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Policy Issue Paper 14-15
A Study on Economics of PV and Wind
Power Generation with Emphasis on
Grid Stability
J. Y. Soh et al.
Ⅰ. Research Background / 1
Ⅱ. Research Results / 2
Ⅲ. Policy Implications / 15
<References> / 20
Contents
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 1
Ⅰ. Research Background
□ One of the factors, which impede the extensive deployment of
renewable energy in the power generation sector in Korea, is the
concern that the variable renewable energy (VRE), such as solar
photovoltaics (PV) and wind power, can undermine the reliability of
the power system.
○ In fact, when the shares of the VRE increases, variability of total power
output increases and it can be more difficult in keeping the balance
between the demand for and supply of electricity in real time.
□ However, there are various alternative technologies that can aid the
grid to maintain the system reliability in the presence of the VRE.
○ For instance, the Energy Storage System (ESS) can improve the system
reliability by smoothing out supply and demand mismatch, storing
excess power and supplying it when necessary. Or it can help to reduce
the output variations caused by the VRE and maintain frequency and
voltage within a prescribed range.
○ However, it is still perceived that costs of the ESS are 'considerably'
higher than the costs of other flexible generation sources or operating
reserves such as gas turbines or coal fired power plants.
□ While technologies are rapidly advancing, researches linking system
reliability and economic feasibility of these technologies have been
2 Policy Issue Paper 14-15
rarely conducted.
○ Especially, it is imperative for the government to take into account the
system stability or reliability aspect of achieving the 2035 VRE
deployment target, as well as cost-effective options for aiding the
reliability in the presence of large shares of the VRE.
□ Focusing on the 'frequency and voltage variations' caused by the VRE,
this study aims at analyzing the effects of the ESS in the improvement
of system reliability using a simulation method and at estimating the
costs for these effects using the simple methodology, the levelized costs
of electricity (LCOE) framework.
○ Based on the results of the analysis, this study suggests policy
implications for achieving the national renewable energy deployment
targets, especially for the VRE, of Korea.
Ⅱ. Research Results
1. Technical Feasibility for the 7.5% VRE Deployment Target by 2035
□ Korea aims to generate 13.4% of its power with renewable energy by
2035, with 7.5%p of the production coming from the VRE.
○ The share of the VRE in the total renewable power generation is set up
to 55.7%.
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 3
- The share of the VRE has to increase dramatically as the shares of PV
and wind power are set to increase rapidly relative to other renewable
and conventional generation sources.
- According to the government's plans, the share of PV in total renewable
generation will increase from 5.7% in 2012 to 23.4% in 2035, while the
share of wind power will increase from 4.7% in 2012 to 30.2% in 2035.
□ Current international renewable energy deployment data show that
many countries already deployed the VRE, as of 2013, more than the
2035 Korean VRE target of 7.5% and are operating their power systems
without notable reliability problems.
○ As of 2013, shares of VRE generation in the total generation are more
than 7.5% in eight OECD countries.
- Denmark is top ranked with 33.6% among OECD countries, followed by
Portugal with 24.8% and Spain with 24.5%.
4 Policy Issue Paper 14-15
[Figure 1] Shares of renewable energy in total power generation of
the OECD countries in 2013
Reference: IEA (2014a)
□ According to the IEA’s technical flexibility assessment of power
systems (IEA, 2014b), some regions or countries are already able to host
high shares of the VRE.
○ The IEA (2014b) conducted assessments for 7 regions consisting of 15
countries and found that current power systems of all the regions were
flexible enough to host at least 25% of VRE generation in the total
power mix in optimistic scenario.
○ This study also found that flexibility of the power systems could handle
at least 5 to 10% of the VRE in total generation mix without any
technical problems even in the pessimistic environments.
□ However, as each country has an unique and complicated power
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 5
system, which is different from other countries’, the technically feasible
VRE deployment levels can be significantly varied across countries,
depending on the size or specification of the power systems.
○ In particular, in the case of Europe where national power systems are
interconnected each other, the shares of the VRE in total system are
more relevant than the shares in each country in terms of system
reliability.
