enerMENA CSP Teaching Materials

Chapter 15
Economic Aspects

Authors
1
Matthias Günther
1
Niklas Alsen

Reviewers
2
Tobias Fichter
2
Massimo Moser
3
Amine Stambouli
2
Franz Trieb

1
Institute for Electrical Engineering, Rational Energy Conversion, University of Kassel, Wilhelmshöher
Allee 73, 34121 Kassel
2
German Aerospace Center (DLR), Institute of Technical Thermodynamics, Pfaffenwaldring 38-40,
70569 Stuttgart, Germany
3
Universite Mohamed Boudiaf USTO Faculté Génie électrique, BP 1505 El Mnaouer, Oran, Algérie
1
Table of Contents
NOMENCLATURE ..................................................................................................... 3
SUMMARY ................................................................................................................. 4
KEY QUESTIONS ...................................................................................................... 4
15. ECONOMIC ASPECTS .................................................................................... 5
15.1 Introduction ............................................................................................................................................ 5
15.2 Demand for new generation capacities........................................................................................... 6
15.2.1 Population growth........................................................................................................................... 6
15.2.2 Economic growth ............................................................................................................................ 7
15.2.3 Growth of electricity demand in MENA........................................................................................ 7
15.2.4 Renovation of power plant capacities........................................................................................ 10
15.3 Economic competitiveness of CSP ................................................................................................ 12
15.3.1 Levelized cost of electricity ......................................................................................................... 12
15.3.2 Levelized cost of CSP electricity ................................................................................................ 17
15.3.3 CSP competitiveness perspectives ........................................................................................... 21
15.4 Market introduction of CSP .............................................................................................................. 38
15.4.1 Support schemes for CSP development................................................................................... 38
15.4.2 Temporality of support schemes and cost of market introduction......................................... 45
15.5 Macroeconomic impacts from constructing and operating CSP plants............................... 47
15.5.1 Example 1: Mojave Desert/California ........................................................................................ 47
15.5.2 Example 2: Spain ......................................................................................................................... 50
15.5.3 Summary of case studies ............................................................................................................ 51
REFERENCE LIST................................................................................................... 53
QUESTIONS ............................................................................................................ 55
ANSWERS ............................................................................................................... 55
EXERCISES ............................................................................................................. 57
SOLUTIONS............................................................................................................. 58

2
Nomenclature
Symbol Meaning Unit

Latin letters
An annuity €
C cost €
Cx cost (per unit) in the year x €
DNI direct normal irradiance/irradiation W/m2, kWh/m2/y
E energy output kWh, MWh, etc.
Exp expenditure €
Expt expenditure in the year t €
F fuel cost €
Ft fuel cost in the year t €
Flh full load hours h
i interest rate -, %
I investment cost €
I0 investment cost in the year 0 €
Inc income €
Inct income in the year t €
lb pound (0.45 kg) -
n lifetime (project lifetime, power plant lifetime) years
O&M operation and maintenance cost €
(O&M)t operation and maintenance cost in the year t €
depending on
Px produced quantity of goods in the year x
type of goods
PR progress ratio -, %
q discount rate -
SM solar multiple -

Acronyms
CC Combined cycle
CCS Carbon Dioxide Capture and Storage
CDM Clean Development Mechanism
CER Certified Emission Reductions
CIF Cost, Insurance, Freight
CSP Concentrating Solar Power
ERU Emission Reduction Units
ETS Emission Trade Scheme
EU-ETS European Union Emission Trade Scheme
EU-MENA European Union and MENA
FIT Feed-in tariff
GDP Gross domestic product
GVA Gross value added
JI Joint Implementation (Kyoto mechanism)
LCOE Levelized cost of electricity
MENA Middle East and North Africa
NPV Net present value
NREL US National Renewable Energy Laboratory
PV Photovoltaics
SEGS Solar Energy Generation System
UN United Nations
UNFCCC United Nations Framework Convention on Climate Change
3
Summary
In this chapter we will discuss economic aspects of the development of a CSP market. In the first
section, the necessity of new power plant capacities in the MENA countries as well as in Europe is
shown. The second section is dedicated to the question whether CSP electricity is competitive in the
energy market. It will be shown that the competitiveness perspectives of CSP are favourable if this
technology receives sufficient political support. Possible support instruments are presented in the
subsequent section. It will be emphasized that the political measures should be considered only as a
temporal support until CSP reaches a higher economic competitiveness. At the end we will remind that
the development of a new energy infrastructure is also a significant positive macroeconomic stimulus
for the respective countries.

Key questions
• Why do we need new power plants in EU-MENA?
• Is CSP an economically competitive candidate for the satisfaction of the demand for new
power plants?
• What are the CSP competitiveness perspectives?
• Which instruments can be applied to support the market introduction of CSP?

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15. Economic Aspects
15.1 Introduction
In the past, electricity generation on the basis of renewable energy sources was considered generally to
be expensive. Only hydropower was considered to be competitive with fossil or nuclear fuel based
electricity generation. In the last years, the situation has become to be regarded differently:
‐ Wind energy has changed from being an expensive energy source to being competitive in
quite a short time. It is not any more only hydropower, but also wind power, which is
competitive with fuel based electricity generation.
‐ Fuel prices have suffered considerable turbulences. In summer 2008, when oil prices peaked at
140 $/barrel and the prices of other fuels also had risen considerably, all over the world
worries arose about the costs of future energy supply.
‐ External costs of fuel based energy conversion technologies have attracted more and more
public attention. There is a growing public awareness of global warming processes, which are
a result of the huge amounts of CO2 that are emitted not only but to a large extent from the
energy sector. Recently, the Stern Review adverted to the possible future impact of an ongoing
climate change.4 Additionally, the more and more evident external costs of nuclear power,
especially the burden of long lasting radioactive waste, is destroying the myth of cheap
nuclear power. The recent Fukushima accident demonstrated once more that the risk,
including the economic risk, of nuclear power is enormous.
In some countries there are still subsidies for fossil fuels, which impede the development of a
competitive renewable energy sector. Such subsidies maintain the energy sector within the path of
fossil fuels and imply that renewable energy technology is not competitive for the energy suppliers.
Additionally, many external costs of the different electricity generation technologies do not appear in
the operational costs of the energy suppliers. This also favours the fuel based electricity generation,
which generally has much higher external costs than most renewable energy technologies.
However, subsidies are macro-economic costs. In the long run, they may be high, especially if fuel
costs rise. Additionally, external costs are also real costs. Maybe they do not have to be covered now,
but they have to be borne in the future.
These aspects, which will be elaborated in this chapter, are the reasons why a renovation of the energy
sector is an economic necessity. In the first section of this chapter we will consider the demand of new
electricity generation capacities in the MENA countries and in Europe. The necessity to install large
capacities in the near future is an economic challenge, but it should also be seen as an opportunity to
open new paths for the future electricity supply. Such a new path can include the large-scale
implementation of CSP plants in the MENA countries with the double aim of power supply to the
MENA countries themselves and the power export to Europe. However, it needs political decisions to
make use of this opportunity, because the young CSP industry is not yet able to produce electricity at
costs that make CSP competitive with some other important electricity generation technologies.
Market introduction instruments will have to be applied in order to develop the existing
competitiveness potential of CSP. Paving the way for a future competitive CSP electricity market is
not only an important step in the introduction of low-carbon technologies in the electricity generation
system, but it can also be at the same time an important stimulus for the economies of the countries
where CSP is developed.

