Economic Costs of Electricity Production in Poland

£<SN encryv innovation ECONOMIC COSTS OF ELECTRICITY PRODUCTION IN POLAND M. BEELDMAM J. SOLINSKI IWjWIWI * m BOOUKNT IS UIUMITEO nun* SAianiMTEf The Netherlands Energy Research Foundation ECM Het Energieonderzoek Centrum Nederland (ECN) is is the leading institute in the Netherlands for energy het centrale instituut voor onderzoek op energie research. ECN carries out basic and applied research gebied in Nederland. ECN verricht fundamenteel en in the fields of nuclear energy, fossil fuels, renewable toegepast onderzoek op het gebied van kernenergie, energy sources, policy studies, environmental aspects fossiele-energiedragers. duurzame energie, beleids of energy supply and the development and application studies, milieuaspecten van de energievoorziening en of new materials. de ontwikkeling en toepassing van nieuwe materialen. ECN employs more than 900 staff. Contracts are Bij ECN zijn ruim 900 medewerkers werkzaam. 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Box I Postbus I NL-I755ZG Petten I755ZG Petten the Netherlands Telefoon : (02246) 49 49 Telephone : +31 2246 49 49 Fax : (02246) 44 80 Fax : +31 2246 44 80 Dit rapport is te verkrijgen door het overmaken van This report is available on remittance of Dfl. 35 to: f35.-- op girorekening 3977703 ten name van: ECN, General Services. ECN, Algemene Diensten Petten, the Netherlands te Petten Postbank account No. 3977703. onder vermelding van het rapportnummer. Please quote the report number. © Netherlands Energy Research Foundation ECN © Energieonderzoek Centrum Nederland FEBRUARY 1994 ECN-C-94-009 ECONOMIC COSTS OF ELECTRICITY PRODUCTION IN POLAND M.BEELDMAN J.SOUNSKI MASTER mrnwmi IF OK MoivEir i nmm «lift mnini On Framework of the study This study was conducted within the framework of a co-operation between the Netherlands Energy Research Foundation (ECN), Petten, the Nether lands, and Instytut Energetyki (IEn), Warsaw. Poland. The authors thank the staff of the System Development Department. [En, and the staff of ECN Policy Studies for their valuable contributions to this study. Abstract In Poland the process of transition from a centrally planned economy to wards a more market oriented economy started in 1990. Subsidies were gradually abolished, and prices are expected to reach the Western Euro pean level in the near future. Therefore, the current costs and accounting method cannot be used for a proper economic appraisal and the concept of real costs must be applied. In power stations the economic costs for fuel and depreciation should be taken into account, which is very important to estimate the expected future costs, price level of electric energy, and the general economic situation of the electricity sub-sector up to the year 2000. This study presents a methodology for the calculation of the economic costs of the production of electricity. This methodology is applied to assess electricity production cost in Poland by type of power station for the years 1995 and 2000. In addition, an overview is presented of the methods used by the OECD countries, particularly in the Netherlands. The main conclusions of the study are: 1) the real economic costs to gen erate electricity in Poland are about two times higher compared with the traditional book-keeping data; 2) the investment costs will become the most important cost component in the near future; and 3) there are con siderable differences in production cost per kWh for the different types of power plants in Poland. Keywords ECONOMIC COSTS POWER SYSTEM DEVELOPMENT ELECTRICITY PRODUCTION 2. ECN-C -94-009 CONTENTS 1. INTRODUCTION 5 1.1 Background 5 1.2 Objectives of the study 6 2. POLISH POWER SYSTEM DEVELOPMENT 7 3. CALCULATION OF ECONOMIC PRODUCTION COSTS 9 3.1 Classification of production costs by type of power station 9 3.2 Calculation schemes of production costs for different types of power plants 9 3.2.1 Cost components 9 3.2.2 Calculation units 10 33 Calculation schemes of power system production costs 11 4. ELECTRICITY PRODUCTION COSTS IN OECD COUNTRIES 13 4.1 Costs for the design and extension of a power system 13 4.2 Cost allocation for an existing system 14 4.3 Economic parameters used in different countries 17 5. COST ASSESSMENT FOR PLANNING PURPOSES 19 6. POLISH ELECTRICITY PRODUCTION COSTS FORECASTS FOR 1995 AND 2000 21 6.1 Future system development in Poland 21 6.2 Assumptions 21 6.3 Forecasts of electricity production costs 23 6.4 Forecasts for the costs of the power system 26 7. CONCLUSIONS 27 REFERENCES 29 APPENDIX A. Levelized costs sensitivity analysis 31 APPENDIX B. Costs of power and heat in CHP plants 35 APPENDIX