Scenarios for assessing profitability and carbon balances of energy investments in industry

Report, 2010

The industrial sector can be a major contributor to increased energy efficiency and reduced CO2 emissions provided that appropriate energy saving investments are made. Profitability and net CO2 emissions reduction potential of such investments must be assessed by quantifying their implications within a future energy market context. Future energy market conditions are subject to significant uncertainty. One way to handle decision-making subject to uncertainty regarding future energy market conditions is to evaluate candidate investments using different scenarios that include future fuel prices, energy carrier prices, CO2 emissions associated with important energy flows related to industrial plant operations, etc. In this report, such scenarios are denoted “energy market scenarios”. By assessing profitability for different cornerstones of energy market conditions, robust investment options can hopefully be identified, i.e. investment decisions that perform acceptably for a variety of different energy market scenarios. Energy market parameters within different scenarios must be consistent, i.e. different energy market parameters must be clearly related to each other (e.g. via key energy conversion technology characteristics and substitution principles). For constructing consistent scenarios, a calculation tool incorporating these interparameter relationships is essential. Hence, the Energy Price and Carbon Balance Scenarios tool (the ENPAC tool) was developed by the authors and is also presented in this report. The ENPAC tool calculates energy prices for a large-volume customer based on forecasted world market fossil fuel prices and relevant policy instruments (e.g. costs associated with emitting CO2, different subsidies favouring renewable energy sources in the electricity market or the transportation fuel market), and key characteristics of energy conversion technologies in the district heating and electric power sectors. Required user inputs to the ENPAC tool include fossil fuel prices and charge for emitting CO2 (other policy instruments can be included on an optional basis). Based on these inputs, the marginal technology for electricity generation can be determined by setting the technology with lowest cost of electricity production as build margin. The resulting build margin determines the electricity wholesale price together with CO2 emissions associated with marginal use of electricity. In the next step, the wood fuel market price is calculated based on the willingness to pay for a specified marginal wood fuel user category. The CO2 emission consequences of marginal use of biomass can thus also be determined, assuming that biomass is a limited resource. Finally, the willingness to pay for industrial excess heat in the district heating market is determined based on the identified price setting technology in a representative heat market. With this procedure, consistent future energy market prices can be determined. Moreover, CO2 emissions related to marginal use of the energy streams can also be determined. Using the ENPAC tool, eight energy market scenarios covering a time period from 2010 to 2050 have been developed for the EU energy market. The eight scenarios are a result of combining two levels of fossil fuel prices and four level of CO2 emissions charge. Two levels of fossil fuel prices represent different developments on the fossil fuel world market. Four levels of CO2 emission charge were chosen so as to reflect a wide spectrum of political ambitions to decrease CO2 emissions, ranging from weak to strong ambition levels. The ENPAC tool and the scenarios are developed for European conditions without taxes. Additional input may be required concerning taxes and policy instruments in order to reflect local conditions in specific markets.