4
The Stern Review can be recalled at http://www.hm-treasury.gov.uk/stern_review_report.htm.
5
15.2 Demand for new generation capacities
The renovation of our energy system is a necessity, which arises because of the environmental and
economic unsustainability of the existing system. High greenhouse gas emissions as well as finite
fossil fuels require the restructuration of the energy supply. A central part of this renovation is the new
design of the electricity generation. New power plants have to be built that are cleaner and that are
economically sustainable.
However, economic rationality requires that new plants are built only if new generation capacities are
needed. In this section we will consider the demand for new electricity generation capacities in the
MENA countries and in Europe. This demand provides the opportunity to break new ground in the
electricity generation, for instance, by making use of CSP technology.
Especially in the MENA countries there is a demand for new electricity generation capacities. The
driving forces are the ongoing population growth and the expected economic growth. In Europe, new
generation capacities are needed too, because there is a continuous renovation process of old power
plant structures.

15.2.1 Population growth

According to the UN World Population Prospect 2006, the population in the MENA region will
steadily grow from about 300 million people today to over 600 million people in 2050. The MENA
region is one of the regions with the highest population growth worldwide.

• The population in North Africa may grow from 140 million to 240 million in 2050.
• The population in the Western Asian countries may grow from 120 to over 220 million by
2050.
• The population on the Arabian Peninsula may increase from 50 million today to over 150
million in 2050.

The development of population growth is illustrated in figure 1.

Figure 1: Population growth in MENA countries according to the UN medium growth scenario (Trieb
2009)

This enormous population growth goes along with a growing electricity demand.
Europe, on the contrary, shows a stabilizing population development until 2050 with slightly growing
numbers in the first two decades and stable and even slightly falling numbers between 2030 and 2050.

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15.2.2 Economic growth
The second driving force of an increasing electricity demand is economic growth, which can be
expressed with the development of the Gross Domestic Product (GDP) or the GDP per capita. Most
MENA countries will have quite a strong economic growth with high annual GDP-per-capita growth
rates. If we take the economy of the USA, which is the largest national economy, as a benchmark, then
we see that the relative gap between the GDP per capita of the USA and the GDP per capita of the
MENA countries will be reduced in the future. Additionally, it is expected that the economies of the
different MENA countries converge. The following table shows the expected economic long-term
(until 2050) growth rates of the MENA countries in comparison to the expected growth rate of the
USA.5

Table 1: Average long-term per capita GDP growth rates in %/year (Trieb 2009)

Population growth and economic growth cannot be translated directly into a proportional growth of
electricity demand. Efficiency improvements provoke that the growth of the electricity demand is
lower than it would be if it was proportional to the growth of population and GDP per capita.

15.2.3 Growth of electricity demand in MENA

Taking into account the economic growth, and taking into consideration possible efficiency measures,
DLR calculated the following scenario of per capita electricity consumption for North Africa, Western
Asia and the Arabian Peninsula6:

• Arabian Peninsula: Today, the consumption is very heterogeneous with values ranging from
17,000 kWh/cap/y in the smaller emirates to 200 kWh/cap/y in Yemen. Falling consumption
per capita in Oman, Kuwait, UAE and Bahrain and rising consumption in Yemen will lead to
a regional convergence. In contrast to other regions, the aggregate average consumption per
capita in the Arabian Peninsula will slightly decrease. This is due to the possibility of large
efficiency gains and also to the fast population growth of Yemen, the low electricity
consumption of which will substantially gain weight in the aggregate average.

5
See Trieb 2009, p. 140.
6
See Trieb 2009, p. 144.
7
 Figure 2: Per capita electricity consumption for the Arabian Peninsula (Trieb 2009, 144)

• North Africa: In North Africa, electricity consumption per capita is considerably lower than in
the Arabian Peninsula. With the exception of Libya, in all countries the consumption is
between 600 and 1,200 kWh/cap/y. By 2050, all countries will have a consumption of around
5,000 kWh/cap/y. The consumption would then be similar to the Arabian countries.

Figure 3: Per capita electricity consumption for North Africa (Trieb 2009, 144)

• Western Asia: The consumption pattern is similar to the situation in North Africa, but starts
from an overall higher consumption level. While today in most countries of the region the
consumption is between 1,500 and 2,800 kWh/cap/y, these values are assumed to increase to
values at around 5,000 kWh/cap/y.

8
 Figure 4: Per capita electricity consumption for Western Asia (Trieb 2009, 144)

From the per capita electricity consumption and the population growth scenarios, the total electricity
consumption in each of the analysed countries can be calculated. By the middle of the century, with
3000 TWh/y, MENA will have a power demand similar to the one of Europe today. Considering that
the actual power generation is still far below 1000 TWh/y it is evident that the demand for new
generation capacities is enormous.

Figure 5: Scenario of electricity demand of MENA countries until 2050 (Trieb 2009, 145)

Currently, the European electricity consumption is at about 3500 TWh per year. Assuming that there
will be no sharp changes of paradigm, like a strongly increasing use of electricity in the heat or
mobility sector, the maximum demand in Europe would be reached in 2040 with an electricity
consumption of about 4300 TWh per year. After that, the demand would show a falling tendency due
to a slightly retrogressive population and due to efficiency gains.

