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Annualization of renewable investment costs for finite horizon electricity pricing and cost recovery

F.A. Campos, J. Villar, E. Centeno

Sustainability Vol. 13, nº. 4, pp. 1993-1 - 1993-16

The increasing penetration of renewable electricity generation is complicating the bidding and estimating processes of electricity prices, partly due to the shift of the overall cost sensitivity from operation (fuel) costs to investment costs. However, cost minimization models for capacity expansion are frequently based on the principle that, for a perfectly adapted system allowing non-served energy, marginal remuneration allows overall operation and investments costs recovery. In addition, these models are usually formulated as finite-horizon problems when they should be theoretically solved for infinite horizons under the assumption of companies’ infinite lifespan. But infinite horizon cannot be dealt with mathematical programming since it requires finite sets. Previous approaches have tried to overcome this drawback with finite horizon models that tend asymptotically to the original infinite ones and, in many cases, the investment costs are annualized based on the plants’ lifespan, sometimes including a cost residual value. This paper proposes a novel approach with a finite horizon that guarantees the investment costs recovery. It is also able to obtain the marginal electricity costs of the original infinite horizon model, without the need for residual values or non-served energy. This new approach is especially suited for long-term electricity pricing with investments in renewable assets when non-served demand is banned or when no explicit capacity remuneration mechanisms are considered.

Spanish layman's summary:
Este paper propone una anualización de los costos de inversión para modelos de horizonte finito con inversiones en generación renovable, tratable con Programación Matemática. Los costes marginales coinciden con el modelo infinito original, sin valores residuales ni energía no suministrada.

English layman's summary:
This paper proposes a new annualization of the investment costs for finite horizon models with renewable generation investments, tractable with Mathematical Programming. Marginal costs coincide with the original infinite models, without neither residual values nor non-served energy.

Keywords: infinite horizon models; investment theory; marginal pricing; renewable technologies

JCR Impact Factor and WoS quartile: 3,889 - Q2 (2021); 3,900 - Q2 (2022)

DOI reference: DOI icon https://doi.org/10.3390/su13041993

Published on paper: February 2021.

Published on-line: February 2021.

F.A. Campos, J. Villar, E. Centeno, Annualization of renewable investment costs for finite horizon electricity pricing and cost recovery. Sustainability. Vol. 13, nº. 4, pp. 1993-1 - 1993-16, February 2021. [Online: February 2021]

    Research topics:
  • Unit-commitment in electricity markets with high RES penetration
  • Analysis of sustainable energy policies