The Cost of Producing Electricity in Denmark: A Technical Companion

What is the consequence on the costs of generating electricity when a new technology is introduced into a country's power system? There could be large consequences for aggregate production costs if (i) the new technology is producing at a higher cost compared to the existing technologies in the power system; (ii) existing technologies cannot be phased-out at a similar pace as the new technology is phased in, leading to over-capacity in the power system; and (iii), the requirements of the existing power system to meet certain types of electricity demand change. These are all important questions to address when countries decide to move towards new technologies for generating electricity. Leading examples include introducing renewable energy sources like wind or the substitution of conventional energy sources like natural gas instead of coal.

The main objective of this project is to study the costs of generating electricity in the Danish power system. Specifically, calculating and then comparing the costs of generating electricity across different types of generating technologies provides an opportunity to measure the trade-offs involved when new technologies are introduced into a power system.

By investigating the case of Denmark, this study provides important new insights into the aggregate costs of generating electricity. Specifically, the actual average unit costs are estimated for the full generating capacity in the Danish power system. Denmark is a particularly interesting case to study because it is a world leader in terms of wind power penetration rates. In 2012, the wind power penetration rate in electricity consumption was equal to 30 percent, whereas it was equal to 34 percent for production, see International Energy Agency (2013). For comparisons, other regions are dwarfed by the Danish rates: the corresponding values were six percent for Europe, 3.5 percent for the US, two percent for China, and 2.5 percent for the world. The countries that are closest to Denmark in terms of wind power penetration rates are Portugal with 20 percent and Spain with 18 percent. Important lessons can be learned about the consequences of the relative rapid introduction of a large degree of wind power on the electricity generating system. In addition, studying wind power in Denmark is also interesting because the penetration rate increased over a short period of time. In 1985, the share of wind generating capacity was essentially equal to zero. By 2012, the penetration rate of wind power in electricity consumption had increased to 30 percent.

In this paper, we calculate the levelised costs for nine different classes of generators and provide a technical comparison across 7 thermal electricity generating technologies and 4 renewable generation technologies. The 7 thermal electricity generating technologies consist of (1) condensing generators, (2) back-pressure generators, (3) extraction generators, (4) combined heat-and-power (CHP) waste generators, (5) combined-cycle gas turbines, (6) single-cycle gas turbines, and (7) gas engines. The two renewable generation technologies are onshore and offshore wind turbines. We also provide a breis analysis of hydro and solar generation.

For all nine technologies we present detailed costs calculations for computing the levelised costs. The major cost components are which are capital costs, operation and maintenance costs, fuel costs, and emission costs. In chapter 2, we present detailed cost calculations for the seven thermal technologies, whereas in chapter 3 we present the results for non-thermal generation in Denmark.

The results reported in this paper are used as inputs in the analysis of the aggregate costs of generating electricity in Denmark reported in Levitt and Sørensen (2014). The analysis of aggregate costs of electricity generation presented in Levitt and Sørensen (2014) include a summary of the main results of the study which is targeted for readers that may not have time for more intensive reading, e.g., policy makers. The paper also included detailed description of the Danish power system with main focus on thermal electricity generation technologies and developments in global fuel costs and carbon prices as well as a detailed analysis of aggregate costs of electricity generation in Denmark. Finally, the methodology we use to compute levelised costs are also documented in Levitt and Sørensen (2014).

[This is a companion report to The Cost of Producing Electricity in Denmark.]