INDUSTRY AND ENERGY DEPARTMENT WORKING PAPERENERGY SERIES PAPER No. 5

Impact of Lower Oil Prices onRenewable Energy Technologies

May 1988

The World Bank Industry and Energy Department, PPR

The World Bank Industry and Energy Department, PPR

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ABS72ACT

Th impacts of reduced oil prices on the economic viability ofselected technologies which utilize solar, wind and biomass energysources are examined. The technologies include dendrothermal powerplants, bagasse, fuel alcohol, wind electric, biomass gasifiers,solar water heaters, biogas, photovoltaic pups and wind pumps.Specific projects In each of these categories which were establishedor planned when oil prices yore above $28/bbl are reviewed and theireconomic justifications recalculated at a range of lower oil prices.The findings indicate that the economic sensitivity of renewableenergy technologies to chaiging oil prices is mainly a function ofscale and location of the project. Renewable energy technologiesthat comaete directly in the modern sector as large-scale petroleumsubstitutes, such as dendrothermal power plants and fuel alcoholprojects, are the most adversely affected by falling oil prices.Remote and rural applications are less affected because of theirgenerally smaller sizes and, therefore, much lower proportion offuel costs to total costs in the equivalent sized couventionalalternative; the reduced availability and higher cost of petroleumfuels as compared to urban areas; and the lover cost of b'omasafuels (eg wood for gsiLfiers) In rural areas.

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Table of Conteuts

TableofContents .............. .

Lst ofTables . . . . . . . . . . . . . . . . . . . . . ii.

LUst of Figures . . . . . . . . . . . . . . . . . . . . . .ii

*. INTRDOCSTON: WUU OIL PRICES . . . . . . . . . . . . . . . . .1

Overview: Categories Of Renewable Energy Applications . . . 1

ActualOilPriceChanges ... 2

II. InPACT ON SELECTED RENEWABLE ENE&GY TECHNOLOGIES . . . . . . . 4

Dendrothermal Power Plants . . . . . . . . . . . . . . 4

Bagasse . . . . : . . . . . . . . . . . . . . . . . . . 6

Fuel Alcohol . . . . . . . . . . . . . . . . . . . . . 8

Wind Electricity Generation . . . . . . . . . . . . . . l)

Biomass Gasifiers ..... . . ...... . . . . . . 12

Heat Gasifiers ..... . ....... . . . . . 12

Power Gasifiers .............. ... . 14

Solar Water Heating . . . . . . . . . . . . . . . . . . 16

Biogas ...... .. . .. 19

Photavoltaic and Wind Powered Water Pumping ..... . 20

In. CONCLUSIONS ..... . . . . . . . . . . . . . . . . . . . . 25

ECICAiA= .UN . ............ .... . 27

Retail Petrolem Price Qma41es . . .. ....... . 28

Fuel Alcohol Base Came Asumptions ..... . . ... 31

Wind Electricity " reati......... ... .... . 32

Bims Gasifis .......... . ... . 33

Solar Water eaing . . . . . . . . . . . . . . . . . . 35

Water Pumping Model Assumptin . . . . . . . . . . . . 37

£

List of Tables

Table 1 Generation Costs at Various Fuel Oil Prices . . . . . . . . . S

Table 2 Minimum Crude Price for Economic Viability of

Anhydrous Ethanol Distilleries in Brazil . . . . . . 9

Retail Petroleum Price Changes . . . . . . . . . . . . . . . . . . . . 28

List of Figres

Figure 1 Retail Price Changes in Current $US . . . . . . . . . . . . 3

Figure 2 Retail Price Changes in Constant Local Currency . . . . . . 3

Figure 3 Wind vs. Oil Thermal Generation Costs . . . . . . . . . . . 11

Figuro 4 Heat Gasifiers vs Fuel Oil Boiler Cot-s . . . . . . . . . . 13

Figure 5 Generation Costs of Gasifiers vs Diesel . . . . . . . . . . 15

Figure 6 SWH ERR: Fuel Oil Boiler Retrofit . . . . . . . . . . . . . I.

Figure 7 SWH ERR: Electric Water Heater Retrofit . . . . . . . . . . 18

Figure 8 Village Water Supply Costs: PV, Wind, & Diesel . . . . . . . 22

Figure 9 Irrigation Water Costs: PV, Wind, & Diesel . . . . . . . . . 23

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S. ZITRODUCTION: LOUM OIL PRICES

1. This paper examines the impacts of reduced oil prices onthe economic viability of technologies which utilize solar, wind andbiomass energy sources. The objective is to determine whichtechnologies were 'hardest hit' by the advent of cheap oil, and whatthe Implications are for renewable energy policies of developingcountries as well as those of the Bank. The analysis reviews theeconomic competitiveness of selected renewable energy technologies(RETs) with petroleum-based altarnatives a. various price levels. Italso examines factors othar than oil prices wkich have equallyimportant bearing on decisions to utilize specific RETs.l/

Overview: Categories Of Rnewable Energy Applications

2. Renewable energy applications cover numerous processes andtechnologies which use solar, wind and biomass resources. These rangefrom small. relatively simple devices such as improved charcoal stovesto megawatt-level, complex solar thermal power plants. RETs also varyin commercial "readiness". A number of technologies can be consideredfully developed (e.g. biogas systems, wood-fired power plants) whileothers are essentially still in the R & D stage (e.g., large solarpower plants and ethanol production from woody biomass). For purposesof this report, the analysis will focus on RETs now in use in thefield, although not necessarily "commercial" in the conventionalsense. This implies that the technologies were, at least,economically competitive with conventional technologies at oil pricesprevailing when the installation was originally assessed.

3. It is usekul to divide such technologies Into two end-usecategories:

a. those that compte directly in the modern sector asrelatively large-scale petroleum substitutes; and

b. those that serve to met small-scale, mainly rural energyneeds. 2

This distinction is important because - as will be shawn later - loweroll prices are more likely to affect the economic viability of RETsbelongitg to the first category. Technologies in the first category,some of which hve been the subject of Bank lending or pre-investmen.activities, include fuel alcohol projects, 'dendrothermal" power

1/ This paper was prepared by Dr. Ernesto Terrado, MatthewMendis and Kevin Fitzgerald of the Joint UNDP/Uorld Bank Energy SectorMandgement Assistance Program.

2/ The scale refers to the size of individual installations,not potential aggregate national contributlon.

2

plnts, bagasse production and utilization schemes, biomass gaslfiersfor process heat, 'wind farms and industrial solar water heatingsystems. Small-scale and/or rural applications include biogas,biomass gasifiers for engine use, photovoltaic and wind water pumps,solar crop dryers, and domestic solar water heaters. Thesetechnologies are essentially beyond the R&D stage and some, like windpumps and domestic solar water heaters, are used extensively in manyparts of the world.

4. A summary of each renewable energy technology, including anassessment of the sensitivity of its economic viability to lower oilprices, is presented in Chapter 2. Conclusions and policyrecommendations that can be drawn from this analysis are presented inChapter 3. Before proceeding to this discussion, however, it isuseful to outline what has actually happend in International anddmestic oil markets.

Actual Oil Price Changes

5. From November 1985 4o July 1986 the average FOB price ofcrude oil on world markets slid from above US$ 28/bbl to below US$1l/bbl. Since mid 1986, crude oil FOB prices remained relativelystable between US$ 15/bbl and US$ 18/bbl. As crude oil prices areprojected to continue within this range in the medium term, thegeneral economic conclusions reached in this paper are expected to bevalid for some time to come.

6. Data collected from almost 20 developing countries indicatethat most countries made only slight retail price adjustments inresponse to tho -60% drop in international oil prices betweenNovember, 1985 and July, 1986.3/ In fact, a few countries actuallyzajgg nominal retail prices during this period. Figures 1 and 2illustrate the magnitude of diesel and fuel oil retail ptice changesin three regions between late 1985 and mid-1986. 4 / Measured inM=r=r TSIS eguivaIants, Figure 1 shows that retail prices dropped 15to 20%, on average, from November 1985 to July 1986. Aq&L pricereductions, shom In Figure 2, avraged 25 to 300 over the sameperiod. There hayw bee two Important results from the pattern ofonly small reductions In local prices of Imported fuels:

a. all petrolem product retall prices in the countriesresarched were above estimted border prices and;

3/ Retail petroleum product price chages from late 1985 tomid 1986 in fourteen developin countries are tabulated in the appendix.

4/ue Figures based oan retail oil product price changes infourteen countries (see Annex)..

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b. fuel p=&Ices currnutly faced by investors ha-e changedlittle In nominal teOs.

ONeel & Fuel Oil Retail Pnce ChangesIn Current US$ by Region

iesel & Fuel Real Price hFaiges Oil

O&M F O *i.

i igurege Retail Price Cheges Cu Current $US

io & Fuel Oi Real Price ChangtsoI Constant 198e Ctrech by Regie n

r.Lt m A" 3NIa

an 2the u economcs of revable enrytchnooges

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u. * nACT 0 SSLCTED RENWABIE EfYT 7ECHOLoGaZS

8. In this chapter, renewable energy technologies that competedirectly in the modern sector as relatively large-scale petroleumsubstitutes are discussed initially. Those that serve to meetsmall-scale, mainly rural energy needs are dis-usoed later. It willbecome readily apparent that the economics of RETs in the first groupare far more sensitive to lower oil prices than those in the second.