9
Figure 6: Electricity demand of European countries from 1980 until 2050 (Trieb, 2006 p. 34)

15.2.4 Renovation of power plant capacities

Besides the growing electricity demand, the continuous renovation of the existing power plant
inventory is another important driving force of the power plant demand. In most European countries
this is the most important motive for investments in the power generation system. VGB Power Tech,
an association of electricity suppliers (most of them European)7, estimates that until the year 2020
power plants with a capacity of 400 GW have to be substituted or renewed in the European Union.8
The following figure illustrates the history of the commissioning of fossil fuel and nuclear power plant
capacity in the European Union.

Figure 7: Commissioning history of fossil fuel and nuclear power plant capacities in the EU-27 (RWE
2010, p. 79)

7
See http://www.vgb.org.
8
See http://www.ipp.mpg.de/ippcms/ep/ausgaben/ep200104/0401_kraftwerke_ep.html.
10
Many plants, especially oil plants, hard coal and lignite plants were built during the 1960s and 1970s.
Also many nuclear power plants were built at the beginning of the 1970s. All these plants become now
older than 40 years. At such an age, many power plants have to be renewed. A renovation of the power
plant inventory is not only necessary because the maintenance of old power plants becomes expensive
and because they do not fulfil any more security requirements, but also because some of them do not
comply any more with the efficiency requirements that are applied generally to current power plants.
This permanent renewing process and the current necessity of an intensified power plant renovation
offer the possibility to break new ground in the electricity sector. In particular, the share of renewable
energy can be increased, which in the case of Europe can include the import of CSP electricity from
the MENA countries.

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15.3 Economic competitiveness of CSP
The construction of a CSP plant is an economic project and has to be rentable. Additionally, CSP
competes economically with other electricity generation technologies. The future perspectives of this
technology depend therefore partially on its economic advantages and disadvantages in comparison to
other technologies. In this section, we will discuss the economic competitiveness of CSP technologies.

15.3.1 Levelized cost of electricity

The central parameter for the economic competitiveness of electricity generation systems is the cost of
the electricity generation, which is specified as the levelized cost of electricity (LCOE). The LCOE is
the ratio of the total cost C of the electricity generated in a power plant to the total electric energy
output E:

. (1)

Its unit is, then, €/kWh or $/MWh, for instance.

In order to develop more in detail how the levelized electricity costs are calculated, we will need
some conceptual tools of financial analysis:
Generally, in order to determine the economic value of an economic project, costs and benefits
have to be calculated and compared. If the benefits outweigh the costs, then it is profitable. And
if the cost/benefit relation is more favourable than for other competing projects, then it is
economically preferable to them.
Many projects have a more or less long lifetime, and costs and benefits are distributed over this
lifetime. Economically it is a difference whether an investment is done in one year or another or
whether an income is generated in one year or another. That’s why an economic analysis of the
project has to treat the costs and benefits differently according to the moment when they are
realized. They have to be related to a common reference moment (for instance the moment
when a project is planned and compared to other alternative projects or the moment when it is
initiated). This is done by discounting future costs and benefits in relation to the reference time.
To understand the meaning of “discounting”, imagine that you can choose between receiving
5000 Euros now or in one year. Surely, under purely economic considerations, you will decide
to receive them now (even if there is no inflation). That means that it is more valuable for you to
have 5000 Euros now than to have them in one year. Maybe you would hesitate if you had to
decide whether you want to receive 5000 Euros now or 5500 in one year. Your hesitation means
that you apply, maybe tacitly, a certain interest rate, in this case 10% per year. 5000 Euros that
you receive now you can invest until the next year and they will render then the amount of 5500
Euros. So, receiving 5000 Euros in one year is less valuable for you than receiving the same
amount now. The future gain of a given amount carries less weight than the immediate gain of
the same amount.
Something analogue happens with expenditures. Imagine that you have to choose between
paying a bill of 1000 Euros now or in one year. Under purely economic considerations, you will
decide to pay it in one year, and not now. Once more, maybe you would hesitate if you had to
decide whether to pay 1000 Euros now or 1100 in one year. Again, you calculate, maybe tacitly,
with a certain interest rate (10% per year). The future payment of a given amount carries less
weight than the immediate payment of the same amount.
So, future gains and costs carry less weight than immediate gains and costs. Future gains and
costs are discounted in relation to the same gains and costs if they were realized immediately. In
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order to quantify the discount, a discount rate q can be determined, which depends, of course, on
the assumed interest rate. The discount rate q indicates the ratio of the economic value of a
given amount earned or spent in one year to the economic value of the same amount earned or
spent one year later. It holds . Taking the interest rate of 10% , the payment of 5500
Euros in one year would have the same economic value as the payment of

Euros now. The payment of 5500 Euros in two years would have the

same value as the payment of Euros now. Generally, the payment of 5500 Euros

in t years would have the same value as the immediate payment of Euros.
Now, this is used in the calculation of present values of future cash flows. For instance, if the
present value of future expenditures in an economic project is determined, the sum of the
discounted expenditures in the years over the lifetime of the project is formed. This value is
called the net present value of the expenditures. This value would be, running from the year 0
(the actual year or the reference year) to the year n:

. (2)

Net present values are used for the evaluation of economic projects concerning its profitability.
Let’s suppose that the project investment is made in one year, which we will call the year
. This year is also the reference year. The net present value of the project is, then, the
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sum of the initial investment (which does not need any discounting because it takes place in
the reference year) and the discounted cash flows of each year over the project lifetime, i.e. of
the discounted expenditures in the year and the discounted incomes in the year
for all years from to :

. (3)

If this sum is positive, the project is profitable, and if the value is higher than the NPV of
alternative projects, then, from the investor’s point of view, it is economically preferable to
them.
Sometimes the net present value is distributed in equal annual parts over the lifetime of the
project. These equal parts are called the annuity. The annuity is calculated multiplying the net

present value with the annuity factor :

. (4)

9
We will use only positive amounts (i.e. also the investment and the expenditures are positive) so that
the “sum” is, more exactly, the subtraction of the investments and the expenditures from the incomes.
13
In a way analogue to the NPV it holds that the project is profitable if the annuity is positive and
that the project is economically preferable among competing projects (from the investor’s point
of view) if it has the highest annuity among them.
The concepts of “net present value” and “annuity” are needed in the calculation of the levelized
electricity cost. The levelized electricity cost, as we said above, is the ratio of the electricity generation

costs to the generated electricity: . This we can now formulate in the following way: The
levelized electricity cost of an electricity generation project is the ratio of the net present value of the
electricity generation costs to the net present value of the generated electricity. The net present value
of the costs is the sum of the discounted costs that have to be borne in the years over the system
lifetime, and the net present value of the generated electricity is the sum of the discounted electricity
quantities generated in the years over the system lifetime:

(5)

The project starts in the year 0, for instance the year of construction, and finishes in the year n, for
instance the last year of electricity generation. The year 0 is the reference year and all values are
discounted in relation to this year. are the costs that are generated in the year t. is the electric
energy generated in the year t.

