With our insights on energy transition issues and pathways, let's turn to something really important that we have to consider for everything we do in today's world: economics. How much will all of these new energy sources and supporting infrastructure cost? Who will invest in them, and can consumers afford them? I'd like to introduce a team of economics experts from GLJ, a company of engineers, project managers, and business people focused on assessing energy sources and understanding the economics of investing in them. Today, they're going to focus on the economics of creating electrical energy, which is seen as the primary energy factor of the future. Trisha MacDonald, Senior Engineering Manager, will be presenting. Take it away, Trisha. Thanks, Brad. Energy sweet spots dictate what the power mix will be in a region. In this figure, many different sources of energies interconnect to form the power grid. From solar, wind, water, geothermal, biomass, natural gas and more, the power grid can be composed of many different source forms of energy. In Alberta, we are particularly lucky as we have multiple energy sweet spots from many diverse products. As well, the Alberta power market is deregulated, which allows for competition and diversity. On the right, components of the Alberta power grid are illustrated. For each of the eight major sources you see listed, the total capacity of that source, its current output, and the proportion of total power generated at the time of measurement. For example, coal is generating 1,264 megawatts or 99.8 percent of its capacity. That 1,264 megawatts is 14.5 percent of the total power supply. Coal and natural gas are generating approximately 87 percent of the total electricity in Alberta at this time, with 8.6 percent from wind, 2.5 percent from hydro, and 2.2 from biomass. At the bottom of the chart, we see that 764 megawatts is currently being imported from neighboring jurisdictions into Alberta. Comparing German power production on the left, we see that renewables generated approximately 40 percent of the electricity in 2021. Germany has been developing renewable energy for some time and has done a great job at diversifying their grid. About 20 percent of the total grid comes from onshore and offshore wind. Energy sources available in a particular jurisdiction impact how energy is generated. Here's another version of the energy Sankey diagram. Note again that energy systems are complex and different sources are best suited to particular end uses. Remember as well that there are energy losses along the pathways, including energy refining, generation, and distribution. We must ask, what is the life cycle of each source? How are these new energies ultimately tied to the existing grid? Finally, how do we deliver and ensure demand is met? To answer, we must assess the appropriateness of an energy source to the end use. Key components of the answer include assessing the economics of changing or diversifying the grid and ensuring supply is maintained while diversifying. A key consideration in building projects is to determine whether the project is greenfield, a new development, or brownfield, adding capacity to an existing project. For example, when considering a place to live, should we renovate existing or should we build new? When renovating, some things come easily. No new zoning or regulation. Other items, though, are more difficult. Reusing old tech, permitting, new building codes. When building new housing, significant costs may include roads and other infrastructure, but new tech may increase efficiency. It's important to recognize that there'll be added costs in both scenarios, and these costs are significantly different. Looking at a current energy market, we're living through supply chain issues, lack of investment in our traditional sources, investment into new sources of energy, and proving commercially, in some cases, war, and a reemergence from COVID lockdowns. This combination is leading to higher costs. Diversity of supply gives us more options and lowers costs. Reliance on one energy source has inherent risk. For example, the cost of power and natural gas in Europe right now is approximately $33 per MMBtu, three times the pre-pandemic levels. There's a real link between energy markets and international energy security. The key link is diversity. But many sources of energies have not been tested at high output levels, and others have uncertain economics. Technology readiness level or TRL is a numerical score given to technology under development, describing its ability to deliver new products economically and commercially. TRL 1 encompasses conceptual and basic principles. Mid-TRL technologies are laboratory tested, generating small energy volumes, and are stretching to meet commercial benchmarks for efficiency, volumes, and economics. TRL 9 indicates that they are operationally proven, possibly with minor economic hurdles remaining. There are many different energy processes and applications in various stage of development to diversify the grid. An emerging energy fields are in various stages of technology readiness for commercial scale projects. This figure illustrates the levelized cost to produce various energy types across the world. We'll talk about levelized cost shortly. As energy technologies develop, its unit price generally falls. Fossil fuel costs generally range between 5 and 17 cents per kilowatt-hour, driven both by global and local demand. As another example, onshore wind has been in development since the 1980s and levelized costs have fallen to 30 cents per kilowatt-hour in 1983 to five cents per kilowatt-hour in 2019. Here we see the median levelized cost of various energy sources in different parts of the world. For specific locations, availability of sources will drive cost and feasibility. For example, will we develop a major new hydro dam in Alberta? Likely not as typography East of the mountains restricts potential sites, amongst other reasons. So what's an acceptable price to pay for energy delivered to customers? Can the available sources be developed economically? Another example, coal is a primary energy source in China. So large volumes of coal are required to meet China's energy needs. It doesn't have the lowest levelized cost compared to other energy sources in China, yet China continues to build new coal-fired generation. Key question is, how do we compare these energy sources more accurately, and what key economic analyses should we use to support these decisions about what energy sources to build? Energy diversity depends upon geographic location, abundance of local energy sources, available technology, scalability, distribution systems, and economics. It's important to realize that energy costs are dependent upon both the local market and global supply and demand. Comparing