Deadrothermal Power Plants

9. A dendrothermal power (DTP) system consists of a woodburning power plant and a dedicated plantation of short-rotation treespecies. The most recent DTP installations are in the Philippines,where the Government has established dendrothermal power plants in the3 to 5 KW range as part of its rural electrification plan. Similarinstallations are contemplated in Thailand, India, Indonesia, Brazil,and other countries. No evaluation reports are available so far onthe performance of the Philippine plants. Since wood burning plantsuse more or less conventional technology, few technical difficultiesare expected on the power plant side. Problems have, however, beenreported on the plantation side, related mainly to factors whichinfluence biomass yield, such as choice of species and condition ofthe land. Analysis indicates that overall plant economics is likelyto be sensitive to biomass yield, which dictates the size of thededicated plantation and therefore the magnitdao of plantatior.development and maintenance costs.

10. la assessing the impact of reduced oil prices on DTPsystems, there are two basic difficulties. First, plantationdevelopment, wood hauling and other costs are very site-specific. Fora given plant size, DTP generation costs can vary widely withlocation. Therefore, any comparison with oll-based alternatives canonly be made in a general way. As widely varying site-specific costsare coon to most renewable technologies analysed in this paper, theimpacts of lower oil prices assessed throughout this papr are limitedto general statements. second, it is not eay to identify the mostappropriate alternativ system to whLch the DTP plant should becompared. If deployed as a unit contributing to the base load of apower grid, the criterion for comparison would be related to theminimum LBNC and the alternative to the DTP plant may very well be anon-oil based installation, such as a coal-fired or a hydro plant.

11. Nevertheless, it is possible to obtain some insight from aBank study of the likely costs at various sizes of a generic DTP

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plezt.5/ Based largely on Philippine data and at 1983/84 prices, thestudy calculated generation costs of about 12.1, 8.4 and 6.6c/kWh;b!se capital costs of 2,100, 1,700 and 1,300 $/kW Installed; andplantation areas of 2,000, 6,700 and 31,000 hectares for 3, 10 and 50MW, respectively. The key assumptions include biomass yield at 10bone-dry tonnes/ha/yr and fuel oil price of 20c/liter (roughlyequivalent to a crude oil price of US$ 37/barrel which L. close to1983/84 Far East border prices).

12. The study compared the above DTP plants with stand alonediesel systems using fuel oil. Even at a high 20c/liter, theelectricity generation costs of a 3 MW diesel plant (7.7c/kWh) aresubstantially below the costs of a 3 MW DTP plant (12.1c/kWh). Thegeneration costs are roughly comparable (around Sc/kWh) at the 10 MWlevel. Thus, under the assumed parameters, including a fuel oil priceof 20e/lt, DTP systems in isolation, such as on a remote island or inan area not serviced by the grid, would be competitive with dieselsystems at plant capacities above 10 1U. At lower fuel oil prices,the comparative generation costs are shown in Table 1.

Table 1 Generation Costs at Various Fuel Oil Prtkces*c/kWh

Oil Price Diesel Dendro6/e/lt Plant Plant

i,20 7.9 c/kWh 8.40 c/kWh15 6.6 8.3410 5.4 8.27

5 4.1 8.20

* Costs for 10 MV plants operating 5500 brs/yr.

13. The substantial drop in diesel generation cost as fuel oilprices fell below 1983/84 levels haa the effect of limiting economiccompetitiveness to larger scale DTP plants, making this optionmpractdical due to greatly Icreasd land area requiremets and low

load factors associated with larger systems. In fact, in small islandor. remote coommities not served by the nationl grid where DTPsystems are likely to be most useful, 10 MV iS probably beyond

5/ World Bank, 'Technical and Cost Characteristics ofDendrotherml Power System", Eergy Dept. Paper No. 31, December1985.

6/ The smll reduction in DTP generating cost is due toreduced truck fuel cost for wood hauling. Distance from plantation-border to power plant is 10.5 km.

0

*iistlng and foreseeable pover demand. Because of this, it can beconcluded that for cases AnoxiMaging the Darameters of the abovestudy. current oil orices do not iustifv new investments in DTP

14. As with most other RETs. however, a full economic analysisbased on the characteristics of the particular location is necessarybefore a definite conclusion could be made about the viability of aDTP project. The analysis would include shadow pricing of labor,which is a highly intense input on the plantation side, determinationof the opportunity cost of land, and quantification of long-termemployment benefits accruing to people in the area. When assessingthe cost of alternatives, the economic or delivered cost of fuel oilat the site should also be determIned. This could be considerablymore thon the international or border prices.

Bagasse

15. In recent years, interest has been renewed in making canesugar mills energy self-sufficient and, thus, to produce surplusbagasse (the fihrous residue from cane crushing) for generating

:ectricity to tbe used internally and for sale to the grid. Cane.44gar mills .tzist in some 80 countries and most are not energyefficient: at best, they recover just enough energy from bagasse tomeet milling season needs. The investments required in "bagasseprojects are those which considerably improve process steam.economyand boiler efficiency, in effect obtaining the same amount of energywith less bagasse fuel. Bagasse dryers, concansing turbo-geovrators,efficient juice heaters and pre-evaporators cam increase thermalefViciency and decrease process stem consmption considerably.Moreover, balers, pelletlzors and briquetting equipment can be used todensify surplus bagasse to be stored and transported safely andconveniently. This is especially important for year-round electricalproduction where the markets for surplus energy are electricalutilities.

16. Davies lamakua Sugar pioneered In this field with theirsills In gavaii. The F.U.L.L. sugar miLl in Nauritius has alsoinstalled, at the pilot level, equipment for generating and densifyingsurplus bagass., naabltng it to sll year-round powar to the grid. In1985, the 8 Ik conducted prefeasibility studie In ¢uyaa and Zthiopiaresulting in specific recommendations for bagasse project. in these

17. in a typical bagasse project, ecmic return is based onrevenua from selling surplus power and savings In Internal use ofpetroleum fuels. In other cases such as the project proposed forIthiopia, the surplus bagasse product was intended to displacefuelvood in homes and later, to substitute for imparted pulp andparticle board feedstock. ' The impact of lower oil prices on project

7

7iability is fairly clear in the first case. It is less ¢lear in thesecond case where the commodity being displaced is not petroleum-based. The Guyana and Ethiopia studies illustrate the differingpotential impacts quantitatively.

18. Guyana's public electricity supply is almost totallydependent on imported petroleum. At present it suffers from a lack ofgenerating capacity and system inefficiencies. Enmore, one of thecountry's 10 sugar mills, was choaan for a bagasse pilot project todemonstrate the feasibility of making the mill independent of dieselwhich it now uses and, at the same time, generating surplus power frombagasse for feeding to the public grid. The investments total US$10.5 million, most of it by Guysuco for mill equipment andmodifications, and partly by GEC for a 14 km transmission line,transformer, and control equipment. The benefits of the project wouldbe savings by Guysuco in diesel fuel (about 830,000 lt/yr during themilling season) and avoided costs by GEC in diesel fuel for 24 GWh/yrof peaking power to be supplied by the Enmore mill. Calculated at theCTF value of diesel fuel at that time, which was US$ 42/barrel, theeconomic rate of return for thu project was an acceptable 21%. A dropin diesel fuel price by 25% reduces the ERR to 14% and, at half the1985 price, the rate of return becomes only 5%. Thus, at. resentinernaional oil nlices. this particular oroe sthe basis of fuel s A1on.

19. The Ethiopia project, proposed by an ESHAP study, consistedof investments in all three Ethiopian sugar mills to enable productionof about 100,000 tonnes/yr of surplus bagasse. The current hydropowersurplus and power tariff structure does not make export of bagasse-based energy to the grid a viable option. The highest value end-usefor surplus bagasse in the immediate future was determined to be asdensified fuel for households and industry. Financial innestments ofUS$ 12.2 million were required for the project which includeddansification facilities in each mill.

20. Unlike the Guyana case, the Ethiopian mills are fairlyefficient. Only one of the mills would obtain some internal savingsIn fuel oil. However, the most likely use of the densified bagassewould be as substitute for firewood, acute scarcity of which is beingexperienced by Etbiopian bousehold.. Therefore, the benefits aremailay due to projected sales of densified bagasse which, if priced at80% of the firewood price (to compensate for its less familiar, harderto ignite form), is thought to have a ready market. Under theseconditions, the fLiaUgeal rate of return is about 30%.

21. The economic value of lirewood in Ethiopia is difficult toquantify but, considering the serious ecoloSical impacts of massivedeforestation which hls occurred in the country, is likely to be veryhigh. Assuming that this value is at least as high as importedkerosene, the economic rate of return at 1985 prices would be a high90%. Even wiith a 50% drop in kerosene import price, the ERR would

8

still be 43%. Therefore, for thin 2ArticUlar nro ia ipact -of

internaionl oil nie oiglet viability LA instiiae

Fuel Alcohol

22. Ethyl alcohol (ethanol) is commonly produced by afermentation/distillation process using sugar cane juice or molasses(a by product of sugar refining) as feedstock. While otherfeedstocks, such as cassava, can be used, the technology for produ:ingethanol from cane or molasses is better developed and more attractivaeconomically because the cane by-product, bagasse, can be used asprocess fuel. ELayl alcohol (ethanol) can be used as motor fuel invarious ways. As nearly water-free or "anhydrous" ethanol, it can beblended with gasoline up to about 20% without -decreasing the mileageyield of the gasohol product and without modifying normal gasolineengines. As hydrous ethanol, it can be used as a straight fuel inspecially designed alcohol engines or modified gasoline engines. Themileage yield of straight alcohol is about 75% that of gasoline.Presently, straight alcohol vehicles are used only in Brazil where anambitious ethanol program has been firmly established.