Now, let us have a closer look at the costs. The costs for an electricity generating system can be
divided typically into investment costs I, operation and maintenance costs O&M (including insurance
costs), and fuel costs F. Equation (5) can be specified, hence, in the following manner:

(6)

In the case of a concentrating solar power plant we suppose, additionally, the following: The
investment is done completely in the year , that means

. (7)

Additionally, fuel costs can be neglected, i.e.

. (8)

Furthermore, operation and maintenance costs are the same for all years from the year to the
last year of operation , i.e. , where is
the annual operation and maintenance cost, and, therefore,

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 . (9)

Finally, the annual electricity generation is taken to be constant over the system lifetime from the year
on to the last year of operation , i.e. , where is the annual
electric energy output, and, therefore,

. (10)

Taking into consideration the conditions (7), (8), (9) and (10), we can simplify equation (6) in the
following way:

(11)

Taking into account that , equation (11) can be transformed into the
following one:10

(12)

This equation, once more, indicates the LCOE as the ratio of the NPV of the costs to the NPV of the
electricity output.
As we have seen above, we can calculate the annuity, i.e. the annual value of a NPV if this value is
distributed in equal parts over the project lifetime, multiplying the NPV with the annuity factor

10
The validity of

(a)
can be shown as follows:
(a) is multiplied with :

(b)
(a) is subtracted from (b):

, which holds obviously so that the validity of (a) is proven.

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 . If we expand equation (12) with the annuity factor, then we express the LCOE as the
ratio of the annual costs (including the investment distributed over the years of the system lifetime) to
the annual electricity generation:

(13)

Of course, equations (12) and (13) are mathematically absolutely equivalent. The difference is that
(12) operates with net present values of costs and electricity output, while (13) operates with annual
costs and annual electricity outputs.
The annuity factor that appears in equation (13) distributes the initial investment in equal parts

among the years of the whole system lifetime. Each part amounts to .
The levelized electricity costs are an essential economic parameter in energy economics because they
are not only an important parameter for investment decisions of electricity suppliers, but they also
allow the comparison of the economic viability of the electricity generation with different
technologies. For electricity suppliers, they are important because they are a parameter for expectable
revenues. In a completely liberalized electricity market the lowest LCOE would result in the highest
revenues (at given consumer prices). In real electricity markets, where political intentions play an
important role (national energy security aims, promotion of own natural and technological resources,
environmental protection) and where these intentions lead to the application of market management
instruments (we come to this topic below), the situation is different. Nevertheless, also in real energy
markets the LCOE are an important investment parameter for energy suppliers. But, beyond this role
in the evaluation of energy economy projects, the LCOE allow the comparison of electricity
generation technologies concerning their general economic viability. An evaluation of the economic
competitiveness of CSP needs, hence, the comparison of its LCOE with the LCOE of other electricity
generation technologies.

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15.3.2 Levelized cost of CSP electricity
The following diagram compares the LCOE of CSP to the LCOE of PV (as the most important solar
competitor) to wind energy (as one of the most important competitor among the renewable energy
technologies) and to the fossil energy mix as the group of energy technologies that is still dominant in
the world. In this case, the German fossil energy mix is selected. The values refer to the second half of
2010.11

Figure 8: LCOE of CSP (a DNI of 2000 kWh/m2/y) in comparison to the LCOE of PV (for small
systems at a global irradiation of 1100kWh/m2/y and big systems at a global irradiation of 2000
kWh/m2/y), wind turbines and the German fossil-fuel based electricity (Kost 2010)

We see that the LCOE of CSP is still high in comparison to the dominating fossil fuel electricity and
to the electricity that is generated by wind turbines.
Grid parity is reached only locally and at a good coincidence of solar radiation availability and
consumption, as it is the case in the Southwest of the USA, where the peak demand of electricity,
which is caused by the widespread air conditioning in the afternoon, coincides with favourable
radiation conditions. In this case no large storage capacities are needed to satisfy the peak demand
with CSP electricity.12
In the case of renewable energy technologies, the LCOE is basically determined by the initial
investment costs. As there are no (or very low) fuel costs during operation (for non-fuel-hybridised
systems), the operation costs are normally quite low. At present it is quite difficult to give universally
applicable numbers about the investment costs for CSP. The number of known samples is still too
small for that. IEA indicates investment costs of 3000 to 6000 €/kW, depending on labour and land
costs, technologies, the amount and distribution of DNI and, above all, the amount of storage and the
size of the solar field.13 Lowest investment costs have to be spent for plants without storage at
locations with very favourable DNI. The investment costs for CSP are higher than the investment costs

11
Numbers are taken from Kost 2010.
12
Grid parity is reached if the electricity produced by an electricity generation system has the same
cost like the electricity bought from a grid operator. This is the case for CSP at peak demand in the
Southwest of the USA and also in Spain.
13
See IEA 2010, p. 27.
17
for PV. However, the energy yield per MW capacity is higher for CSP. That’s why there is not an
analogue difference in the LCOE of CSP and PV.
The following figure shows the investment cost structure of the Andasol plants in Spain. The solar
field represents the largest cost factor. Andasol has a solar multiple 2 so that the solar field has a
correspondingly large size in relation to the power block. (More specifically, at design conditions, the
thermal energy output of the solar field is twice as much as necessary to operate the steam turbine at
nominal capacity. The energy that cannot be processed in the turbine is stored in the thermal storage.)
But also if a CSP plant does not count with a storage system and if the solar field is smaller, the solar
field cost is the largest cost component. So, for a cost reduction of CSP electricity it will be very
important to reduce the solar field costs.

Figure 9: Investment cost structure in a 50MW power plant with SM2 in Spain (source: IEA 2010)

Concerning the LCOE of CSP the following comments should be added:

a) DNI conditions determine to a large extend the CSP electricity costs. In the diagram (figure
10), a DNI of 2000 kWh/m2/y is chosen. This corresponds to the best locations in Europe
(Southern Spain). In the MENA countries, on the contrary, it corresponds to intermediate or
even weaker locations. The following diagram shows the sensitivity analysis for the LCOE of
CSP including the LCOE dependence on the DNI. The chosen reference point is 2000
kWh/m2/y.