○ Therefore, even though some of the countries in Europe show technical
feasibility for high levels of the VRE, it may not have direct implications
for the technically feasible VRE deployment level of Korea.
○ Unlike the European countries, the Korean power grid is isolated from
neighbor countries. As a result, Korea has no access to flexible power
resources of neighbor countries, and it may limit the technically feasible
VRE deployment level.
□ In the Korean case study, Jeon (2014) showed that reliability of the
whole grid can be undermined when the targeted 17 GW of wind
power is constructed and connected to it without improvement of
current power grid conditions.
○ It is because the variability of wind generation, especially the maximum
output reduction, can exceed the capacity provided by operating reserves
defined by the Korean regulation.
○ His study does not even include PV, and, if we take into account the
planned PV construction into his analysis, the issue can be more serious.
6 Policy Issue Paper 14-15
Hence, he argues that countermeasures to secure the system reliability
should be prepared to achieve the wind power deployment target.
2. Effects of ESS Technologies on System Reliability
□ The simulation result of this study shows that a battery energy storage
system (BESS) has an effect to stabilize the frequency and voltage of a
power system through the operation of output compensation in
response to output variations caused by the VRE.
○ When an 1 MW PV system was configured to have 5% (10% and 15%)
output variations and a 50 kW (100 kW and 150 kW) BESS to
compensate the output variations, the final output variations of the
PV+BESS system was reduced to 0.2% (1% and 2%).
- In addition, approximately 70% (65% and 65%) of the voltage variations
caused by the PV output variations was reduced by the output
compensation of the 50 kW (100 kW and 150 kW) BESS.
○ When a 2 MW wind power was configured to have 5% (10% and 15%)
output variations and a 100 kW (200 kW and 300 kW) BESS to
compensate the output variations, the final output variations of the wind
power+BESS system was reduced to 0.25% (0.5% and 0.75%).
- In addition, approximately 70% (63% and 66%) of the voltage variations
caused by the wind power output variations was reduced by the output
compensation of the 100 kW (200 kW and 300 kW) BESS.
○ The results above imply that, when a PV or a wind power is equipped
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 7
with the BESS, the system reliability can be improved by stabilizing
frequencies and voltages through reduction of the output variations.
Output variation= BESS
capacity
Output variation before
compensation
Output variation after
compensation
Output variation reduction effects
5% 950kW±50kW 947kW±2kW4.8%
(96% of BESS capacity)
10% 900kW±100kW 890kW±10kW9.0%
(90% of BESS capacity)
15% 850kW±150kW 850kW±20kW13%
(87% of BESS capacity)
Output variation= BESS
capacity
Voltage variation before
compensation
Voltage variation after
compensation
Voltage variation reduction effects
5% ±0.01% ±0.003% 70%
10% ±0.02% ±0.007% 65%
15% ±0.035%. ±0.012% 65%
Note: BESS capacity means the size of the BESS with respect to the
installed capacity of the PV to which it is attached.
<Table 1> Effects of the BESS in output stabilization against the output
variation of the PV
8 Policy Issue Paper 14-15
Output variation
=BESS capacity
Output variation before
compensation
Output variation after
compensation
Output variation reduction effects
5% 1900kW±100kW 1851kW±5kW4.75%
(95% of BESS capacity)
10% 1800kW±200kW 1765kW±10kW9.5%
(95% of BESS capacity)
15% 1700kW±300kW 1660kW±15kW14.25%
(95% of BESS capacity)
Output variation= BESS
capacity
Voltage variation before
compensation
Voltage variation after
compensation
Voltage variation reduction effects
5% ±0.02% ±0.006% 70%
10% ±0.04% ±0.015% 63%
15% ±0.06% ±0.02% 66%
Note: BESS capacity means the size of the BESS with respect to the
installed capacity of the wind power to which it is attached.
<Table 2> Effects of the BESS in output stabilization against the output
variation of the wind power
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 9
3. Analysis on the Economic Feasibility of the BESS
A. Utility Level
□ According to the analysis of economic feasibility, the PV and the wind
power are still expensive power generation sources compared to the
conventional generation sources, such as coal fired power plants and
gas turbines in Korea.