23. Since 1980, a number of countries have implemented fuelalcohol programs. The largest is that of Brazil where 10 billionliters of ethanol is currently produced for mse as a blend and instraight alcohol cars. In Africa, plants in Malawi, Zimbabwe, Kenya,and Mali produce ethanol from molasses to substitute for 3-15% ofdoe stic gasoline demand. The IFC supported the Malawi project andsubmitted a proposal for a plant in Zambia while the small annexeddistij,ery in Mali was financed with a World lank loan. A recent BanKpaper / recommended further assessment of proposed ethanol programsfor Thailand and the Philippines.

24. In general, the viability of a fuel alcohol programincreases when it is possible to use lower econormic value molassesrather than cane as feedetock, the sugar mill is far from the coast,thereby reducing the value of molasses as an export commodity, andwben the distillery can be annexd to the suga mill so that surplusbagasse cam provide process energy for othanol production. As theprimary economic benefit of ethanol production is the displawement ofimported gasolins, the economic rate .of return of an othanol projectrl:ses dLrectly with the econaomic price of gasoline. Exchange ratesalso affect economic viability, but less robustly because astrengthening local currency will reduce both gasoline import costsand export values of molasses and sugar. Additional benefits thatshould be accounted for in a full economic analysis include:

7/ Ody, A;, "Prospects for Ethanol in Developing Countries',NDD2 Office Memorandum, 21 Febrtary 1985, World Bank.

9

employment, foreign exchange savings, and security of access to anindigenous transportation fuel.

25. To illustrate the impact of lower oil prices on fuelalcohol projects, it will be sufficient to consider the case ofanhydrous alcohol production from molasses (i.e., if projectjustification is lost for this case, so would it be for ethanol fromcane). As with dendrothermal power above, the economics of et.hanolprojects are very site specific. Hence, two representative projectswill be analyzed: a proposal in Swaziland recently reviewed by theBank and the Brazilian ethanol program.

26. Three proposals for ethanol production in Swaziland wereanalyzed as part of the Swaziland Energy Assessment. The mostpromising proposal (by CDC/PEA for 65,000 lpd annexed distillery atthe Hhlume sugar mill) is designed to produce ethanol at 21C/liter tomeet 20% of a growing national gasoline demand until 1995 (details inAnnex). If savings on imported gasoline are the only benefits countedin the economic analysis. the 22% drop in the actual landed price ofgasoline3/, from 30¢/1 in mid-1985 to 240/1 in July 1986, is enough tocut the project economic rate of return from 28.5% to 18%.

27. The approximate minimum real crude oil prices needed tojustify the Brazilian anhydrous ethanol program in economic terms areshown in Table 2 below9/. Minimum crude oil break-even prices forhydrous import substitution and export of hydrous ethanol average 25%and 50% higher.

Table 2 Niiu;mum Crude Price for Economic Viability ofAnhydrous Ethanol Distillcries In Brazil

In Constant 1984 US$/barrel

Sdh PLU1Q rhet

Build New Distillery 23-28 24-34

Operate Existing Distillery 17-23 20-28

26. The CIF price of crude In November 1985 in Santos, Brazilwas US$ 29.40/bbl. The C!? Santos price had fallen below U1S$ l5/bblby August, 1986 and was nealy US$ 17/bbl in February, 1988. Hence,

8/ The FOB price of gasolin, in the Middle East market dropped50% from October 1985 to July 1986, while due to high transportationcosts and other levies, the landed cost of gasoline at Eatsapha,Swaziland dropped only 22% oaver the same period.

9/ Draft Public Sector Investment Review: Brazil, October1986, LC2BR, World Bank.

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since mid 1986, the ethanol program in Brazil could be only marginallyjustified in a strict economic sense. Because of this the Governmentof Brazil has announced a suspension of further expansion in fuelalcohol distilling capacity.

29. As anhydrous ethanol substitutes for imported gasoline, theeconomic viability of ethanol production is robustly sensitive to theeost of imported gasoline. The Swaziland proposal stuarized above isfor a plant designed to produce ethanol at roughly 21¢/liter, whilerepresentative production costs in Brazil range between 18C and264/liter.10/ If the economic cost of gasoline remains above theseprices, all else being equal, ethanol production makes good economicsense. Many proposed ethanol installations have been at locations farinland, where the transport component of gasoline costs are high andthe export value of molasses is low or nil. Consequently, at suchinstallations (as in Swaziland), the actual landed cost of gasolinewill not have-dropped as much as the drop in international FOB prices.Hence, the hlume oroooaL still acocars viable using actual summer'86 gasoline imoort i_ricea as delivered to Matsapha. while certainingtallations in Brazil are on the marain of econo iustification.

Wind Electricity Generation

30. To properly assess the place of wind electricity generationcapacity in an electrical grid, planners must consider the uncertaintyof wind power supply, daily and seasonal wind profiles and how theymatch load profiles, fuel savings due to use of wind turbines, as wellas possible deferrals of future capital investment in conventionalgeneration capacity. Hence, the economic value of wind power isdetermined not so much by average cost considerations as by long runmarginal cost and wind time distribution characteristics.

31. With this caveat in mind, a rough order of magnitude"analysis can be c-nducted on electricity generation costs of wind vs.thermal. The results of such an analysis are shown in Figure 3 inwhich representative generation costs over a range of oil prices for ahypothetical grid, supplied exclusively by lrge base load fuel oilatesm plants and smaller diesel oil gas turbine paking plants, are

compared to estimated wind electricity generation costs. l/ Thoughactual costs can vary considerably, these generic cost estimates show

10/ SAl: Brazil Alcohol Rationalization and Efficiency Project;Industry Department, World Bank, 1985. Quoted costs are average 1983.costs of alcohol production in constant 1984 US$.

11/ Detailed assumptions are tabulated in the Annex. Windelectricity costs are based on actual costs from California windfarms.

1.

that lower oil prices can significantly change goneration costs. A50% drop in representative 1985 import prices of diesel oil (from300/1 to 154/1) and fuel oil (from US$ 30/bbl to US$ 15/bbl) couldreduce electricity generation costs so0e 30%, from 8.3¢ to 5.8c/kwh.Of course, if a significant share of total demand is met by coal, gas,nuclear, or hydro capacity, the actual change in system generationcosts due to lover oil prices will be less than that depicted inFigure 3.

Grid-Connected Wind Turbine EconomicsAvg Cost: Wind vs. Fuel Oil Generation

conta/kWh

-6m/sec -8 .

NON-ECONOMIC7.

-7m/sec -6 / ~~~ECONOb11C

S7J tl 5215 630

Fuel Oil Price ($/bbl)8mm. 8, .

Figure 3 Wind vs. Oil Thina.L Generation Costs

32. The wind electricity costs presented in Figure 3 are roughestimates, based on the actual costs of 100W wind turbines inCalifornia wind farms, for a good wind regim (annual averagswindspeed of 6m/sec) and two excellent regimes (7 and Sm/sec). It isevidoet that electricity generated with an annusl average windspeed of6m/sec, *et unlike the resource in the mountain passes of California,would cost as ac'h as electricity generated by an *griallv rm oil.

b *d astm3 under estimted 1985 economic fuel prices of US$ 30/bblfuel oil and 30C/liter diesel fuel. At lower oil prices, only rarewind resources remain economically competitive with oil-basedgeneration on an gage cost basis.

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33. (orsover, as amply demonstrated in a recent Bank LEergyDepartment Paper, 2/ unless the wind resource and demand peaks areclosely matched, wind turbines displace primarily low costintermediate and base load capacity. Clearly, in an environment ofeconomic oil prices below US$ 15/bbl, wind-to-grid electricitygenoration would not be cost effective unless average annualwindspeeds exceed 6m/sec an the wind profile tightly corresponds todemand peaks.

Biomass uasifiers

34. In biomass gasifiers, solid combustible biomass materialslike wood, charcoal, rice husks, or coconut shells, arethermochemically broken down into a combustible gas. Though theenergy content of this "producer gas" (4 to 7 WJ/m4) is usually farless than that of natural gas (35 HL/m3), the economics ofgasification were attractive enough throughout the early 1980's forindustrial and commercial process heat applications to become commonin Brazil, Southeast Asia, and the South Pacific. Heat gasifiers,primarily large systems replacing ful oil in industrial applications,are commonly located in urban or peri-urban areas. Conversely, manyrural applications are found for power gasifiers that burn the gas ininternal combustion engines. These applications primarily replaced±as9l oil in small engines used to generate electricity, pump water,or mill grain. Given these basic differences, the impact of changingoil prices on the economic viability of these systems must be viewedindependently.