C. Simulation of electricity producing units 37 APPENDIX D. Production per unit in 2000 45 ECN-C-94-009 3 ECM-C--94-009 1. INTRODUCTION 1.1 Background Poland is a medium size country. The area is 312.700 sqJun and the popu lation is over 38 million. The population density is 122 inhabitants per sqJtm. Poland has rich primary energy resources, but they are mainly solid fuels: hard coal and lignite. Natural gas resources are relatively small and crude oil insignificant. Hydroelectric potential is also low. There are no uranium deposits. Therefore hard coal is one of the most abundant natural resources, playing the essential role in the Polish economy. During last years over 95% of primary energy production were coal and lignite, and about 75% of primary energy consumption. Hard coal is the country's leading export product. The Polish economy is presently undergoing a period of transition towards a more market oriented economy. In September 1989, the Polish Govern ment launched a cra^h programme of macroeconomic reforms to curb the huge inflation rates and to reduce foreign debt. The crash programme resulted in a decline of industrial production by more than 40% and. conse quently, primary energy demand fell from 127 Mtoe in 1988 to 97 Mtoe in 1992. The current energy situation in Poland is characterized by: - Excessive dependence on coal and an unfavourable structure of primary energy supply. The liquid fuels per capita consumption is 3 to 4 times lower than in Western European countries. • High dependence on the formei USSR for imports of natural gas and crude oil. In 1992 about 65% of natural gas came from the former USSR. - High energy intensity of the economy (at least two times higher than in OECD countries) and a relatively low per capita energy consumption, approximately 2.5 toe. - Unfavourable trends in energy foreign trade balance. From a substantial exporter of primary energy in the past, Poland became a net importer. In financial value, hydrocarbon imports exceed considerably the decreasing coal exports. - Serious environmental degradation. High energy intensity and excessive coal use cause serious environmental problems, in particular air pollution. - Low energy prices, which are still below economic cost level (particularly prices of electricity) and do not reflect full social costs. The economic reform affects the electricity subsector and the cost of electricity produc tion. In Poland the process of transition from a centrally planned economy to wards a more market oriented economy started in 1990. Subsidies were gradually abolished, and prices are expected to reach the Western European level in the near future. Therefore, the current costs and accoun ting method cannot be used for a proper economic appraisal and the con cept of real costs must be applied. In power stations the economic costs for fuel and depreciation should be taken into account, which is very important ECN-C-94-009 5 to estimate the expected future costs, price level of electric energy, and the general economic situation of the electricity sub-sector up to 2000. 12 Objectives of the study The main objectives of the study are as follows: - to present general data on the Polish electricity subsector. - to assess the economic costs of electricity production for different types of the Polish power plants, - to asses the system costs for production of electricity. The assessment of economic costs serves several purposes. Firstly, in de signing a power system it is necessary to assess these costs in order to establish a power system with the lowest total costs and a cost assessment method cen give a quick insight into the consequences of changing certain parameters; and secondly, the assessment of economic costs relates to the management and operation of a system. This concerns decisions on which power stations are to produce electricity and which costs should be paid by which customers. This study deals with both objectives, although no translation is made from electricity production costs into end user tariffs. The currency used in this report is US dollars unless stated otherwise. The study has been conducted jointly by the Institute of Power Engineering, Warsaw and by Netherlands Energy Research Foundation. Petten. The study consisted of three phases: I. Formulation of methods to calculate the costs of electricity production and discussing these methods during a meeting in Petten. II. Calculation of the 'economic costs' of electricity production for dif ferent types of Polish power plants and a forecast of the system pro duction costs for the years 1995 and 2000.

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