Figure 10: Sensitivity analysis for CSP, based on 50MW plants (Kost 2010)

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 A DNI of 2400 kWh/m2/y lowers the LCOE by about 3€ct/kWh compared to the reference
point of 2000 kWh/m2/y, which corresponds to a cost reduction of 16%. From the European
point of view this explains why the import of CSP electricity from the MENA countries may
be economically more attractive than the generation in Southern Europe. DLR counts with less
than 2€ct/kWh transmission cost from the MENA countries to Europe, considering 3000km
land and 200km sea distance, so that the transport costs are overcompensated by the lower
LCOE at MENA locations.14
b) What is also to be seen in the sensitivity analysis diagram is the high dependence of the LCOE
on the investment. This is typical for renewable energy technologies, which do not need fuel
during operation, but a comparably high initial investment. For the competitiveness of CSP it
is, hence, important to make efforts to reach lower investment costs and to achieve favourable
financing conditions.
c) The dependence on the system life-time is also quite strong. Therefore, it is important to use
high quality materials for the construction of CSP plants. Once the investment is paid back, a
CSP plant can produce electricity with very low costs. It is important to built a CSP plant in
such a way that its life-time is longer than the financing period.
d) The LCOE is the most important economic parameter in electricity economics. However, the
LCOE is not the only indicator of the economic status of an electricity generation technology.
Further important criteria are how the electricity generation is distributed over time and, in
particular, whether there is the possibility to offer power on demand. This is not only a general
advantage for a stable energy supply and a stable operation of electric grids, but also an
economic advantage because it is possible to react to changing demand situations and thereby
to realise higher prices for the generated electricity. In many electricity markets peak-load
pricing is applied. That means that higher prices can be realised at times of peak demand.
Furthermore, there is a distinction between base load electricity and medium load electricity,
being base load electricity the cheapest form of electricity and intermediate load electricity
between peak load and base load electricity. Now, if an electricity generation technology is
able to offer power on demand and to react, hence, to peak and intermediate demands, then its
electricity can be sold at higher prices.
A CSP plant with a thermal storage or with a fossil back-up system can offer power on
demand, while a PV plant cannot because there are no economically viable large electricity
storages. This is a competitiveness advantage of CSP over PV that has to be taken into account
if the LCOE of the two technologies are compared. Also in comparison to wind energy CSP
has the advantage of offering power on demand.
Anticipating what will be described in the subsequent section about the future LCOE
development we can represent the economic advantage as follows:

14
See Trieb et al. 2009.
19
 Figure 11: Possible future intersection of the LCOE of CSP and the electricity costs at the
different demand levels (source: Trieb et al. 2011)

Supposing falling LCOE of CSP (and additionally supposing growing LCOE of the
conventional – fossil fuel and nuclear – electricity generation technologies) we can suppose
that CSP will firstly be competitive if the electricity is sold at peak demand, then at
intermediate demand and finally at base demand. Only if there is a storage possibility, it is
reasonable to relate the LCOE of a technology that operates on the basis of fluctuating energy
sources (solar radiation, wind) to the difference between peak, intermediate and base load,
because only in this case it is possible to target the produced electricity at different demand
situations. If there is no (economically viable) storage possibility, then the electricity produced
on the basis of a fluctuating energy source has to be sold whenever the source is available.
This may be at times when peak load is needed (for instance if there is a coincidence of high
solar irradiance and air conditioning demand) or it may be at times, where only base load
electricity is needed, which generates less revenues. In this sense, CSP, which has the
possibility to store thermal energy, has an economic advantage over PV, which is not reflected
in the comparison of the LCOE.15
If the energy market in a country does not have peak-load pricing and the power is sold at an
average electricity price (which may be the case in countries without liberalized electricity
markets), the possibility of CSP to generate power on demand still has an advantageous
economic effect: The average cost of the electricity generation depends on the costs of peak
load, medium load and base load generation. If CSP is competitive with peak load generation,
then it can be applied to reduce the average cost of the electricity generation because it can
replace expensive peak load power produced with expensive fuels like diesel or light fuel oil.
The macroeconomic value of CSP, then, is the reduction of the total costs in the national
energy supply system.
Additionally, an electricity generation technology that offers power on demand can fulfil a
stabilizing function in grids. This advantage may be difficult to be evaluated economically, but
it is an essential technical advantage that can be an important selection criterion for the design
of new electricity supply systems, if these include a high share of electricity generated on the
basis of fluctuating renewable energy sources.

15
The advantage of CSP can be explained also in a slightly different way: The similar LCOE of CSP
and PV that are indicated in figure 8 do not reflect that in the case of CSP the cost includes a
complete electricity generating system with storage and back-up possibility included, while in the case
of PV only the electricity generating system (without storage and back-up) is included.
20
We have seen that the LCOE of CSP is still high in comparison to the LCOE of other electricity
generation technologies. We will ask now what the competitiveness perspectives of CSP are. Which
circumstances make the future economic success of CSP probable although their LCOE are still higher
than that of some competing technologies?

15.3.3 CSP competitiveness perspectives

In this section we shall discuss the future economic perspectives of CSP. First, we describe how a
continuous technology and market development can cause a cost reduction of CSP electricity. After
that, we mention political instruments that have been created to internalize the external costs of
electricity generation technologies with high CO2 emissions. These instruments will have
consequences for the cost relation between electricity generated on the basis of renewable energy
sources and fossil-fuel-based electricity and will help to make renewable energy more competitive.
Finally, we will remind that prices for fossil fuels and hence for fossil-fuel-based electricity will most
probably rise. These three factors together allow that CSP should be competitive in the near future.