Reat Gasifiers

35. Biomass heat gsifiers are presently used to provideproess heat in a wide variety of applications Including: tea, grain,and lumber drying; glass, tile, and brick anufact; cementproduction, food processing, and greenhouse beating. pet gasifier

*systems, conisting essentilly of a fuel feed system, reactorchamber, and gas burner, ar. commercially available, In sizes from10OkW to 1O01. The smaller, manually batch fed, systems are coummorlyused for crop drying, baking or other similar applications. Thelarger systems are automatically fed ind are used to provide heat forindustrial kilns, boilers, driers and furnacus. As heat gas ifiers canusually be retrofit to existing oil or natural gas burning equipment,the potential umber of applications is extremely large. The main

12/ Moreno, R., uide lines Assessin; Wind arsz 2tential,Energy Department Paper #34, World Bank, January 1987.

13

constraint to wide scale use of biomass heat gasifiers is posed bytheir requirement of an economic and reliable source of biowass fuel.

Heat Gasifier Retrofit EconomicsHeat Gasifiers vs Fuel Oil Boiler Costs

cosm of steam (85) Fuel off Price (WIb20

~I Economic Zone 41.- 3

4 30

4- 6 10 11S 20 26 30 31S 40 46 tO 20

I- Non-Economic Zone S10

o a 10 16 20 25 30 36 40 46 60 56 60Wood Price (S/tonne)

SASFIIER COSTS- .000 a GJ/Iht ' '-,000 per OJt

Bourn. See Amus

Figure 4 Neat Gasifiers vs Fuel Oil Boiler Costs

36. AS with fuel alcohol programs above, the primary economicbenefits of heat gasifiers accrue from savings in imported petroleumfuels. Given the wide range of possible beat gasifier applications,it is difficult to generalize on the economics of these systems.Nonetheless, a brief cost analysis of a generic beat gasifier retrofitto an oil-fired boiler illustrates the sensitivity of this technologyto lover oil price". Flgure 4 shows the economic sensitivity of sucha system to changes In oil prices, wood fuel prices, and gasifiercapital cost estmates. 3 For a drop in fuel oil price from US$30/bbl to US$ 15/bbll 4 / the break-even fuelvood price for a moderately

13/ Souree: Foley, 0. and Barnard, C., Biomass Gasification inDeveloping Countries, Karthscsa, 1983. Gasifier cost estimatessumerized in Annex.

14/ Averag, border prices for fuel oil dropped from $30-$35/bblin November 1985 to $10-$1e/bbl in July 1986 for countries with ornear a port.

14

priced heat gasifier system (US$ 25,OO/GJ/hs) drops from US$ 30/tonneto near zero.

37. As the market for large scale heat aasifiers is generallyin populated urban or rural areas, where fuel oil is counonlyavailable and alternate demandL for wood fuels exist, the fuelwoodprice is usually above US$ 20/tonne. Moreover, as large scale heatgasifiers t.'nd to be fully mechanized, they commonly have capitalcosts at the *nigh end of the range shown in Figure 4. Conversely,snail scale heat easifier systems, such as those used for tea andcopra drying, are usually located in more remote areas where theeconomic cost of fuel oil is relatively high while the economic priceof wood and biomass fuels can approach zero. In addition, small scalebeat gasifiers are amongst the lowest cost systems shown in Figure 4because they are often manually fed. For these reasons, the economicfeasibility of large scale heat gasifi-ers will be affected first bydecreasing petroleum prices. Small scale installations in remoteareas may continue to be competitive because of access to andreliability of low cost biomass fuel supply and high transport costsof petroleum fuels.

Power as if iers

38. Biomass power gasifiers from 5 kW to lMW are commerciallyavailable. A power gasifier system consists of a manual or automaticfeed system, a reactor chamber, a gas clean up system and either adiesel or spark ignition engine. If a diesel engine is used, somediesel fuel still mst be used to induce ignition. Most commerciallyavailable power gasifiers are designed to operate with A specificbloass fuel: wood, charcoal, rice husks or coconut husks. Theanalysis below focuses on wood and charcoal power gasifiers as theseare the most commo.

39. The economics of power gasifiers hinges on the savings thatean be realized by switching from high cost liquid fuels (i.e.,diesel) to low cost biomas fuels. These fuel cost savings must beweigbed against the additional capital costs of the gasifier, thelicrease in operation and aintennecosts, and the reducedrelLability of the system. One way to evaluate the tradeoff betweencapital costs and OEK costs is to comWpare the levelized costs ofelectricity generated by each systes. This has been done In anongoing IENHZ study which compares goneric V0i sand charcoal gasifiersto diesel stand-alone systeas from 5kW to lAW

40. The IDHI study has evaluated commercially available powergasifiers in the following ranges:

15/ Assumptions used in the study are presented in the Annex.

15

a, Eanully fed charcoal gasifiers from 5 kW to 200 kW,b. Manually fed wood gasifiers from 5 kW to 200 kW, and;c. Automatic feed wood gasifiers from 100 kW to 1 MW.

Figure 5 presents some of the principle findings of this study. Theanalysis indicates that gowar, galifier economics is most stronid vaffear,ed by system aize and by the relative2 gost, of getroleum andbioasus fuels.

Costs of Electricity ProductionSmall Stand-Alone Systems

EIeoroty Coast (6/KW K h _ _ __ _ _ _ __ _ _ _0.8 - C-ON WkWh - -I

0.7 1_ TT_POWER MURNCE0.7 DIOSOI ~~~~~~4- 01s 400/1

0.6 -U@ 01d e 200a11.

0. @ wb~~~~~~fodousm s20/Mt

0.4

0.3II 9

10 100 1000INSTALLED CAFATY (kW)

Saws~. Sue . ........

Figur 5 GeC aetio Costs of G Ifters vs Diesel

41. Under baselin price assumptions (diesel Q 40/1, charcoal@ US$ 80/ut, ad fuelvood Q US$ 20/mt), the full range of charcoalgasifiers, manually fed wood gasifiers abov 30kW. and automaticallyfed wood gasifaers above 300kW are economically competitive withdiesel systems. In this analysis, a 50% fall In diesel prices, to20e/1, would make electricity generation by diesel cheaper than eithercharcoal or wood power gasifiers over the entire range of analysis.

42. With decreasing petroleum prices, it is clear that powergasifiers, like small-scale heat gasifiers, willl have a niche only inremote applications where the economic cost of diesel is high due to

16

transport costs, whereO diesel supply is unreliable, and where there isa surplus of biomass fuels.

Solar Water Heating

43. The basic principle behind solar water hoating (SUH) issimple: by passing a cool fluid through small pipes imbedded in ablack collector plate, exposed to the sun and housed in transparentglass, thermal energy is captured in the heated fluid. SWH designsdepend on the end use (industrial process heat, restaurant, hotel, ordomestic hot water), load and solar resource profiles (daily andseasonal), and water temperature requirements. The solar collectoritself is the most expensive system component, commonly constitutingover 50% of installed system cost. As most end uses requireadditional components, such as circulating pumps, temperaturecontrollers, storage tanks, and heat exchangers, the cost of solarwater heating can vary significantly with each application.

44. Many developing countries have active solar water heatingindustries. Solar water heaters for residential and .nall commercialL stallastj are manufactured locally in Israel and Jordan where asmany as 1 in 5 homes use solar water heating. The SUH industries inMorocco, Tunisia, Egypt, Senegal, and Zimbabwe fabricate as well asimport some collector components. Both India and Nepal have sound SWHindustries supplying residential and cotmercial systems. Australia,Israel, France, USA, and Japan are major exporters of SUR technologyand large domestic markets exist in both Australia and the USA.

45. tndustrial an=lications of solar water heating indeveloping countries are limited to a few large pilot plants in theMiddle-East and a few other countries. The brief analysis below,based on an ESMAP study of the potential for solar water heating inKenya, illustrates that low oil prices can severely curtail theeconomic advantages of industrial SUm.

46. An LSNAP SUE study for Kenya, originally assessed at 1985fuel prices, was recently reevaluated at border prices of August,1986.X6 The border price of fuel oil fell from US$ 16.75 to US$11.25/bbl over this period. Becase all of the industrial SEinstallations originally proposed were only mar lly viable, thisdrop cosed over 90% to lose economic viability. I/ Conversely, even

16/ Joint UNDP/World Bank ESMAP Solar Water Heating Study,Kenya, December 1986. Assumptions and results of this report aresummarized in the Annex.

17/ For purRoses of this paper, installations with an economicrate of return above 15% are considered economically viable.

17

though the. cost of electricity supply in Kenya. fell from 5.50/kWh inOctober 1985 to 4.40/kWh in Autust 1986, all residential installationsproposed in the original report (exclusively for the displacement ofelectric water heating in upper income urban homes) wers still foun-4to be economically viable.

