Energy­ Sector Fundamentals

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Energy­ Sector Fundamentals ( energy­-sector-fundamentals )

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Energy­Sector Fundamentals: Economic Analysis, Projections, and Supply Curves 9.12.2 Variabledebt/equityratesvs.fixedchargerates(FCRs) Chapter 9 (9­14) Most energy models adopt either fixed or variable charge rate­based scenarios. Fixed charge rates include a range of factors such as construction financing, financing fees, return on debt and equity, depreciation, income tax, property tax, and insurance. The fixed charge rate, when multiplied by the cost of a new construction project, yields the annual “fixed charges.” Thus, the fixed charges are the annual interest expenses of the money borrowed to build, plus the annual costs to operate and maintain a new construction project. This is in contrast to the variable cost rate charge, which shows what any given loan fund needs to yield to cover variable costs. Here, Fixed charge rate comparison for renewable technologies is a common procedure and allows comparison across technologies. We have adopted the 12.8% fixed charged rate cited in the National Energy Modeling System (NEMS) model, sponsored by DOE, as our fixed charge rate for calculations. This is used consistently in both the GETEM and MIT EGS models. Although all results from either the GETEM or the MIT EGS model show the cost of energy declining to a point below competitive alternatives and are in general agreement in terms of overall cumulative supply, the use of VRR in MIT EGS offers what we believe is a closer approximation of market conditions when used in the case of developing technologies as opposed to commercially mature, established technologies. A comparison of the two approaches will illustrate this effect. The results can be dramatic as shown in Figure 9.18. In Figure 9.18b, the levelized energy costs are significantly lower when using a fixed charge rate opposed to using a variable rate of return as in Figure 9.18a, holding other model parameters constant. A key result that emerged between the use of variable cost and fixed cost models is illustrated by comparing Figure 9.18a and Figure 9.19a. Here, both scenarios achieve 100,000 MWe from EGS with a vertical reservoir spacing of 1 km. Using the VRR method requires 80 kg/s with a quartet (one injector to three production) well field, while the fixed charge method requires only 60 kg/s for a triplet in order to deliver economic power. If one compares the results from the GETEM model in Figure 9.19b to the results from the MIT EGS model using a fixed charge rate in Figure 9.19a, it is evident that the two models agree relatively well. 9­39

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