Falling LCOE for CSP: Learning effects and economies of scale

The costs of the installation of CSP plants and of the generation of electricity from these plants are
expected to decrease in the future. This expectance exists because of the short history of the CSP
industry and its corresponding growth potential. Both CSP technology and CSP market are young, and
young industries have the potential to reach lower costs if they achieve a continuous growth.
Indeed, the CSP industry did not have a continuous history until the last years. Until the 1980s only
few systems had been installed, many of which had a rather demonstrative character. In the 1980s the
CSP industry got a strong impetus when the first large power plants in the USA were built, which still
are in operation. However, lower prices for fossil energy carriers in the subsequent years and missing
political support hindered the extension of the CSP capacities in the 1990s and in the first years of the
new millennium. Only in the last years the CSP industry gained new importance with many new
projects that were and are developed in different Sun Belt countries (mainly in the USA and in Spain).
The CSP industry is, hence, a young industry with much development potential. This potential implies
also possible cost reductions.
Two major types of effects, which are not independent from each other, make cost reductions in a
young and growing industry possible: experience effects and economies of scale.
• Experience effects: Human beings acquire new capabilities when they act. They learn.
Experience can lead to a quicker, safer, more efficient, better or cheaper acting. We all know
this from our own life.
Experience effects are also important in economic contexts. If a new technology is developed
and applied in industrial production, then it can be expected that there will be future
improvements in production efficiency, production costs and quality. This can happen due to a
higher labour efficiency (workers become more dexterous and mentally more confident),
standardization, specialization, and method improvements, automation, more efficient use of
equipment, changes in the resource mix, product redesigns and network building. Information
sharing with other producers can reinforce the effect.
• Economies of scale: In many cases, an expanding business obtains cost advantages. The cost
per unit (for instance, MW CSP installed or kWh electricity generated) can decrease if the
output is increased. This is caused, for instance, by large scale purchasing (bulk buying of
materials trough long-term contracts), manager specialization, financial advantages (lower
interest rates, access to a greater range of financial instruments), marketing efficiency

21
 (spreading the marketing costs over a greater range of output), and technological and logistical
advantages (optimized utilization of capacities).
In the case of CSP plants it is not only the expansion of the installed capacity, which has the
potential to reduce the specific investment costs. Additionally, it is supposed that the
economically optimal power plant size is not yet reached. The power plants with the largest
rated power have a power block of 80MWe. The construction of larger units has a direct cost
reducing effect.16
So, a young and small (small in relation to its potential) business has the possibility to decrease its
specific costs (cost per unit) in the future, if the conditions are favourable for its maturation and
growth. It has the possibility to decrease its specific costs in a twofold way: through the gathering of
experience and through mass production.
Empirically it has been observed that during certain development stages of a growing business there is
a logarithmical dependency of specific costs and produced goods, i.e. each doubling of the produced
goods decreases the costs per unit by a certain percentage. This percentage can be called the “progress
ratio” PR. A progress ratio of 80% means that after the doubling of the quantity of produced goods of
a certain type the cost per unit amounts to 80% of the cost per unit before the doubling.
If such a regular behavior of the costs per unit is assumed, i.e. each doubling of the total production
implies a decrease of the costs per unit by a constant percentage, then the costs per unit can be
determined that are reached after any gain of additional production experience. The general
mathematical expression is the following:

where is the quantity of produced goods at a reference time (for instance the first 100 cars in the
year 1900), the corresponding cost per unit (in 1900), the total quantity of produced goods at a
time after the reference time (for instance the 1000 cars, which were produced until 1905) and the
cost per unit at that time (i.e. in 1905).
Approximately constant progress ratios may not hold for the whole history of a given industry, but, it
has been shown empirically that at least during more or less extensive stages of the development of an
industry quite stable progress rates concerning cost per unit are maintained.
A recent example from the energy market is the very successful development of the German wind
energy sector over the last twenty years. Between the years 1990 and 2004 the price of the wind
turbine investment per annual energy yield (€ct/kWh/y) followed a curve that corresponds to a
progress ratio of about 91%. In 1990, when only 60MW were installed, the value was about 80
€ct/kWh/y. In 2005, when about 18,500MW were installed, it had sunk to below 38€ct/kWh/y.
Today, the levelized electricity cost of wind energy has sunk to about 5.4 to 10€ct/kWh. The lower
values are achieved near the Northern Sea coast. With such LCOE values, on-shore wind turbines have
become absolutely competitive with other electricity generation technologies. In particular, they are
now competitive with the German mix of fossil-fuel-based electricity, which has a reference cost of
6.1 €ct/kWh.17

16
IEA supposes cost reductions for parabolic trough power plants up to a power of 200MW (IEA 2010,
p. 27). The consultancy CSP Today published in 2011 a study in which an optimal size of 150MW for
parabolic trough power plants with SM2 is claimed (http://social.csptoday.com/pr/150-mw-optimal-
plant-size-new-report-finds).
17
Numbers are taken from the Bundesverband WindEnergie,
22
Figure 12: Dependency of on-shore wind energy LCOE on total installed capacity, calculated for a
reference location (source: Fraunhofer Institute IWES)

CSP, of course, has not yet reached such a competitiveness level, with only 1000 MW installed
capacity up to now. But, it may reach it if it enjoys the same favourable market conditions that the
wind industry enjoyed in some countries during its adolescence and that let it grow to the size and the
efficiency it has today.
DLR estimated progress ratios for the investment costs for CSP plants in order to estimate the
economic competitiveness perspectives of CSP. The progress ratios for the different parts of a CSP
power plant were distinguished because the experiences concerning, say, the power block are much
more advanced than the experiences concerning the solar field. A doubling of the installed CSP
capacity will hardly have any effects on the investment costs for the power block (although the
integration of solar field and power block still has some improvement potential). The construction of
the solar field, on the contrary, should still have considerable efficiency potentials. DLR estimated in
2005 the following progress ratios for the solar field, the power block and the molten salt storage
system18:
Table 2: Progress ratios and start values c0 for CSP plant components (parabolic trough power plants
with molten salt storage)
Progress ratio Start 2005

Solar field 90% 360€/m2

Power block 98% 1200€/kW

Storage 92% 60€/kWh

Starting with 354 MW installed capacity in 2005 (the SEGS plants in California) and assuming a CSP
growth scenario according to which the installed capacity expands to 5000 MW by 2015, 150,000
MW by 2030 and 500,000 MW by 2050, the specific investment costs for CSP plants would develop
as follows19:

see http://www.wind-energie.de/de/themen/kosten and Kost 2010.