Induistrial Sector SWH ApplicationIRR: Kenya Brewery Fuel Oil Retrofit

SWH Internal Rats of Retun

30%-

20%-

10 1 20 26 30 36 40 46 60

Fuel Oil Economic Price ($/bbl)SWAMm GM. Aine

Figure 6 SW DR: fuel O±1 Soiler Retrofit

47. The economic sensitivity to fuel prices of tworepresentative SW installations In the Kenya study are displayed inFigures 6 and 7. Under the assumptios used In the Kenya report, 18/

htca e .e112ra3113 staned that if OM cooi urcea of disulacedfuels reMdLan bov USS 15O/TO! fUMS 25/bbL&ul oIL_ 4Cd -. r S

50/m vod~Lstae-of-the-=r SW installato I octoswt godea be cosat ffQGide. As the landed cost of fuel oil

18/ - Economic rates of return were calculated by comparing the

economic value of displaced fuels to SWE system costs (includingImported collectors and. locally made balance of system components)calculated @ $103/m2 of collector area for industrial applications and$126/m 2 for all others over a 15 year lifetime at 10% discount rate.

2.8

dropped to around US$ 10/bbl in July 1986 and are below US$ 15/bbl asof February. 1988 for most countries with a port and the price offuelvood rarely exceeds US$ 50/mt, SWH installatious that displacethese fuels may not be cost effective unless cheaper, doziesticallyproduced SWH systems are available.

Residential Sector SWH ApplicationIRR: Electric Water Heater Retrofit

SWH Interna Rae of Return

* 0%

60%

40%-

20%

2 a 4 a 6 7 6 9 10 tI 12

Economiic Cost of Electricity (c/kWh)SGaG See AiMs

Figure 7 SWE RI: Electric Water Neater Retrofit

48. Uhile the actual dr,-, In fuel ol1 prices In Kenya hasseverely curtailed the economic viability of SUE systems that displacefuel oil, systems that displace electricity were barely affectedbecause generation costs did not change markedly and the economics ofSUN retrofits for electric water heaters are robust. State-of-the-artsolar water heating systems sized for Kenyan conditions cost about 40per kUh displaced. As elgee=tr-ity syste Lot omol rang. frm3rc-10/kUh far hva-iiowr to 5C-2!OCAdkh for. therMa ggMenrign,_=U

systemm a delive ht waLtek for domASti uses At owr cost taeetrical wate htin nMgt olaces with a 2ood soa0 rsur1

Non6theless, this does not Imply that SUH is the lowest cost waterheating technology. Comparing SUH system costs to those of electricvater heaters does not assure SUH a market niche if. fuel oil boilerretrofitting is cheaper.

19

Biogas

49. Biogas is the gaseous product (mainly methane) obtained inthe anaerobic (oxygen-free) digestion of dung and other biomassv'tstes About 6-7 million biogas digesters have been built inCh.ina,i9/ about half a million in India, and a few thousands in otherdeveloping countries. A majority of the digesters use cattle or pigmuaLae as feedstock. Most of the digesters now in operation are"family size", each unit yielding about 2 m3 of biogas daily andrequiring dung from at least 3 cattle or 6 pigs. The larger digestersare often built for institutions (schools, prisons, etc.), industries(slaughterhouses, breweries) and communities, where gas from a bigdigester is piped to the kitchens of several families.

50. The costs of establishing and operating a biogas digesterinclude capital investment for the digester, gasholder, pipes, andaccessories; labor for construction,, dung collection, and systemoperation; and the costs of water, land (for the installation), andthe dung itself. Some of these items require cash outlays, others donot. The family-sized KVIC system in India, for example, has acapital cost of about Rs 4250.

51. The first principal benefit is the fuel value of the gas.If used for cooking, it may displace kerosene, fuelwood, or drieddung. For lighting with a mantle lamp, it usually substitu.tes forkerosene. As fuel for an internal combustion engine to obtain directshaft power for flour milling, water pumping, or electricitygoenration, it displaces diesel fuel, gasoline, or grid electricity.TMe slurry or dried sludge represents the second principal benefit 'nterms of its value as fertilizer or "soil conditioner". The value ofthe sludge is often assessed as equal to or even greater than the fuelvalue of the gas, depending on the particular installation.

52. In the financial analysis, the flow of costs and benefitsis evaluated over the digester lifetime of 15-20 years. The value ofgas In terms of substituted fuels is fairly esQy to determine.However, valuation of sludge or slurry as fertilizer substitute hasalways bee an it.. of disagreoent. Although the viability of abiogas installation can only be assessed on a case by case basis, itis possible to make some general statements. Without subsidies, it isvirtually impossible to make a system financially viable on the basisof the fuel value of the gas alone. Counting the fertilizer value ofthe sludge, there fan be some instances where acceptable financialrates of returns may be achieved. It may also be generally said that

19/ Taylor, R.P., Decnali blg Energv DeMsIoM t iChinaoi The State of the Art, World Bank Staff Working Paper #535,1982. -

20

due to the scale factor, family-size systems are generally less viablethan coumm-ity-sized biegas systems. These statements are drawn fromrecent analyses done by many authors when petroleum product priceswere high. -Clearly, at current (1986) oil prices, the financialviability of biogas systems in general has either remained the same orworsened.

53. It must be kept in mind, however, that national policiesfor dissemn:Uating biogas systets are adopted not only on the basis offuel substitution goals. There are indaed other economic benefits,including: destruction of pathogens in the raw dung, health benefitsto households from using a smokeless fuel, reduction of pressure onthe forests from fuelwood collection, ewployment generation, reductionof uncertainty in fuel supply, and reliance on indigenous rather thanimported energy.20/ For obvious reasons, there have been no generalagreements on how these externalities should be quantified andincorporated into the economic analysis of biogas projects.

54. It is beyond the scope of the present analysis to make ajudgement on the economic desirability of biogas technology. The onlytask is to assess the potential impacts of lower prices of competingpetroleum fuels. As the preceding discussion clearly indicates, ithas been difficult to justify biogas systems on the fuel value of thegas alone even when oil product prices were high. Therefore, loweroil prices would cause very little change in the financial viabilityof biogas systems.

Photovoltaic and Wind Powered Water Pumpingfor VllSe Water Supply and Irrigation

55. Wind power has been used for grinding grain for centuries.Water pumping by windmills played a major role in the agriculturaldevelopment of the American West and land reclamation in Holland.Relative to the history of wind power, photovoltaic technology or PVhas just been born. Today's photovoltaics (solar cells) convert about10% to 14% of the energy in incident sunlight into electricity.Falling production costs have recently mads direct solar electricconversion competitive with diesel as a power source for remote powersupply applications. While PV pumping systems require powerconditioning equipmeut to convert direct current electric power intorotating mechan4cal power for the pump, most windpumps transfer therotary motion of the blads directly to the pump via a mebiknicalshaft. Tell designed wind machines can convert 25-40% of the power in

20/ Conversely, equity and distributional concerns are raisedby biogas technology: affluent households have more opportunities. tobuild biogas digesters than poorer people who would be deprived ofdung otherwise avatlable to them for conversion to drie4 fuel.

21

the wind into rotary power. In remote locations with mean monthlywindspeed in excess of 3 m/sec, wind can be the most economic powersource for water pumping.

56. Simne 1979, significant operating experience with PVpumping has been gained through UNP a.nd USAID funded otrlaicts. N(ajorprojects include the Mali Aqua Viva Program, Desert Development inEgypt, Solar Pumping in Botswana, Remote Village Water Supply inIndia, and the UNDP Pump Test Project. Small PV pumping systems arein plaeo throughout the Carribean, Africa, South and Southeast Asia.

57. In the developing world, wind pumps are produced in Kenya,Ethiopia, Mali, South Africa, India, Pakistan, China, Thailand,Philippines, Peru, Argentina and Brazil. Data on installed windpumpcapacity has not boon gathered on a global scale. Nonetheless, asover 50 komn windpump menuturers were operating globally in 1983(20 for more than 20 years), it is evident that the industry servesa significant global market.

58. Both wind and solar electric pumps convert low densitypower flows into pumped water. Conversely, a diesel pumpset isdesigned to convert a donse form of potential energy into a relativelylarge mechanical torque on demand. The smallest diesel enginesdeliver about 2.5 kW of power at rated load, while many small-scalepumping applications could be satisfied with less than 500 Watts ofpower, four hours daily. Consequently, in many small village watersupply and irrigation applications, diesel pumpsets supply only afraction -of the water they are rated to deliver over their lifetimes.Because of the technical lower limit to diesel pumpset size,photovoltaic and windpumping technologies carve out an economicallycompetitive niche In small scale mechanized water supply.

59. Figure 8 shows representative village water supply costs ar40m head provided by diesel, photovoltaic, and wind energy sources.22/Because fuel accounts for only 5-20% of total water costs, the dieselcost curves are largely insensitive to fuel price changes. Incomparison to PV pumpsets and windpumps, the hypothetical 67% drop indiesel fuel price from 450 to 150/liter makes diesel pumpingeconomically competitive with PY and wind at 12% and 21% smaller

village populations.

21/ IT Power LTD, Wind TZhnalomv Assesmn.nt Study, Vol 1, pp16, February, 1983.

22/ Water cost curese generated by the World Bank HandpumpNodel, Urban Jater Supply Department. Water costs include annualizedcosts of each puipset, the well, and storage. Assumptions for village.water supply and irrigation models are presented in the Annex.

