 Cost of electricity generation As this study focused on the capacity addition problem, we shall emphasize on the cost of electricity generation only as obtained from the average incremental cost (AIC) (Shrestha et al., 1998; Shresta and Marpuang, 1999, 2005). In this research, it is assumed that average

5.4.2 Subsidized-gas case without geothermal Subsidized gas impact to generation scene without geothermal is examined as follows (see Figure 21)

Yodha Yudhistra / Thesis Summary (2009)

incremental cost (AIC) represents the long run marginal cost (LRMC) of electricity generation. Average incremental cost (AIC) of electricity generation is calculated as follows:
( ( ) )( ( )( ))

where TC is present value of total cost of power generation during the planning horizon, C1 is the present value of capital cost in year 1, VC1 is total costs of fuel and operation and maintenance in year 1, Ei is electricity generation in year i, E1 is electricity generation in year 1, r the discount rate (WACC, 12%), and T is the length of the study (10 years, 2009 2018). Table 6 presents cost of electricity generation from five scenarios.
Table 6 Cost of electricity generation from five scenarios, (in US cent/kWh) Base case w/o geothermal Subsidized gas w/o geothermal Base case w/ geothermal Subsidized gas w/ geothermal

Externality

5.49

5.37

4.56

4.33

5.98

Under base case (with geothermal) scene, the cost of electricity generation is 17.03% lower than that one in the base case (without geothermal) scene. The gas subsidy reduces the cost of electricity generation by 2.17% and 4.97% from that of the base cases (without and with geothermal). In case of externality, the cost of electricity generation in the base case (with geothermal) scene will increase from that under no-externality by 31.34%, respectively. Thus, it can be concluded that geothermal power plants have reached its economical price and tend to mitigate the security of supply issues.

southern Sumatera system. Backed by abundant reserve of low rank coal in southern Sumatera, this fact would not be a problem for next one decade. However, volatile price of coal commodity still brings to security of supply problem. Therefore, these fuel requirements are further examined in this subsection. It is also noted that all coal plants (existing and candidate) coal requirements are equivalent to low rank coal (lignite), assuming its Gross Calorific Value (GCV) as 4,200 kcal/kg (Indonesian Coal Index (ICI), 2008). This study has reported the results for the five scenarios. Figure 24, 25, and 26 present gas and coal requirement, respectively. The coal requirement in the base case (without geothermal) increases from 3.7 million tonnes (Mt) in 2009 to 11.6 Mt in 2018. Meanwhile, in the base case (with geothermal) coal requirement only slightly increases from 3.7 million tonnes in 2009 to 6.0 Mt in 2018 or on average 28.75% lower than that on the base case (without geothermal) which can be stored as reserve. This coal reserve will assist Domestic Market Obligation (DMO) of coal, as it can be used for supplying existing coal-fired power plants outside southern Sumatera or can be exported. Under externality scene, coal requirement is lower than that on the base case (with geothermal) but it is not significant. It can be concluded that subsidized gas scene does not primarily affect the coal requirement over the study period. On average, coal requirement is only 5.15% and 6.86% lower than that on the base cases (without and with geothermal). Figure 26 shows that the requirement of gas in both base cases (with and without geothermal) are slightly fluctuates on average of (25 106) MBtu per year until the end of study period. Meanwhile, under subsidized gas scene, gas requirement increases from (24 106) MBtu in 2009 to (40 106) MBtu in 2018. This number is larger under externality scene, (45 106) MBtu in 2018, but the average is approximately remain same.

5.5.2 Fuel consumptions The results of energy mix of each models show that coal will continue to be main fuel for power generation in
Base case w/o geothermal (coal) Base case w/ geothermal (coal) Base case w/o geothermal (gas) Base case w/ geothermal (gas)

200 180 160 [10^6 MBtu] 140 120 100 80 60 40 20 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 24 Coal and gas requirements with / without geothermal

Yodha Yudhistra / Thesis Summary (2009)

Base case w/o geothermal Subsidized gas w/o geothermal Externality

Base case w/ geothermal Subsidized gas w/ geothermal

14 12 [million tonnes] 10 8 6 4 2 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Figure 25 Coal requirements from five scenarios (eq. 4200 kcal/kg, GAR)
Base case w/o geothermal Subsidized gas w/o geothermal Externality Base case w/ geothermal Subsidized gas w/ geothermal