○ The levelized costs of electricity (LCOE) of a 20 MW PV system and a
20 MW wind power were 242.3 won/kWh and 153.9 won/kWh,
respectively, while LCOEs of coal fired power plants, gas turbines and
nuclear power plants were 62.3 won/kWh, 119.6 won/kWh and 46.9
won/kWh, respectively.
○ The LCOE of PV was also higher than the average system margin
prices (SMP), 152.1 won/kWh, for the year 2013. However, the LCOE of
wind power was almost equal to the same to the SMP, meaning that it
almost reached to the grid parity..
□ When the PV system and the wind power were equiped with the
BESS, economic feasibility became worse further compared to the
conventional power plants.
○ When 2 MW BESSs, which were 10% of total installed capacity of the
generation systems, were equipped to the PV and the wind power,
LCOEs of the systems became 261.7 won/kWh for the PV system and
10 Policy Issue Paper 14-15
167.4 won/kWh for the wind power system.
○ These costs were considerably higher than LCOEs of conventional power
sources.
[Figure 2] Comparison of LCOEs of various generation sources
□ When only costs for the frequency control against output variations of
the VRE were considered, LCOEs of systems increased with increasing
rates as the installed capacities of the BESS increased.
○ When a 2 MW BESS was equipped to the 20 MW PV to respond to the
10 % output variations, the LCOE increased by 7.99% (19.4 won/kWh)
compared to the PV alone system, while the total investment costs
increased by 5.23%.
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 11
- The rate of increases in the LCOE was greater than the rate of increases
in the total investment costs. It is because adding the BESS does not
increase generation capacities and, rather, the final output decrease due
to input/output/stand-by losses from the BESS.
- When a 1 MW BESS and a 3 MW BESS were equipped to respond to
the 5% and 15% output variations, respectively, the LCOEs increased by
3.96% and 12.09%, respectively. That is, as installed capacities of the
BESS increased, the LCOEs increased with increasing rates.
○ When a 2 MW BESS was equipped to the 20 MW wind power to
respond to the 10 % output variations, the LCOE increased by 8.76%
(13.5 won/kWh) compared to the wind power alone system, while the
total investment costs increased by 6.01%.
- Similar to the PV case, the rate of increases in the LCOE was greater
than the rate of increases in the total investment costs.
- When a 1 MW BESS and a 3 MW BESS were equipped to respond to
the 5% and 15% output variations, respectively, the LCOEs increased by
4.34% and 13.26% respectively. Like the PV case, as installed capacities
of the BESS increased, the LCOEs increased with increasing rates.
○ When the same installed capacities of the BESSs were equipped to the
PV and the wind power, the levels and proportions of increases in
LCOEs were different between systems. The costs increases were greater
for the PV system than for the wind power system, while the rates of
increases were higher for the wind power system than for the PV
system.
12 Policy Issue Paper 14-15
- For Example, when 2 MW BESSs were equipped to a 20 MW PV and a
20 MW wind power, the LCOEs of the systems increased by 19.4
won/kWh and 13.5 won/kWh, respectively. The rates of increases were
7.99% for the PV system and 8.76% for the wind power system.
Installed capacity of
BESS
LCOE(won/kWh)
Total investment costs
(1 billion won)
Investment costs of BESS
(1 billion won)
Cost changes(won/kWh)
0% 242.3 57.3 - 0
5% 251.958.8
(2.62%)1.5
9.6(3.96%)
10% 261.760.3
(5.23%)3.0
19.4(7.99%)
15% 271.661.8
(7.85%)4.5
29.3(12.09%)
Note: The number in ( ) implies the increase rate from the 0% of BESS case.
<Table 3> Comparison of LCOEs by sizes of the BESS for the PV
Installed capacity of
BESS
LCOE(won/kWh)
Total investment costs
(1 billion won)
Investment costs of BESS
(1 billion won)
Cost changes(won/kWh)
0% 153.9 49.9 - 0
5% 160.651.4
(3.01%)1.5
6.7(4.34%)
10% 167.452.9
(6.01%)3.0
13.5(8.76%)
15% 174.354.4
(9.02%)4.5
20.4(13.26%)
Note: The number in ( ) implies the increase rate from the 0% of BESS case.