22

Village Water Supply Power Source Costs20 Liters/capita, head a 40m

Power source costs only ($/m3)

.~~~~~~~im ..of

-~-Wind e 3wmie

-4- Wind e 4Miee

0.9 >\ X- PV 0 41kWfM2

o.s °- PY * 4kWhim*

0.8

100 300 600 700 900 1100

Village Population

Figure 8 Village Water Supply Costs: PV, Wind, & Diescl

60. Irrigation water costs at Sm head are shown in Figure 9.As above, a 67% drop in diesel fuel cost would make dieseleconomically competitive with PV add wind at 6% and .16% smallerrrigated plots. Clearly, the economic tradeoff between power sources

for either water pumping application is not sigificatly changed by- ala.zp drop in oil prices.

23

Irrigation Water Costs34 m3/ha/day Head * 8m

Power source costs only ($/m3)

\~~~~~~~~~~Wn o X t* *ss0.5 Olsfelc0.Q1 0-l. Witd c o*isei

XPY 0 4ktWIUMI0.3 - I: Pe 0 GkWivhm

0.2 0~~~~~~~~~~~

0.10 0.5 I 1.8 2

lITigated Area (hectares)

1igwre 9 Irrigation, Vater Costs: PY, Wind, & Diesel.

61. In, actuality, the landed cost of diesel fuel in remoteregions where these technologies are cost effective has not changednearly as much as international prices because of significant overlandtransport costs. 2 3 / In addition, the operators of village watersupply systems or small pumps for irrigation often face retail fuelprices well ab-ve economic prices due to lack of regulation inoutlying areas. 14/ For these reasons, the actual impact of lowerinternational oil prices on village water supply bas been far less

23/ Recent Bank reports cite a transportation margin on dieselfuel of up to 180/liter for a 1500 kI overland haul in Zaire andtransport costs of 0C/liter for 1120 kI overland transport in Uganda.This indicates an average overland transportation cost of roughlybc/tonem-lu.

24/ Retall prices of sall quantity purchases is oftenuncontrolled in remote regions. For example, the official retailprice of kerosene was 5CC/liter below the actual market price in KanoCity, Nigeria in 1980 (Fishwick, .19811.

24

than the extreme case assumed above of a 67% price drop for dieselfuel.

62. Moreover, the final choice of pumping system is commonlybased on more than just A.mual water costs. Other factors such asreliability, fuel availability, and ease of maintenance can rank asimportant as water costs. In areas where the supply of diesel fuelmay be erratic or spare parts and skille l mechanics are scarce,photovoltaic and wind power systems may be the most reliable powersources. However, the need for financing can be significantly greaterfor PV and wind pumps. Hence, access to credit can become a majorissue in the tradeoff between diesel and renewable technologies forwater pumping.

63. In sum, the impact of lower diesel fuel prices on theviability of PV and wind power for water pumping is relatively smllbecause:

a. fuel costs constitute only a fraction of annualized watercosts for small diesel pumpsets, and so, a large fuel pricedecrease results in only a small drop in annual water costfor diesel pumped water;

b. large price decreases have not occurred in rem'ote areasbecause falling import costs constitute a small part of thefinal diesel fuel price when long overland transport isrequired, and;

;. other factors. such as reliability, maintenancerequirements, and access to credit can become as importantas annualized water cost in the final decision betweendiesel, wind, and solar powered water pumping.

25

II. CONCLSIONS

64. The analyses presented in Chapter 2 indicate that, ingeneral and with the discount rate used in Bank studies, the economicsensitivity of renewable energy technologies to lower internationaloil prices is mainly a function of scale and location of theparticular RET installation.

65. Fuel coats generally comprise a larger percentage of totalannualized system costs for large-scale petroleum-based conventionalenergy installations than for small-scale ones. Hence, a markeddecrease in fuel oil and diesel fuel prices reduces large scaleconventional energy costs significantly, whils barely changing thoseof smaller conventional energy tecbnologies. It was seen, forexample, that a 50% drop in fuel oil price (from a base of 20 c/lt)would reduce the cost of electricity generated by a 10 KW diesel byover 30%, thereby sharply reducing the competitiveness of anequivalent-sized deadrothermal power plant (Table 1). On the otherhand, even a 678 drop in diesel fuel price (from 45 c/l to 15 c/i)would reduce the cost of water, pumped by a 2.5 kW diesel for avillage of 500, by less than 10%, thus hardly changing the relativecompetitiveness of renewable alternatives (Figure 8). Clearly,renewable energy technologies that compete directly In the modernsector as large-se le petroleum substitutes are the most adverselyaffected by falling oil prices.

66. The location of a renewable energy project is oftenindicative of its scale. RETs that are large-scale petroleumsubstitutes tend to be located close to urban areas, while thesuiiller, stand-alone technologies are often used in rural and remoteapplications. The price of petroleum fuels generally increase withdistance from major urban areas because of transportation anddistrlbution costs. LLkewise, the price of biomess fuels generallydecrease with distatce from major uIban areas due to Licreasingavailability in rural areas. For these two reasons,r the economicviAbility of rural and remote UST applications is affected less byfalllng International oil prices than large-scale, petroleumsubstitution RITs locat near urban areas.

67. Two additional attributes of location serve to inslate theeconomics of small-scale, rural RET applications from the fall in oilprices. First, as shown in Figures 1 and 2, in most developingcountries the regulated fincial prices of diesel fuel and fuel oilhave not been reduced nearly as much as the drop in international FOBoil' product prices. It has been noted that retail prices of smallquantity conventional fuel purchases is often uncontrolled in- remote

26

regions. Hence, operators of small-scale rural energy applicationscam face -financial fuel prices well above regulated prices and farabove economic fuel costs. Second, a reliable supply of conventionalfuels is much more common in and near cities than in remote regions.Even though the economic analysis may show a particular RET to beslightly more expensive than a conventional power source, theintermittency of conventional fuel supply could well be enough to makethe renewable application the appropriate choice.

27

TECHNICAL AEN=

Fuel Alcohol Base Case Assumptions . . . . . . . . . . . . . . . . . . 31Wind Electricity Generation ....... .. .. .. .. ...... . 32Heat Gasifiers ........................... . 33Power Gasifiers . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Solar Water Heating ............ .... .... .... . 35Water Pumping Model Assumptions .................. . 37

miel nua uemas usa mues: see 59

ASIA

.Wan hsV * A 48t a) (596) 001

s59 a61 wX S uutL atii 06

mun It wit 1 "a Lss -00 ."g41 u.Js r .1 to ".r as "3

eauiUwi pre ita OAe 5 41.515461'11 a5. 46. 45.00 1.5 44.69 1.43 51.3 100 56.11 450 36.90 44a 39.111 6.0 33.6 1.46 31.14,

* Sus~~~~~ie lIte 340t 35 34.. 6.5 31.0 1.01 36.0.

lisa 6.n1 a1. 1.3 3 3.n6 11.5 3.30 U" 3." s 1.30 3.11 11.10 t1.59 us5 14* 4.6 3.11 6 30.116

195 it9d 5*1 A. MA 4.06 31.5. 343f 3.30 1.4 31.69 9 .1 10.09

bier dIesel 6.11~~~~- 3.15MA 3.65 31.9 4.25 U6.56 3.50 36.96 3."9 21.4 M6 1.60 4515 .6 3.3 11 99

160..IrIet kew5 8140 M20 19.1t9

fuel OtI tiler 4.0 55.55 5.4 59.5 I.5 9.3 543 50.09 81.60 M3 19.59 3.62 13.16 4.53 3.51

suma us~~~~~~~~~~~U S 1 mu

I*166) SyO) eb h11r e0s) SA*7 e6b (SeS) 0 W$ de as)

6t,u F UNITS to Tml TE1s i rw-7 us r a a-' rse arui-l

Iselinsp pemlia Slew MA 54.41 M.0 64610 30.65 3.98 19.65 515.59 13.0 33.1It 99.0 31.61 %

6sud Slew 35.40 60.*u 16.53 9*.35 65.0 29.55 9.0 35.19 co

Ow S lw 3.0 .3.5 a5. 46.16 .4 U." 4.8 5.61 a.4s .5 .36 1.50 44.53 59.0 22i5 05.0 30.00

btet Ot 36.0r 44 o .36 .4 14 a Ir ".0 5s65.7 Is.21 SI. 2-0Os 55.7 5s .3 5.1.51KNC d Wt 0.t 51.46 1 59 36.65 1t96 445.13 15.02 3n.92 0.15 19.15 0. 2-. .L 17

14itrIl" diese tHew tM I5.11 .I1 a 5.16 ItS2 1.97 U 7.45 43.63 we 6.36 6.0 31.05

W allon miii. 1.6 35.13 6.0 RAY 5.151 9."4 I i.9i ss. 6.60 30.46 S.49 3r89

a" s) 565 5t meg 066 (NW 05) (N 06) (act 05) 5w 066 CISOS SJuV M65 lAds' all

fwts lov F5 U usj --- i of.- -Ca----Ui m1selt- .1. us* v -~U-. I -$. -

66iseettAs Or I,. tkw L.5 110.4 LW9 59.4 24 43.6 A4 45.45 4.65 33.60 2.36 36.40 0.6 44.30 0.96 49.20 51.26 IS$^~ 11.0O 2.30

Segtet Iiter 0.6 43.50 0.96 41.60 53.35 62.55 53.30 59.10

gtesaw ISew 5.66 36.6 L.B 61.0 Il 5110., It 3.2.3 0.51 21. 10 0.61 30.10 3.14 1.41 3.55 5.10ips ~~~~~~~~~~~ ~~~~~~ ~~~~~~~~~~~~~~~~~~~~10.61 9.1is 10.1Z is. 40

atordleout ttet 8.05 41.0 3.9 19.4 a6 35.15 II 35.96 3.02 21.0 S.AO IS."6 0.10 34.00 0.16 31.60 10.65 9.1 1 0.4A2 15.50

fuel oil 1ISWe 6 to."6 6 11.36 5.52 U).97 0. i8 9.12 1.49 6.61 6.60 9.60

29NOTES TO TABL!