the economic value of different energy projects helps an investor decide where they should invest their money. To properly assess economic value, we'll need to dive into some basic economic metrics, including levelized cost of energy and full cycle economics, including net present value and internal rate of return. We will also dabble and explain some other jargon along the way. For more information on economic terms and jargon, have a look at the link shared in this unit. When investor considers putting money into an energy project, they want to achieve a certain level of profit or return on their capital invested. They think of the time value of money. Understanding that money spent now is not equal to the money made in the future. In other words, the investor compares the value of a dollar they have right now compared to the promise to earn a dollar a year from now. If there's real risk to that investment, that is, the project could fail to be built or might not make a profit, then today's dollar in hand has more value than the dollar that might be earned in the future. So we apply discount factor, DCF, to represent that risk. Investors look for a positive value in their investment when each future revenue dollar is discounted by an acceptable discount factor representing risk tolerance. As we progress on an energy project from pre-engineering studies to development and production, risks becomes smaller and costs and other factors are better defined. It's important in estimating the value of new energy projects to understand what stage is project at and the nature of the costs and risks that go into each stage. Important inputs and outputs of project economics include costs associated with feasibility studies, paying the experts to tell us whether or not the project will work, cost to procure land and buildings, component costs. The physical items needed to create product, including capital expenses to build the project, including equipment, also called CAPEX, operating expenses required with running the project, also called OPEX, cost for humans to operate the project. Process inputs including energy and feedstock cost, transmission and delivery costs to sell now, or storage costs to sell later. Of course, project economics depend upon our revenues minus the taxes and royalties paid to the government and other stakeholders. Finally, we must consider decommissioning costs. What it cost to return the site to the original conditions. Depending upon the stage of the project, inputs can be known quantities or estimates based on similar projects or historical values, but all will have an associated level of uncertainty. Estimators are generally good at looking at historical data, but not as good at predicting the future. Ask any commodity price forecaster. Here, we see historical natural gas prices on the left side of the plot for both domestic gas sold in Canada and the United States as shown in orange and European gas as shown in green. Looking at the pre-2022 history, one could have projected the domestic gas would be sold in the future at prices illustrated in the orange box and European prices as shown within the green box. Of course, when we look at what really happened, actual prices exceeded our expectations significantly, rendering our estimated project revenues for our new gas project incorrect. Market price forecasts are critically important inputs for investment decisions. Significant deviations needs to be understood and explained to investors and projects can fail if revenue expectations are not met. The project life cycle defines each component of a project from identification to end-of-life and decommissioning stages. Life cycle cost analysis is a process of evaluating the economics of the project over its entire life. During the first stages, the project team is doing studies, proving technology, determining costs, and significant capital investments are being made. This happens even before the project is approved and the final investment decision or FID is made. Once FID occurs, investors provide more capital so that the operator can build infrastructure, procure equipment, buy materials, obtain approvals, engage in contracts to deliver, and hire staff, essentially getting ready to start making the product. In this case, electricity. Once production begins and electricity is sold, the operator must pay operating expenses, taxes, fees, royalties, even before the profits come in. Toward the end of the project's useful life, more capital is spent to decommission infrastructure, returning the land back to its original state, and repairing any environmental damage. Considering all the different stages of development and all the economic inputs and outputs, let's explore three methods to compare the economic value of various projects. Let's start with levelized costs, whereby we evaluate the economic performance of a project over its entire life taking into account all project costs, including construction costs, costs of fuel and repairs, costs imposed by emissions. Levelized cost measures all costs over the lifetime of the project to determine how much it costs to produce a certain amount of energy. Returning to our project life cycle, costs that are generally not included in levelized cost analysis are grayed out, while pre-revenue costs highlighted in green may or may not be included. We may make reasonable comparisons of different projects when comparing costs in the same levelized cost study. However, the return to investor and total capital employed maybe unknown or not clearly stated. As well, these calculations don't necessarily take into account the time value of money or even discount future dollars. There is no consistent based method to calculate levelized cost. So different levelized cost studies should not be used to compare project values beyond the early project identification stage. For example, upfront capital may only be a function of what's left to spend or doesn't consider all capital required to create and deliver the energy to the consumer. In addition, cost estimates may or may not include changes to programs such as taxes, royalties, grants, or incentives into the future. Levelized cost can provide quick snapshots of different energy projects. Let's investigate this further with an example. This table from the International Energy Agency compares levelized costs across various Canadian gas, solar, and wind projects. The two solar projects both have 20 megawatt capacity, but they're levelized costs are significantly different, $62 and $88 per megawatt hour. Does the levelized cost analysis help to inform an investment decision? Perhaps, but to make a good investment decision, more information would be helpful. Here's the questions I have when looking at this table. Do potential investors understand why