<Table 4> Comparison of LCOEs by sizes of the BESS for the wind power
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 13
○ When the installed capacity of the BESS was about 56% of the total
installed capacity of PV, the increment of the LCOE of the system
became the same as the LCOE of the gas turbine. In terms of the wind
power, when the installed capacity of the BESS was about 78%, the
increment of the LCOE became the same as the LCOE of the gas
turbine.
○ When the installed capacity of the BESS was about 31% of the total
installed capacity of PV, the increment of the LCOE of the system
became the same as the LCOE of the coal fired power plants. In terms
of the wind power, when the installed capacity of the BESS was about
43%, the increment of the LCOE became equal to the LCOE of the coal
fired power stations.
B. Household Level
□ In case of the household installation, the PV+BESS system was still
expensive in general but reached to the grid parity for the households
that consume electricity over certain thresholds. Also, the LCOE of the
PV+BESS system was already less than the power supply costs in
many islands as of 2014, and was expected to be lower than those in
most of islands in 2017.
○ In 2014, the LCOE of the PV+BESS system for households was 267.3
won/kWh, which was about 35% more than the LCOE of the PV
system without the BESS, 198 won/kWh.
14 Policy Issue Paper 14-15
- The LCOE of the PV+BESS system was equal to the consumer tariff
(per kWh) for households consuming 501 kWh/month. As of 2013,
335,000 households were consuming more than 501 kWh/month and
were in the grid parity.
- In case of regional consideration, the PV+BESS system for the household
scale was in grid parity in most of remote islands, whose grids are
isolated from the main grid in Korea, as of 2014. For example, power
supply costs for islands, such as Ulleung-do, Deokjeok-do, Wi-do, and
Chuja-do, were much higher than the LCOE of the PV+BESS system.
□ When we assume that the installation costs of the PV and the battery
for households decrease by 20% and 30%, respectively, by 2017, the
LCOE of the PV+BESS system will be reduced to 206.9 won/kWh.
○ In this case, households consuming 401 kWh/month or more will have
grid parity. Using 2013 electricity consumption information, we found
that 1,182,000 households would fall in this category. The share of this
category is about 7% of the total 16,782,000 households in Korea.
○ Furthermore, the Jeju Island, the largest island in Korea, whose power
supply costs were 249 won/kWh as of 2014, would be able to offer the
household PV+BESS system without any government supports scheme,
such as subsidies or tax incentives.
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 15
[Figure 3] Economic feasibility of PV+BESS system for households
Ⅲ. Policy Implications
□ The literature review shows that high shares of the VRE in the entire
power mix may undermine the reliability of the power grid in Korea.
○ If Korea is to achieve the 7.5% target for the VRE by 2035 as planned,
the government should explore various means and measures to ensure
the reliability of the national power grid and set up a comprehensive
plan to thoroughly implement them.
○ This study found that the BESS is one of the effective means to aid
system reliability in the presence of the VRE. A set of implications were
16 Policy Issue Paper 14-15
suggested below, which need to be considered for the expansion of
BESS deployment along with the dissemination of the VRE.
□ First, deployment of renewable energy is mainly aimed at
decarbonizing energy supply to mitigate the climate change, and the
deployment of the BESS can be one of means to lift barriers that
hinder further deployment of the renewable energy.
○ In general, as the shares of the VRE increase, the maximum load of the
net load1) does not decrease much, while the minimum load of the net
load decreases rapidly (IEA, 2014b). That is, although the deployment
level of renewable energy is increased, large installed capacities of
conventional generation sources are still required as flexible resources to
deal with the variability of the VRE.
○ For true and effective decarbonization, conventional generation sources
as flexible resources should be replaced by carbon-neutral technologies,
and this study shows that the BESS is one of the alternatives.
□ Second, this study found that the BESS is still an expensive
technology that requires some sorts of supports from the government.
Without any intervention from the government, VRE developers would
have little incentive for installation of the BESS, because they cannot
internalize the benefits induced by installation of the BESS, while it
bears significant costs2).