SOURCE: letroleua product prices are quoted in local currencyand are converted to $US at prevailing market eachange rates asnoted. In countries where no distinction is made between gradesof gasoline or grades of diesel oil, prices for these productsare listed as premium gasoline and motor diesel. For furtherproduct specification, such an gasoil in Africa, see notes foreach country.

2/ SOURCEs All prices from de Lucia and Associates, converted atTk3O.3 * $1 (July '56) and Tk 27.3 a $1 (1965). Fuel oil priceis ez-depot.

3/ SOUIs All petrolem prices frm de Lucia end Associates.u oil price a Rs 1650/mt, assumed 6.7 bbl/mt. Prices

converted to $U5 at Rs 16.82 * $1 (July '86) nd Rs 16 - $1(July '85). Natural gas prices, from EGYDI, World Bank, are forthe first 7 mcf/month consumed at domestic rates.

4/ SOURCE: All prices from de Lucia and Associates, converted toUS$ at Rs 13 *$1 (1986) and Us 12.35 * $1 (1985).

5/ SOURCE: World Bank Staff Appraisl Report #5942-IDD, 11 April1986 and World Batk Economic Nemorandum #6201-ID, 20 Mty1986. Petroleum product prices remained unchanged between 1April 1985 and March 1986. These prices are reported asNovember 1985 prices and are converted to $US at 1123 Up - $1.July 1986 prices ounced by the Deprtment of Mines and

nergyp, donesia on 9 July 1986, were converted at 1131 Up a$1.

6/ SOURCE: All prices from official Governmet price changeannouncements obtained from East Asia and Pacific CountryProgram Departments, Philippines Division, World Bank and ECYDi,World lank. Fuel oil price is wholesale. January 1986 pricesare preelection price reductions. Average product pricesbefWore the price chne of 25 Jauary wre 60 CetaosP/literhighe. Janury 198k prices converted to $118 at 19.11p $1;June 1966 prices at 2.05 P a $1.

/ hSOURCE: Eastern and Souther Africa, Coutry ProgramsDepartment South Central Divsion, Vorld Sak. All prices areeferee Prce (without distribution margin) in Kinshasa and

are, therefore, retail prices in Kiabsa. DKesel prices arefor 8gasoil" in Zaire. Janury 1986 Wices conveted to US$ at55.1 a $1; Aeust 1986 prices at 58.75 Z * $1.

8/ SOURCE: 1985 prices from Kenya Solar Vater Veating ProjectCren Cover, March 1986, World Bnk. July 1986 prices wereanounced in the June 1986 Budget, Governmet of lenya. Dieselfuel prices for "gasoil" in Kenya. Industrial diesel prices arefor 2500 sec fuel oil and fuel oil prices are for 1000 sec fueloil. No*ember 1985 prices converted to $11 at 16.5 Ksh * $1;

30

9/ SOURCs: Official anouncment October 3, 1984 and Budgetstatement June 1986, Covernuent of Tanzania. Official pricesanoned on October 3, 1984 were unchanged as of April 1986 forgasoline, kerosene and diesel. Hence, it is assumed that nosignificant retail price changes occurred between October 1984ad April 1986. 1985 prices converted to $US at $1J TSH * $1(Oct. '85 Avg) Jult 1986 prices at 42 Tbh a $1. Prices quotedfor diesel are for diesel gas oil' in TSanni. 1985 LPC andhevy fuel oil prices am wholeslal.

10/ SOURCE: 1985 prices fru Swaziland Eneg Assessmetl, YellowCover, World Bank. July 1986 prices from personal comnicationwith USD regional economist for Southern Africa. Pricesquoted for diesel are fur 'bs rates diesel fuel s almot alldiesel pumps in the country are set at the bus rate. Industrialdiesel 1985 price is for "mid-duty" diesel fuel. November 1!85prices converted to $US at 2.71 - $1; July 1986 prices at 2.2 2

iI/ SOURCE: September 1985 prices from Latin America and theri"bje, -Country Progrm Departmt, World Bank. August 1986

prices from Shell Oil, Haiti (new prices effective Hay 1986).Diesel prices are for "gasoil' in Haiti. All. prices convertedat CS a $1.

12/ SOURCE: August 1986 prices have not changed (in nominal[l310itar) since 1983, a pe 3D3 Costa hiea. August 1986

prices converted to lS$ at 56.3 CaC a $1; November 1985 pricesat CIC 52.8 a $1.

13/ SOURCE: Central Bank of Brazil, July 1986 Bulletin. Prices inCr$Ilter for gasoline and diesel oil, and Cr$/kg for fuel oil,assumd to be residual with density of .94 kg/I. October 1985prices converted to US$ at 8.56 Cr$ a $1; May 1986 at 13.84 Cr$a$1 A price freez oan ptrolei products has bees in effectsince "rly 1986, but a new 28S taz ba bee imposed on gasolineon 25 July 1986. This taz is not reflected in the table.

14/ SOURE All prices fom do Lucia end Associate, coverted to$M *S 2B a $1 for eac period.

15/ s5C: July 1985 local prices frm Table 2*2, °euador Energyds61m"t, Deember 1985, World Bnk. 22 July 1966 lcal

prices quoted in Office mmrandvu of 31 JIly 1986 of RD2,lWold Bank. Local prices conrt ed to $115 at official rates forJuly 19853 67.175 SUCWES 81 ad July 1986 109 SUCuaS s $1(before dealuation).

31

P1el Alcohol Base Case Assumptions

69. Assumptions and results of the base case analysis for theiClume project include:

Original Revised(May 1985) (al1y 1986)

Discount Rate 10%Interest Rate 12%Exchange Rate E2.1 - US$ 1

Plant Size (liters/day) 65,000Average Production ('000 liters/yr) 11,938Operation (days/year) 250Plant Life (years) 20Salvage Value 10%Recovery (liters alcohol/mt molasses) 250

Molasses Ex-mill price (US$ /mt) 24

Capital Cost (US$ million) 6.38Amortized Capital Cost (C/liter/year) 7.16Variable and Fixed Costs

(excluding debt service) (C/liter) 12.68Economic Cost, Zblume (C/liter) 19.84Transport to Matsapha (C/liter) 0.85

Ethanol Cost Eatsapha (C/liter) 20.69 20.69

Gasoline Import Parity 93 RON Matsapha (C/1) 28.09 21.81

Difference Between Gasoline Import Parityand Economic Production Costs (C/liter) 7.40 1.12Savings on Fuel Oil and SFF Levies (C/liter) 1.69 1.69

TOTAL ECONOMC COST DIFFERENTIAL (C/liter) 9.09 2.81

Economic Rate of Rpturn 28.5% 18.0%

32

Wind Electricity Generation

70. The wind generation costs quoted in Figure 3 arerepresentative anualized costs derived from actual 1986 installedcosts of 100 kW turbines in California wind farms, estimated 06&costs, and annual energy production at -25% capacity factor.25/

71. The oil-based electricity generation costs shown in Figure3 were derived by finding the least cost generation mix, of large fueloil steam base load plants and diesel oil gas turbine peaking plants,to meet a hypothetical load duration curve at representative 1985 fueloil and diesel import prices (shown below) and at fractions of thoseprices. As fuel prices can change much more quickly than actualgeneration capacity, this least cost generation mix will represent aloaer boud to actual oil-based generation costs for any givenutility.

-yowc ftet= Load Pmfb

HS S 4 n

iSU_

fets/w e % a Pecam* MN)

Themal Plant Cost Assumptions400 KW 50 KWFuel Oil Steam Diesel Oil Gas

Turbine

Capital CostIncludlng Reserve ($/kW) 1,100 450

Arnual OUK (8 of Cap) 2.5t 3%Lifetim (yrs) 25 15Annual cost.Q 10% ($/kW) 148.50 72.50

Fuel Price US$ 30/bbl (20 G/l) 30 e/lTherml Efficiency 36% 28%Fuel Cost (4/kth) (4.7 4/kUh) (10.90/kWh)

25/ -Study of the Potential for Wind Turbines in DevelopingCountries , Phase I Draft Report, for USDOE and the World Bank byStrategies Unlimited, December 1986.

33

Siamss Gasifiers

flot Gasifiers

72. A recent Es2thscan study 2 6/ estimated the capital costs ofhea tasifiers to vary from US$ 15,000 to US$ 35,000 per GJ/hr ofrated boiler output. The higher end of the range represt.'ts highlymechanized systems while the lower end represents manually operatedsystems. The principle economic assumptions and results of this studyare tabulated below.