50 45 40 35

[10^6 MBtu]

30 25 20 15 10 5 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Figure 26 Natural gas requirements from five scenarios

5.5.3 Environmental emissions As described before, of the major concerns of electricity generation is its environmental emissions. This issue has become of wide interest to the public and it is likely to remain an influential hurdle for electricity energy mix in the future. Based on the simulation results, the research therefore primarily evaluates environmental emissions from all of five scenarios. Generally, there are three pollutants which are considered as externality producer, namely CO2, NOx, and SO2. However, only emission of the main pollutant, that is CO2, is examined in the study as the others (NOx, SO2) will proportionally include. Calculation is carried out based on emission factor of each fossil fuel as listed on Table 7. The yearly amount of CO2 emission is presented in Figure 27, respectively. From this figure, an average emission of CO2 is further calculated. Table 8 summarizes the average emission of CO2 per energy unit.

Table 7 Emission factors for different sources of energy used, (in kg/MWh)

Energy source Coal Oil Natural gas Geothermal

Technology Steam turbine Diesel engine OCGT CCGT Geo. plant

Efficiency 35% 35% 33% 56% -

CO2 915 760 575 345 100

Source: New Zealand Energy Conservation Authority (2001) and our assumptions

It is interesting to observe that the CO2 emissions trend is quite similar with the coal requirements trend. This can be described from Table 8 that conventional coal-fired candidate power plant is obviously the main source of environmental emissions. If conventional coalfired power plants are partially replaced by geothermal candidate power plant as on base case with geothermal scene, an average emission per unit will be reduced by 22.8%.

Yodha Yudhistra / Thesis Summary (2009)

Base case w/o geothermal Subsidized gas w/o geothermal Externality

Base case w/ geothermal Subsidized gas w/ geothermal

20,000 18,000 16,000 14,000 kilo.Tonnes 12,000 10,000 8,000 6,000 4,000 2,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Figure 27 CO2 emissions from five scenarios Table 8 Average environmental emission per unit of electricity, (in kg/MWh) Base case w/o geothermal Subsidized gas w/o geothermal Base case w/ geothermal Subsidized gas w/ geothermal

Externality

815

802

629

617

602

6.

Conclusion and recommendation

New build power generation energies has each playing roles on the mix scene. Plant with higher capital costs and lower O&M cost will play role as base loader. In the other hand, plant with lower capital cost and higher O&M cost will serve as peaker. For next decade, in southern Sumatera system, coal still has important role to hold base load and geothermal following at the second place. In that order, though geothermal has reached its economic price it could not be further developed because of its limited proven reserve. This makes coal stays dominate due to its abundant resource. At peak load, natural gas respectively, into peaking plant (open-cycle) can achieve premium over base load. Addition of geothermal power plant tends to offer the lower cost of power generation, reduce environmental emission, and a number of additional capacities based on these sources would be able to secure the supply. Under this scene, new build energy mix comprises 55% of coal, 43.5% of geothermal, and 1.5% of natural gas. However, uncertainties of geothermal regarding its exploration cost and reservoir risk tends to bring for higher investment cost. Therefore, Clean Development Mechanism is needed for supporting the finance. From simulation resulted, CDM policy effectively increase geothermal employment. It is also observed from the simulations that externality and subsidized gas policies are not effective to mitigate both environmental emission and supply security issues. Externality policy increases the cost of power

generation but only slightly decreases the emissions, whether subsidized gas gives equal cost to the country and the impact does not improve the base case despite of significant increase on natural gas share. It is considered to be more effective if those policies are substituted by geothermal subsidy and Domestic Market Obligation (DMO) of natural gas which tend to give similar impact. Finally, this thesis only focuses at the theoretical aspect on how primary energies can supply electricity demand optimally through implementing assumptions. Deeper findings of coal and gas prices in Indonesia, sustainability issues on geothermal energy utilization, Domestic Market Obligation (DMO), and Clean Coal Technology (CCT) employment should be conducted in order to provide more comprehensive analysis to this research.

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