CDM Consolidated Methodology for Electric Sector Baselines – Issues and Proposed Answers

1. CDM Consolidated Methodology for Electric Sector Baselines – Issues and Proposed Answers Duane T. Kexel, Vice President Power System Engineering Madison, WI USA kexeld@powersystem.org Buenos Aires, December 8, 2004

2. Background of My Comments • Dozens of Power Supply, IRP, and Feasibility Studies In Numerous Countries • Czech Standardized Electric Sector Baseline • Hungarian Biomass Project • Poland Standardized Sector Baseline • Flies, Birds and Elephants

3. The CDM Challenge

4. CDM Quality Assurance Troika CDM Meth Panel Validators Verifiers

5. Baseline Uses • Ex Ante Allocation • Forgone Opportunities for Buyers • Underdelivery Penalties for Sellers • Inaccurate Methods Chill The Market • Ex Post Disbursement • Does Not Depend Totally On Forecasts • Should Make Maximum Use of Actual Data • Impacts Risk Split Between Buyer and Seller • Never Forget That The Common Goal of All Is To Reduce Emissions of GHG

6. Czech Electric Sector Standard Baseline Objectives • Minimize Transactions Costs For Multiple Small Projects • Consistent Comparative Standard for Renewable Electric Generation • Simple and Dynamic • Recognize Key Features of Czech Grid • Both Screening and Monitoring By Local CEA Staff/Consultants • About One Day Per Project Per Year For Analysis • Requires Only Readily Available Data With A Known Publication History and Expected Future • Defaults Are Defined In Case Data Are Not Available • Conservative but Competitive

7. Key Czech Grid Considerations • Impact of Temelin (2,000 MW Nuclear, 11,000 MW System) Addition • Additions Before 2010 Not Load Driven • 8% Renewable Target by 2010 • Many Small Renewables Not Dispatchable • Large Blocks of Must Run Units – IPP CHPs • Coal Dominance - Gas Limited • Marginal Not Average Fuel Mix Matters • Operating Margin - Not Build Margin is Relevant

8. CDM ACM0002 – Operating Margin • EF is calculated as a combined margin (CM) of the operating margin(OM) and the build margin (BM) • OM (a) – Simple OM – Weighted average of generation by fuel above non-displaceable sources • OM (b) – Simple Adjusted – Adjusts for “excess” non-displaceable sources above minimum load – then the weighted average of generation by fuel • OM (c) – Hourly Dispatch Using Top 10% Mix in Each Hour • In all cases, data from last available years or ex post monitoring is acceptable

9. OM(a) & OM(c1) Graphic Concepts

10. OM (a) and OM (c1) Example

11. OM (c1) Methodology • OM (c) – Conceptually correct but literal data demands are excessive and often not practical • Use of 3 year historic average can very seldom be justified. • Concept can be used but much more simply applied – that is (c1). • Czech method only needs the split of marginal hours by fuel and the average conversion efficiency for the class of marginal plants (Hg and Hc and maybe Hn). • Three methods of estimating marginal hours by fuel

12. OM (c1) vs OM (c) • OM (c1) Statistical method requires only monthly generation by fuel – Typically easily available and reliable data – Self testing. • OM (c1) Screening curve requires more data and calculation but dramatically less data than hourly generation by unit • Proxy unit hours are useful check if such units can be identified. • Statistical method is easily applied going forward with other methods as checks if results are bizarre. Default bounds can be reasonably set.

13. Screening Curve Hg-Hc Split

14. Statistical Method of Hourly Split

15. Monthly Gas Gen = f(Total Gen)

16. Model Fit For 2002 For Czech Rep

17. Proxy Unit Method • Look at average operating hours of peaking units on the system. • Would work well if system has conventional peaking CTs. • Czech case, IGCC and pumped storage hydro cover some of the peak. These are actually coal equivalent units. • Gas-fired CTs are minimal and the only sizeable unit is often used for voltage support rather than load. • For CR, it is more useful to track gas-fired generation.

18. Czech Results Comparison

19. What About OM (b)? • More than gas and coal may be displaced. • It is critical to check for displacement of non-displaceable generation – “Above the knee”. • For Czech Republic, just completing 2,000 MW of new nuclear generation. Also, many coal-fired CHPs dispatched for heat load. • Czech method calculates from energy data like OM (b). • Still must decide on dispatch order of low-cost units. Must-run cannot be displaced. For CR, nuclear was chosen.

20. Czech Method for Excess Baseload

21. Summary on OM Methods • OM (a) will generally overstate emissions • Marginal rather than average fuel displacement should be used based on marginal hours. • Within fuel types, average unit efficiencies can be used and will provide conservative results with reasonably accessible data • OM (c1) is correct and preferable if data can be obtained and project can justify the transactions costs. • Three year historic average would only be reasonable in very few cases and could be very misleading.

22. Select Additional Key OM Issues • Time Resolution of The Analysis • Load Curve Representations • Liberalization of Power Markets • Complete Calculation Method

23. Proper Time Resolution For OM • Fuel mix may change significantly by month if load changes significantly by month. • Production may vary dramatically by month for wind or hydro – generally not for biomass although the maintenance month could matter. • Practical candidate periods are annual, seasonal, monthly. • Hourly load data can be used to identify monthly distribution of peak hours and of low load hours.