1) Net load means all loads but renewable energy.2) For example, BESSs will replace operating reserves currently provided by conventional generation sources,
and the grid operator may save the costs, while the developers pay for BESS installations.
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 17
○ This phenomenon is what is called a market failure caused by external
effects and therefore the government's intervention may be needed in
order to let VRE developers internalize the external benefits.
○ The external benefits should be directed to developers as forms of direct
government supports, such as subsidies, or as indirect forms, such as
the promotion of R&D, which can contribute to reducing costs of
adapting BESS technologies.
- Thus far, the policy-led costs reduction and market creation have been
successful in creating massive demands for renewable energy
technologies and it has led further costs reduction and demand creation,
which contributed massive deployment of renewable energy technologies.
- These supports should be extended to the BESS to lift the barrier which
hinders further deployments of renewable energy, especially the VRE.
□ Third, the study shows that the value of the BESS is derived from
and depend on the generation systems to which it is attached. That is,
the characteristics of the generation systems, such as their unit costs
and capacity factors, alter the values of the BESS.
○ For example, technologies with higher capacity factors would utilize the
BESS more than technologies with the low capacity factors do.
○ For the BESS support policies to be fairly applied across different
technologies of renewable generation, the differences of the derived
values should be considered and the levels of supports should be
differentiated according to the economics of integrated systems of
18 Policy Issue Paper 14-15
different technologies.
○ Or for the cost effective deployment of the BESS, the selection and
concentration strategy may be applied at the initial stage and then
extended to the BESS equipped in other technologies. For example,
increment of the LCOE of the wind power+BESS system was
significantly lower than that of the PV+BESS system, so the wind power
can be the first choice.
□ Fourth, the study shows that the PV+BESS system for households have
already reached to the grid parity for some classes of consumers and
some regions in Korea, and the classes and the regions will be
expanded in the future as the costs of the system decrease. Lifting
economic and non-economic barriers can create an environment where
the households have incentives to install the system even without
supports from the government.
○ Nevertheless, high upfront costs of investment is still an obstacle to the
further dissemination of the system. Also, government's support scheme
that does not discriminate certain classes of consumers makes potential
installers with the grid parity reluctant to install the system on their
own. The ceiling on the electricity retailer tariff makes the system
economically unattractive even in islands, where the grid parity is
already reached. Removing these kinds of barriers can trigger fast
dissemination of the technologies.
□ Finally, this study tried to bring the engineering aspect and economic
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid Stability
Korea Energy Economics Institute 19
aspect of the BESS together in terms of improving grid reliability in
the presence of high share of the VRE. The methodology was simple
but helpful in analysing technical and economic feasibilities of some
technologies and in drawing some implications and future policy
directions.
○ This methodology can be extended to answer certain pending questions
regarding VRE related technologies with respect to grid reliability and
economic feasibility.
○ Also, necessity for developing a more comprehensive analysis model is
recognized. Grid or system reliability includes many more elements than
elements that this study covers. So, this study can be utilized as a basic
framework to make an extensive analysis model, which can incorporate
comprehensive national power systems including power generation
facilities, transmission and distribution facilities, power demands, and the
operational issues and stability of power systems.
20 Policy Issue Paper 14-15
< References >
IEA, Renewables Information, IEA, 2014a
IEA, The Power of Transformation-Wind, Sun and the Economics of
Flexible Power Systems, IEA, 2014b.
Yeong-hwan Jeon et al., Study for Establishment of Electricity Supply and
Demand Plan with Regard to Deployment of Large Scale Renewable
Facilities, Korea Power Exchange, 2014 (Korean)
Policy Issue Paper 14-15
A Study on Economics of PV and Wind Power Generation with Emphasis on Grid
StabilityPrinted on February 23, 2015
Issued on February 23, 2015
Author:Jin-Young SohPublisher:Joo-Heon Park
Published by Korea Energy Economics Institute, (Address) 405-11, Jongga-ro, Jung-gu, Ulsan, 44543, Korea, (Phone) +82-52-714-2114, (Fax) +82-52-714-2028
Registered on December 7, 1992ⓒ Korea Energy Economics Institute, 2015