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Study on Renewable Energy Resources, Oman - authority for ...

Study on Renewable Energy Resources, Oman - authority for ...

Renewable Energy Resources in Oman 6 Cost of electricity generation in Oman In this section we compare the cost of electricity generation using conventional fossil fuel generation technologies to the cost of electricity produced using renewable energy technologies. The methodology used is levelised cost and the comparison focuses on Long Run Marginal Costs (capital, fixed and variable o&m, fuel costs and financing costs). 6.1 Generation based on conventional fuels 6.1.1 Investments in new power capacity Investments in the power market/sector are typically connected with the following characteristics: • Investments require much capital; • Investments are long-term investments; • The time from plant decision until the plant is ready for operation is long (particularly for major thermal power plants); • The market/sector is heavily influenced by political conditions (taxes, regulation etc.) which normally change over time. This means that calculations on new investments are often connected with large uncertainties. During a 20-30 year period, which is a typical investment horizon for a power plant, substantial changes may occur in the market/sector. The main risks for generators are the uncertainty about fuel and electricity prices, and the risks of increased environmental restrictions or other restrictions from the regulators. The higher risk there is in the market/sector, the higher risk premium the investors or project developers will take, and the higher electricity prices the consumers will have to pay (assuming that the electricity prices are based on market prices). In order to estimate the feasibility of investments in new power capacity, it is necessary to have an overview of the expected annual income and costs. The main income comes from sale of electricity, whereas a supplementary income may come from sale of system services (e.g. voltage regulation) or from sale of by-products (e.g. gypsum from de-sulphuring equipment). These supplementary income source are not considered here. Page 92 of 134 .

Renewable Energy Resources in Oman The main costs include the following elements: • Fuel costs; • Environmental costs, e.g. taxes; • Variable O&M costs; • Fixed O&M costs; • Investment costs. In order to evaluate an investment, the investor or project developer has to set up requirements to the investment horizon and to the rate of return. A typical investment horizon in the power sector is 20-30 years, which in some cases is shorter than the actual life time of a new plant. The cost estimates in the following sections are the levelised cost of the total life of the investment. A typical required rate of return including risk premium is 10%. In this study a discount factor of 7.55% p.a. is used as agreed with the Authority. In some cases sensitivity calculations with discount rates from 5 to 13% p.a. have been made. 6.1.2 Short- and long-term marginal costs When estimating costs, it is relevant to differ between short- and long-run marginal costs. The short-run marginal costs include only variable costs such as fuel costs and variable O&M costs (including environmental taxes, if any). In addition to this, the long-run marginal costs include capital/investment costs and fixed O&M costs. In this section, the short- and long-term marginal costs for new generation capacity based on fossil fuel are estimated: for two different gas technologies, one HFO technology, and one coal technology. This comparison is the most relevant in terms of deciding if renewable energy should be included in the future fuel mix. However, in order to determine the financial impact on the subsidy expenditure in Oman current average cost in the power production of Oman is also considered at the end of this section. The long-term marginal costs are estimated assuming an annual number of full load hours of thermal power plants of 5000 and 7500 hours, respectively. Table 6.1 below shows the main assumptions and the calculated marginal short- and long-run costs for the four different plants/technologies. The assumed price used is 1.5 USD MMBtu (595 USc/Gcal), the crude oil price 50 USD/barrel and the coal price 62.45 USD per ton. Page 93 of 134 .

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