Capital Cost ($/GJ/hr) 15,000 25,000 35,000Lifetim (years) 12 12 12Discount Rate 10% (CRF-.147) 10 10% 10%Anrnualized Cap Cost ($/GJ/hr) 2,205 3,675 5,145O&K ($/yr) 1,500 2,500 3,500Fixed Costs ($/GJ) 1.85 2.85 3.95

Woodfuel Cost ($/mt) 20 20 20Energy Content (GJ/mt) 15 15 15Conversion Efficiency 65% 65% 65*Voodfuel Cost ($/GJ) 2.05 2.05 2.05

Total Costs ($/GJ) 3.9 4.9 6.0

73. By way of comparison, the conversion efficiency in aconventional fuel oil boiler is approximately 85% and the energy

ontent of fuel oil is 37.6 JU/1. At 20¢/liter (US$ 31.75/bbl) theenergU cost of fuel oil steam is roughly US$ 6.26/GJ. As the casepresented in Figure 4 is for a heat gasifier retrofit to an existingfuel oil boiler, the total costs of the retrofit gasifier are comparedto the energy costs of che fuel oil boiler over a range of fuel oilprices.

26/ Foley, G. and- Barnard, C., Biomass Gasification in

Developing Countries, Earthscan, 1983.

34

lower Gas ifiers

74. In the IErEM analysis, estimates of installed cost, plantlife, annual power output, efficiency, and 06K cost vary by technologyand plant size. Some representative installed cost and plant lifeassumptions in the baseline comparison are tabulated below. Thediscount rate, fuel costs, and load characteristic under which thesetecnnologies are compared is also specified.

Installed Cost Lifetime($/kW) (years)

50kUW SOOi 50 W 500kW

High speed diesel 585 553 6 8Charcoal gasifier 910 5Wood gasifier (manual) 1300 . 5Wood gasifier (automatic) - 2135 - 6

Discount rate 10%

High speed diesel fuel costs (¢/1) 40Charcoal costs ($/mt) 80Wood fuel costs ($/mt) 20

Hi speed diesel energy content (NJ/1) 36Charcoal energy content (NJ/kg) 29Wood energy content (NJ/kg) 14Moisture content (w.b.) wood 30%

Load characteristic

30 % of time: 80 % of rated load70 8 of time: 30 8 of rated load

35

Solar Water Heating

75. A recent ESHAP study of the Potential for Solar WaterHeating in Kenya provides a unique case study on the impact of loweroil prices on the economic and financial viability of solar waterheating (SWH) applications. The study originally assessed SWH systemsusing October, 1985 fuel prices and was revised using August 1986prices. Between October 1985 and August 1986, petroleum productborder prices in Kenya declined on average 32% and nominal retailprices wera reduced on average 201.27/ Economic and retail fuelprices as of October 1985 (used in original study) and Augusc 1986(used in revision) are presented in Table Al.

TABLE Al

ECONOMIC ECO14OIC RETAIL RETAILPRICE 85 PRICE 86 PRICE 85 PRICE 86

FUEL $US/TOE $US/T0E $US/TOE $US/TOE

Gas Oil 260 140 405 363Fuel Oil 1000 sec 120 81 144 108

2500 sec 143 107 167 134LPG 321 276 410 347Kerosene 321 193 320 240Charcoal 151* 161* 151 161Wood 46* 48* 46 48Electricity 222 178

Residential A 251 267Residential D 145 154Commercial 166 176Industrial _ | 142 151

* Retail prices assumad as economic prices.1985 prices L 17 KSH - $USI; 1986 prices @ 16 KSH - $US1.

76. The tachnical performance of optimal solar water heatingsystems was simulated in forty five sites. The average installedsystes cost was determined to be US$ 126/rn while the simpler systemsused In Industrial applications averaged US$ 103/a 2 of collector area.A sample of the original and revised economic evaluations aresumarizal in Table A2. The financial net present worth of eachInstallation in the revised amalysis is presented as an Indication ofthe impact of lower retall oil prices on the viability of SUH systemsfrom the consumr s perspective. In the origiasl report (1985), allapplications had a positive not present worth.

27/ Real petroleum product retail price reductions averaged21%. These prices are peculiar to Kenya and -the following summary isnot intended as a general model of the impact of lower oil prices onthe economic viability of solar water heating.

36

Table A2NPW @

APPLICATION DISPLACED ERR ERR r-. 25uFE 1985 1986 i-.13

Mt. Kenya Safari Club Fuel Oil 18 9 -3763Nyali Beach Hotel Fuel Oil 21 11 -5240Diplomat Cafe Electricity >60 4 3255

Kenya Brewery Puel Oil 15 <5 -15471Elliot' s Bakery Gas Oil >60 23 80216Dandora Creamery Fuel Oil 23 10 -4404

Health Center Electricity >60 30 6567Heala sh Center Kerosene >60 >60 46172University Dormitory Gasoil 45 14 311184Rural Dormitory Wood <15 <5 -2331

Residential Electricity >60 30Tariff A 854Tariff D - - 290

77. In general, the applications which displace kerosene,electricity, and (marginally) gasoil still appear favorable usingrevised 1986 fuel prices. Due to the extremely low prices of bothfuel oil and wood, SUH applications that displace these fuels do notappear to be cost effective. Table A2 shows that the economic rate ofreturn for most applications displacing petroleum products has droppedto less than 50% of the rate of return calculated at 1985 oil borderprices. This significant reduction in economic viability is duesole to the 32% (on average) drop In petroleum products borderprices.

78. From the consumer's perspective, the financial viability ofthe sample applications is indicated by the NPW column in Table A2.28/Installations with a negative net present worth are not financiallyviable under the assumptions used. The VW for the proposed Mt. KenyaSafari Club installation under 1985 retail prices of fuel oil (fuelsaved) and electricity (pumping costs) was US$ 420. This compareswith a VPW of -US$ 3763 using 1986 retail price. The differencebetween these two indices of financial viability is due saa1. to the25% drop in the retail price of fuel oil.

28/ The IW was calculated at discount rate of 25%, for systemsfinanced @ 13% interest over 10 years, assuming no increase in fuelprices, 259 duty on imported parts and no sales tax on solarpquipment. A 20% premium on foreign exchange was used throughout theanalysis.

37

Water Pumping Nodel Assumptions

Village Water Supply

79. Each system is sized to provide 20 liters ofwater/captta/day. This represents a minimal health standard dailywater requirement.

Irrigation

80. Systems are sized to pump peak daily water demand Qmax -1.76 x Q and Q - 34 mO daily average per hectare. This peak ratio is-derived from Kenyan irrigation practices as described in Small-ScaljSolar-Powered uMoinx Systems: The Technologv. Its Economics and&4yaneeent, UNDP/World Bank, June, 1983. Irrigation water costsinclude gnly the costs of the pumpset and well.

All Systems

81. In water lifting applications, the daily hydraulic demand ismeasured by the volume-head product: m4 - daily water demand(m3) xlift(m). Since the size and cost of a pumping system is directlyrelated to the hydraulic demand it is designed to serve, water costsare commonly compared over a range of hydraulic demands to determinewhere economic tradeoffs occur. The computed water costs includeanualized power source capital cost, fuel, O6&, and the costs ofstorage and wells.

82. Pumping systems are sized for a solar resource of 5kWh/m2 /dayand winds of 4m/sec during the critical demand month. Theseassumptions represent a normal solar regime for equatorial countriesand a good wind resource.

Discount rate 10SPeriod of analysis 20 yearsFuel inflation 0%

Useful lifemechanical equipment 10 yearsnon-mechanical equipment 20 years

Maintenance costsmChanCal -equipment 10% of cspital costsno-mechanical equipment 1% of capital costs

Diesel efficiency 7.5% fuel to hydraulic energy

38

Total Dynamic Read TDO - Lift + lOm friction and pumping tostorase

Pumped volume Q (m3/day) - Population x 20liters/capita/day/lO00

Dissa- calInstalled engine cost $3000 for 2.5 kW enginePump cost ($) - 275 + 25(TDH) + 75Q/4, but at least $750

Solar ostIrstalled array cost $12/WpPump cost ($) - 275 + 25(TDH) + 75Q/4, but at least $750

Installed system cost $500/12 swept area of rotor

WelJl cost . 2000(Q)4/4, or $2000 for Qc16.

Storass cos lOOO(Q*0.3)h

Renewable technology system sizing

Array size in peak watts: Up - Z x Q x TDH x PEAKSwept area of windmill rotor in m2 - 1.13Q x TDH x PEAK / v3

v - design month mean windspeed (r/sec)PEAK Qmax/QQuaz - peak daily demand during design monthZ ° sizing factor from table below.

SIZING FACTOR (Z)

PUMP Design Month Daily InsolationEFF ~ 4k/m 2 Sk3h/m2 6knh/m2

408 1.97 1.61 1.33

50% 1.60 1.30 1.08

60% 1.28 1.04 0.87

iaggca: IT Power, Solar Powere TheirPerfoBme. Cost_and_Economies, July 1986.

UCf SERIES PAPERS

Ho. 1 Energy Issues in the Developing World, Fahruary 1988

No. 2 A Review of World Bank Lending for Electric Power,March 1988

No. 3 Some Considerations in Collecting Data on HouseholdEnergy Consumption, March 1988

Go. 4 Imroving Power System Efficiency in the DevelopingCountries through Performance Contracting, May 1988