the operating costs are so different for the two projects and how they might change into the future? What is the capital spend profile? How do CO_2 credits and taxes compare and change over the lives of the projects? Are any grants or incentives included? What are the transportation and transmission costs? What are the uncertainties in the project economics? How long are the project lives? Are future costs inflated in the analysis? What does the sale price forecast look like for each project? What are the commissioning costs? Lots of information has been left off the table, making accurate comparisons difficult. Levelized cost analysis can be easily manipulated to highlight or promote specific projects. As we just saw, this implies levelized cost calculation failed to inform about specific project details and uncertainties. Overall, the levelized cost method does not provide the key investment information. How much is the project expected to earn? Project value is key to investors, as their primary concern is getting their investment back as quickly as possible and making money after that. This chart compares levelized cost calculations for various types of electricity generation projects on a global generalized basis. This table is interesting as it provides a comparison of cost metrics between projects and information on overall project costs. However, from an investment perspective, using levelized costs as a comparison method may be too generalized and oversimplified. As illustrated in this table, the ranges of costs can be broad and project specifics may not be easily identified. One might take away from this example that certain projects are very inexpensive. But many project specific questions are unanswered, including important information on capital and revenue projections. Full cycle economic analysis includes all the costs in building an energy project, including initial costs such as land, infrastructure, distribution to customers, CAPEX, OPEX, product costs, incentives, and other considerations. It is the most comprehensive analysis best suited to compare the economic value of competing projects, such as proposals to build wind, solar, gas-fired electrical generation for a particular market. Intuitively, most people assume that all comparative methods are robust, but this is not the case. The investor needs to review the full cycle economic analysis to determine whether it makes safe, fair assumptions that are relevant now and in the future. They need to know whether the capital they're going to invest will still earn an acceptable return and how long it will take to get it. Returning to our project life cycle, you see nothing has been removed as all costs and revenues have been included in the full cycle analysis. Net present value or NPV and internal rate of return or IRR are two metrics calculated from a full cycle economic analysis. NPV is simply the value of the project. All costs or inputs and revenues calculated yearly, and then further discounted based on a discount factor determined by investors and their tolerance to risk. Values of DCF commonly are 10-20 percent. The net revenue after discounting is summed up to give us the NPV, which essentially is the profitability of the project. Internal rate of return uses the same project inputs and outputs. After all the costs and revenues are calculated, it calculates at what discount factor would make the NPV equal to zero. Or simply put, at what discount factor would the project generate zero profit. IRR tells the investor whether the capital is going to yield a positive return. NPV is the best measurement to use when comparing and ranking different projects. An investor looking to decide which project to fund should run the full cycle economics and choose the project with the higher NPV. Good project evaluations use multiple forecasts running various scenarios to help identify uncertainty in the project economics. An energy producer can run half-cycle economics on a project that is currently operating to assess the value of expanding the project or bringing on additional volumes. We see that early stages of the project on the life cycle chart are not included as they've already been completed when the analysis is performed. Generally, when companies run half-cycle economics, they indicate costs, revenues, or capital on a per unit incremental volume. So they might say, for example, that they are investing X dollars of capital per additional barrel or additional megawatt hour produced by their expansion project. Half-cycle economics informs on the go forward robustness of a plant operation. It does not allow the investor to compare different projects across different sources. When we compare the metrics, what's our final decision on investing in a new electrical generation project? An investor must do the work to guide their decision-making. We suggest that they compare levelized cost values as a baseline test early in the project's life cycle. Use full cycle economic analysis, including NPV and IRR metrics, to evaluate the projects and guide decision-making. Refine the economic inputs as they progress from the identified stage to project sanctioning. Understand risk tolerance and acceptable rates of return for the investor. When comparing competing generation projects, the investor must understand the scope of the project and supporting infrastructure, what costs are included, present and future policy tax regulatory regimes, key differences between competing projects and associated risks, what important factors may be missing or understated in the analysis. But we see levelized cost estimates and comparisons everywhere. So why are they so popular if they're not good measures of project value? Well, they're simple and easy to generate and easy to understand. They are a quick way to promote or make a specific project look good to investors in a very fast-paced competitive market, particularly when they do not include all important details or aspects of a project. A key takeaway, read the fine print. The future is exciting. Many different energy sources are competing on many different levels. Carbon rating, cost competitiveness, abundance and reliability. All of these are key drivers of our diversifying grid. We will need contributions from all types of energy to meet future energy demand. The dominant technologies will be driven by cost, policies, and pertinent, available, cost competitive, regional mixes that can be delivered to the end user. Well-informed feasibility and economic analyses are key to choosing the right energy projects. We will also need contributions from all types of people with diverse backgrounds, training, and thought. Thank you for your time and attention, and thank you to the energy transitions MOOC for inviting us to participate in this incredible course.