24. Hgas and Hnuc by Month and Year

25. Marginal Fuel Mix by Month/Year

26. Czech Rules On Time Granularity • If max and min monthly production of proposed project are within 10% of average, annual is okay. • If annual not okay, seasonal or monthly is required. • If within season variation about the mean is within 10%, seasonal is okay. • If annual and seasonal are not okay, monthly analysis is required. • Monthly is always accepted since it is more accurate.

27. Load Curve Representations • Relevant LDC for domestic generation is domestic consumption plus net exports. • Best basis is three year history of hourly domestic consumption. • Net exports can be adequately represented from data for peak and minimum loads plus annual total MWh. • Domestic load shapes normally shift slowly over time.

28. Load Curve Approximations • Linear is ideal for simplification but not adequate. • Piecewise linear was used for CR based on 2002 history and two segments. • Algebraic representation is very good for load factors between 40% and 60% • MWt = f(LF, Max, Min/Max, Pi, Hours)

29. Czech Piecewise Linear @ 360 Hrs

30. Net Exports From Peak, Min MW and Annual MWh

31. Displaced Emissions Calculation

32. ACM0002 – Build Margin • BM (1) – Ex Ante • Five Most Recent Power Plants Built, or • Most Recent Vintage That Accounts for 20% of MWh • BM (2) – Ex Post For 2008-2012, Then Ex Ante • Default Weighting of OM and BM is Equal but Proponent Can Defend Alternative Weights.

33. Concerns With ACM002 BM • Observed Additions Cannot Logically Represent What Was Displaced By The CDM Project Since The Displacement Was Not Built. BMs Are Inherently Based on Forecasts. • Historic Additions Are Not Good Predictors of Future Additions • Reliance on 20% of Generation Will Bias Results Toward Baseload Additions When Many Renewable Projects Do Not Displace Baseload. • Default of 50-50 Seems Arbitrary And Will Seldom Be Reasonable For Specific Years. • Should Require A Demonstration of When BM Becomes Relevant And Then It Should Get 100% Weight. Before That, Weight Is Zero.

34. Principles of Correct BM • Expansion Plan Should Be Constrained Least Cost Path (CLCP) • Additionality Typically Based On Investment Analysis • OM Based On Constrained Economic Dispatch • BM Should Have Same Foundation • Concept Is The Difference in CLCP With and Without Proposed Project • Many CDM Projects Will Provide Energy Only Which Is A Sticky Wicket

35. Constraints to CLCP • Transmission Limits Can Corrupt The Timing, The Amount, And The Mix of Capacity Additions • Must-Run Units Distort Simple Investment Sequence • Emission Limits Will Constrain Expansion Path Unless Monetized • Portfolio Standards Will Corrupt LC Mix • Poland – 25,000 MW Peak, Need To Replace 10,000 MW by 2010 – May Replace 5,000 MW • But Subject To These, It Is Still The Best Predictive Assertion

36. Illustrations of Problems • Czech Case • 2000 MW Nuclear Unit Is Last Addition – Accounts for about 16% of Total Generation in 2003. • With 20% Rule or With Last Five Plants BM Would Be Mostly Nuclear and Some Coal For ROR Small Hydro • In Fact, BM is Not Relevant For CR Until 2010 or Later • Displaced Future Plants Are Certainly Not Nuclear • US – Most Recent Plants are Merchant Gas CCs - Future plants are now Utility Coal • CLCP Is Always Alternating Between Fuels, Technologies, And Duty Cycles. Long Term Extrapolation of Recent Past Would Clearly Not Be the Least Cost Plan

37. Proposed Minimalist Solution • Start With Load Vs Capability Analysis To See If BM Is Relevant For Period of Interest – If no Capacity Change In That Period Only OM Matters. • Compare Optimum Mix With Existing Mix For Select Future Years To Establish Likely Sequence of Additions. • Establish Addition Sequence of Each Type (Peaking, Int, Base) by Year. • Find Least Cost Option For Each Type In Each Year • Determine What Type or Mix The Proposed Project Displaces • Say Biomass Displaces Baseload Coal in 2012. Then Use 100% Weight for OM through 2011 and 100% Weight for Coal Thereafter.

38. Optimum Mix Analysis

39. Generic Competitors By Type • Baseload – • Clean Coal • CC Gas or Oil • Other Renewables • Intermediate • Small Clean Coal • CC Gas • Peaking • CT Gas • Storage Hydro

40. Conclusions On State of the Art • Art Striving To Become Science • CDM Meth Panel Process Is Sound But • Should Retain Flexibility Based On Relatively Small Case Law Base • Should Continue To Broaden Case Base • Substantial Carbon Is Still At Issue • Dialogue Is Expanding And Needs To Expand Much Further • OM Rules Are Now Reasonable Although I Would Hope OM(c1) Will Be Recognized To Avoid Need for Dispatch Data • Three Year History Is Not Very Reliable Basis – Should Be Dynamic • BM Is Much More Complex And Should Still Evolve • 50-50 Weighting Is Weak Link And Should Not Be The Default