A Levelized Cost of Energy Model for Wind Farms That Includes Power Purchase Agreements
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Many government entities throughout the world are developing mechanisms to help renewable energy become better integrated and more competitive with nonrenewable energy. Typically, renewable energy is more expensive and riskier than conventional energy generation, thus creating an emphasis on the need for cost reduction of renewable energy, as well as understanding how the contractual agreements affect buyers and sellers of energy. In the United States, government mandates have been developed in the form of State-specific Renewable Portfolio Standards (RPS) that require specific percentages of renewable energy consumption to be met, along with the procurement methods to be used that ensure the renewable energy percentages will be met. The usage of RPS and renewable energy requirements have increased the need for long-term energy agreements. The two most common forms for managing the purchase of renewable energy are Power Purchase Agreements (PPAs) and bundled Renewable Energy Credits (RECs). Both RECs and PPAs typically use a Levelized Cost of Energy (LCOE) calculation to determine the price of energy and they may contain limitations on how much energy can be purchased. Conventional LCOE calculations are limited, as most analyses assume constant cash flows, and do not account for variable annual energy generation from renewable energy or contractual terms that limit the purchase of energy. This can lead to significant errors, because the conventional LCOE calculation may be lower than the actual LCOE, since it does not consider the energy purchase limitations created by PPAs and RECs that lead to additional costs when energy generation falls above and below the energy purchase limitations. The conventional LCOE calculation also does not consider the effect on financing a project when penalties associated with the under or over production of energy are not symmetric. It is critical to have an LCOE that accurately reflects the actual situation for an energy project or the project may be in danger of failing as the costs to run the project are not being covered from the revenue received from selling energy. It is also important for utilities to obtain accurate LCOEs because utilities may be reluctant to use renewable energy if the calculated LCOE is higher than the actual LCOE. This thesis develops a new model for LCOE that accounts for the energy purchase limitations used in PPAs for wind farms. The thesis also provides a real case study from the Maryland Offshore Renewable Energy Credits (ORECs). The case study demonstrates that the LCOE is higher when including the production loss from years where energy is higher than the awarded OREC quantity. The case study also demonstrates the potential to award more ORECs at a lower cost, because the Total Life Cycle Cost (TLCC) is able to be distributed amongst more energy produced.