Scenarios for assessing profitability and carbon balances of energy investments in industry

The industrial sector can be a major contributor\nto increased energy efficiency and reduced CO2\nemissions provided that appropriate energy saving\ninvestments are made. Profitability and net CO2\nemissions reduction potential of such investments\nmust be assessed by quantifying their implications\nwithin a future energy market context. Future energy\nmarket conditions are subject to significant\nuncertainty. One way to handle decision-making\nsubject to uncertainty regarding future energy\nmarket conditions is to evaluate candidate investments\nusing different scenarios that include future\nfuel prices, energy carrier prices, CO2 emissions\nassociated with important energy flows related\nto industrial plant operations, etc. In this report,\nsuch scenarios are denoted “energy market scenarios”.\nBy assessing profitability for different\ncornerstones of energy market conditions, robust\ninvestment options can hopefully be identified, i.e.\ninvestment decisions that perform acceptably for a\nvariety of different energy market scenarios.\n\nEnergy market parameters within different scenarios\nmust be consistent, i.e. different energy\nmarket parameters must be clearly related to each\nother (e.g. via key energy conversion technology\ncharacteristics and substitution principles). For\nconstructing consistent scenarios, a calculation\ntool incorporating these interparameter relationships\nis essential. Hence, the Energy Price and\nCarbon Balance Scenarios tool (the ENPAC tool)\nwas developed by the authors and is also presented\nin this report. The ENPAC tool calculates\nenergy prices for a large-volume customer based\non forecasted world market fossil fuel prices and\nrelevant policy instruments (e.g. costs associated\nwith emitting CO2, different subsidies favouring\nrenewable energy sources in the electricity market\nor the transportation fuel market), and key characteristics\nof energy conversion technologies in the\ndistrict heating and electric power sectors.\n\nRequired user inputs to the ENPAC tool include\nfossil fuel prices and charge for emitting CO2\n(other policy instruments can be included on an\noptional basis). Based on these inputs, the marginal\ntechnology for electricity generation can be\ndetermined by setting the technology with lowest\ncost of electricity production as build margin. The\nresulting build margin determines the electricity\nwholesale price together with CO2 emissions associated\nwith marginal use of electricity. In the next\nstep, the wood fuel market price is calculated based\non the willingness to pay for a specified marginal\nwood fuel user category. The CO2 emission\nconsequences of marginal use of biomass can thus\nalso be determined, assuming that biomass is a limited\nresource. Finally, the willingness to pay for\nindustrial excess heat in the district heating market\nis determined based on the identified price setting\ntechnology in a representative heat market. With\nthis procedure, consistent future energy market\nprices can be determined. Moreover, CO2 emissions\nrelated to marginal use of the energy streams\ncan also be determined.\n\nUsing the ENPAC tool, eight energy market scenarios\ncovering a time period from 2010 to 2050\nhave been developed for the EU energy market.\nThe eight scenarios are a result of combining two levels of fossil fuel prices and four level of CO2\nemissions charge. Two levels of fossil fuel prices\nrepresent different developments on the fossil fuel\nworld market. Four levels of CO2 emission charge\nwere chosen so as to reflect a wide spectrum of political\nambitions to decrease CO2 emissions, ranging\nfrom weak to strong ambition levels.\n\nThe ENPAC tool and the scenarios are developed\nfor European conditions without taxes. Additional\ninput may be required concerning taxes and policy\ninstruments in order to reflect local conditions in\nspecific markets.