18
Numbers and methodology are taken from Trieb et al. 2009, pp. 83-85. IEA assumes a general
progress ratio of 90% for CSP investment costs (IEA 2010, p. 29).
19
The scenario is taken from Viebahn, P., Lechon, Y. (2007).
23
Table 3: Specific CSP investment costs [€/kW] according to the specified CSP growth scenario and
progress rates, indicated in [2005 Euros]
Year 2005 2015 2030 2050

SM1 3360 2559 1869 1690

SM2 5880 4269 2907 2560

SM3 8400 3978 3944 3429

SM4 10920 7688 4982 4299

The costs are distinguished according to the solar multiple, considering solar multiples up to 4. It was
supposed that SM1 requires 6000 m2 aperture area per MW, SM2 requires 12000 m2 aperture area per
MW, etc.20 The numbers of the table are represented in the following diagram:

Figure 13: Specific CSP investment costs according to the specified growth scenario progress rates

Now, for each plant configuration (each solar multiple) the future LCOE can be calculated. Remember
that the LCOE are calculated according to:

Additionally to the investment costs I, some additional parameters have to be fixed: Plant lifetime (n)
is taken to be 25 years, the interest rate (i) is supposed to be 6% and annual operation and maintenance
costs (insurance included) amount to 2.5% of the investment volume. The costs are indicated in
specific values (€/kW). The annual energy output Ey, hence, must also be indicated in specific values
(kWh/kW), which is the number of full load hours of the plants. The full load hours of a parabolic
trough plant depend basically on its solar multiple and on the radiation conditions of the plant location.
From hourly time series analysis of the plant performance at different solar multiple configurations

20
See Trieb et al. 2009, 81.
24
and under different annual DNI conditions, a general correlation could be derived of full load hours
(Flh), SM and DNI:

The resulting full load hours in dependence on the solar multiple and the direct normal irradiation are
indicated in the following diagram:

Figure 14: Annual full load hours of a CSP plant as function of annual DNI and SM (Trieb et al. 2009,
p. 84)

With these data, the LCOE can be calculated. For solar multiple 4, the LCOE are the following:

Table 4: LCOE scenario [€/kWh] for CSP plants (parabolic trough technology with molten salt storage)
with SM 4
DNI [kWh/(m2y) 2005 2015 2030 2050

2000 0.183 0.129 0.083 0.072

2200 0.168 0.118 0.077 0.066

2400 0.155 0.109 0.071 0.061

2600 0.144 0.102 0.066 0.057

2800 0.135 0.095 0.062 0.053

The following figure illustrates the result:

25
Figure 15: LCOE development for CSP reference plants (parabolic trough technology) with SM 4
(Trieb et al. 2009, p. 85)

Taking the German fossil fuel based electricity mix as the benchmark (figure 10) and assuming that
the fossil fuel based electricity will maintain its costs (what most probably will not happen, costs will
rather grow), CSP electricity generated at locations with very favourable radiation conditions would be
economically competitive with base load electricity in 2030 (in reality it should be earlier because of
expectable fossil fuel price increments). Between 2040 and 2050 even the electricity generated under
intermediate radiation conditions would be competitive with base load electricity.
However, as we noted above, CSP electricity will become competitive much earlier with peak load
and medium load electricity. Peak load competitiveness is realized already now in some countries. We
can conclude that there are strong reasons for the competitiveness of CSP electricity in the future if
sufficiently high progress ratios are achieved.
However, the competitiveness gains are achieved only if there is a strong CSP growth. Only in this
case the LCOE will fall due to the mentioned effects. But, what will trigger this growth, if CSP is not
economically competitive until the growth has taken place? A liberal energy market alone would not
do it because until now there would be no economic stimulus to invest.
We see that the described cost dynamics are not sufficient to make the CSP technology competitive
because a bridge is needed to get to the cost reductions. So, it is necessary to implement political
instruments to improve the market position of CSP now in order to achieve the mentioned cost effects
in the near future. We will discuss some specific instruments for the market introduction in section 3.
Additionally to these specific instruments, there are other measures that improve the market position
of renewable energy technology generally and CSP in particular: International climate protection
instruments have been implemented that on the one hand make more expensive technologies that
cause higher CO2 emissions and on the other hand can reduce CSP electricity costs.

Climate protection instruments

Like many industrial and other human activities, energy supply and electricity generation in particular
have environmental consequences: Nuclear technology produces radioactive waste; combustion-based
power generation releases gases and changes thereby the composition of the atmosphere. While the
first is directly dangerous for human beings and life in general, the latter can trigger climate change
processes.
Anthropogenic climate change, i.e. climate change that is caused by human activities, has become a
global problem, as the Intergovernmental Panel on Climate Change (IPCC) stated in several
26
Assessment Reports. The main cause of the anthropogenic climate change is the modification of the
composition of the atmosphere. Climate-relevant gases, especially greenhouse gases that are highly
transmissive in the solar spectrum, but poorly transmissive in the infrared spectrum, and that therefore
cause a global temperature rise if their share in the atmosphere increases, have already triggered a
global warming process. The most important greenhouse gas is CO2, which is emitted in large amounts
in many industrial and other activities. One of the biggest CO2 emitters is the electricity sector, given
that it generates a large part of the electricity by means of combustion-based technologies.
Global warming has already now become a serious problem in some parts in the world, where it
gradually changes the living conditions. And there is the thread of ongoing climate change that will
endanger more and more severely the living conditions for many species and for human beings in
many parts of the world. In order to slow down and finally stop the anthropogenic climate change,
efforts have to be done to diminish the emission of greenhouse gases or even to withdraw them
partially from the atmosphere. As climate change is a global problem, instruments have to operate at a
large scale, possibly at the global level. Central instruments that have been developed and
implemented are the capping of greenhouse gas emissions and the creation of carbon markets that
make greenhouse gases a tradeable good and allow the internalization of the otherwise external
environmental costs of certain industrial, agricultural and other activities.

Kyoto Protocol

The United Nations Framework Convention on Climate Change (UNFCCC) is an international

environmental treaty that has the aim to stabilize the greenhouse gas concentrations in the atmosphere
at a level that would prevent dangerous anthropogenic interference with the climate system.21 Every
year, conferences are organized in order to establish climate protection measures. The most famous of
these conferences took place in 1997 in Kyoto/Japan where the so-called Kyoto Protocol was
adopted.22 It became effective on 16th February 2005 and expires in 2012. For the first time, countries
committed themselves to reduce or at least to limit the emission of several greenhouse gases (CO2,
CH4, N2O, SF6, hydrofluorocarbons/HFCs, perfluorocarbons/PFCs). The industrialized countries
agreed to reduce their collective greenhouse gas emissions by 5.2% of the 1990 level by the end of the
year 2012. The unit that is used to quantify the greenhouse gases is Carbon dioxide equivalent
(CDE).23
This general aim had to be translated into policies and measures in the different regions and countries.
The European Union, together with some other European countries, committed itself to a greenhouse
gas emission reduction by 8%, Japan to a reduction by 6%, Russia to no further emission increase,
Australia to an increase cap of 8% and Iceland to an increase cap of 10%. Within the European Union
the reduction commitment was distributed among the member countries. Within the countries the
corresponding emission allowances are distributed annually among greenhouse gas emitting
companies and installations according to National Allowance Plans.
The Kyoto Protocol includes some mechanisms to make the fulfillment of the national reduction aims
more flexible. These flexibility measures allow the industrialized countries to meet their emission
reduction commitments with reduced impact on their economies. The flexibility instruments improve
the cost-efficiency of the greenhouse gas mitigation policy:

21
See http://unfccc.int.
22
See http://unfccc.int/kyoto_protocol/items/2830.php.
23
Carbon dioxide equivalency is a quantity that describes, for a given mixture and amount of
greenhouse gas, the amount of CO2 that would have the same global warming potential, when
measured over a specific time scale.
27
 • International Emissions Trading: Nations that emit less greenhouse gases than they are
permitted can sell Assigned Amount Units24 to nations that exceed their quota.
• Clean Development Mechanism (CDM): Countries that are committed to greenhouse gas
emission caps (industrial countries) can comply with their obligations partially by means of
emission reduction projects in developing countries. CDM projects must reduce greenhouse
gas emissions in the host countries (e.g. by investments in renewable energy technology) or
enhance the greenhouse gas capture (e.g. by means of reforestation activities). The investing
part, for instance a German energy supplier, achieves Certified Emission Reductions (CERs)
and can use them to comply with its emission cap (and contributes, hence, to the compliance
with the national emission cap of Germany).
In order to quantify the emission reduction in the host country, a baseline scenario is applied.
The difference between the emissions that are generated with a particular realized CDM
project and the emissions that would occur in the absence of this project determines the
quantity of assigned emission reduction credits.25
The second essential requirement of a CDM project, besides the emission reduction, is that it
contributes to the sustainable development of the respective developing country. The host
country itself has to confirm that the project complies with this requirement.
Each project has to prove its additionality, i.e. it has to be shown that the project would not be
realized if the CDM mechanism was not applied.
The general motivation for the inclusion of developing countries in the global efforts to reduce
greenhouse gas emissions is the supposition that there are emission reduction measures in
developing countries that are less expensive than in industrial countries. One reason for this
supposition is that environmental regulations are sometimes weaker in developing countries
than in industrial countries so that there may be a large potential to reduce greenhouse
emissions without high financial efforts.
• Joint implementation (JI): Countries with binding greenhouse gas emission caps can meet their
obligations partially by means of projects that are developed in other countries with emission
caps. So, JI projects are quite similar to CDM projects. The essential difference is that CDM
projects are realized in developing countries without own greenhouse gas emission caps while
JI projects are realized in countries with emission caps.
Emission reductions are awarded with Emission Reduction Units (ERUs), which come from
the Assigned Amount Units pool of the host country. JI projects do not create additional
greenhouse gas emission reductions (neither do CDM projects), but they translate the
reductions from the investor’s country to the host country and allow that the investor’s country
realizes less emission reductions within its own limits. The total number of emission credits in
the developed countries remains unaffected by the JI mechanism.
The Kyoto Protocol is important in the context of the future development of CSP. Renewable energy
projects help to lower the greenhouse gas emissions and are, hence, an appropriate instrument to reach
national emission reduction aims. But, there are only few Sun Belt countries, i.e. countries with
potential CSP locations, that have emission caps. Spain is one of them. The United States, which is the
most important industrial country with Sun Belt locations, did not sign the Kyoto Protocol (as the only
one among the important industrial countries). Nevertheless, thanks to the mentioned flexibility

24
An Assigned Amount Unit is a credit representing an allowance to emit greenhouse gases
comprising one metric ton of carbon dioxide equivalents.
25
There are some exceptions in which a (theoretically possible) reduction of greenhouse gas emission
in comparison to a baseline scenario is not rewarded with CERs, most importantly the installation of
nuclear power plants and the avoidance of deforestation.
28
mechanisms, CSP projects can be used to meet the emission limitation aims of the industrialized
countries even if they are realized in Sun Belt countries that do not have own emission caps.

Figure 16: 470 MW Integrated Solar Combined Cycle plant Beni Mathar, CDM project in Morocco26

The European Union Emission Trading Scheme

An Emission Trading Scheme (ETS) is a market-based approach to control polluting emissions.

Economic incentives are provided to achieve pollutant (e.g. greenhouse gas) emission limitations.
Such a scheme, which is sometimes referred to as “cap and trade”, works basically as follows: A
central authority (e.g. a national government) sets a cap on the amount of the greenhouse gases that
can be emitted. The permitted amount of greenhouse gases is allocated or sold to firms in the form of
emissions permits, which represent the right to emit a specific amount of greenhouse gases. The firms
are required to hold a number of permits that is equivalent to their emissions. Firms that need to
increase their emission permits must buy permits from other firms that require less permits. The total
number of permits remains unchanged by the trading processes.
There are several ETSs in the world. The largest one is the European Union Emission Trading Scheme
(EU ETS).27 It was launched in 2005 and is a major pillar of EU climate policy. It controls a large part
of the CO2 emissions in the EU countries plus Norway, Iceland and Liechtenstein. It covers
installations with a rated thermal input of at least 20MW in the energy sector and in some emission
intensive industrial sectors. In the future, the EU ETS shall be extended to other greenhouse gases and
further emitting industries.
Three stages are distinguished: first stage 2005-2007, second stage 2008-2012, and third stage 2013-
2020. In the first and second stage the emission certificates are distributed in the different countries
according to National Allocation Plans among the mentioned CO2 emitting firms and installations. The
biggest part of the emission certificates is distributed for free. At the beginning of the second stage the
industrial emitters received all certificates for free and the electricity generators received 91.2% of the
allocated certificates for free. The remaining 8.8% had to be bought at the respective stock exchange.
In the third stage, the National Allocation Plans will lose their importance, because the emission
certificates will be sold more and more by auction. In 2013, the share that is sold by auction shall be
about 20%. Until 2025, all emission certificates shall be sold by auction. Additionally, the total

26
See http://www.cdmmorocco.ma/en/portfeuil_mdpma_en.php and
http://www.renewableenergyworld.com/assets/images/story/2010/5/28/2-1332-integrating-solar--gas-
turbines.jpg
27
See http://ec.europa.eu/clima/policies/ets/index_en.htm.
29
number of distributed emission certificates will decrease so that there will be a continuous pressure to
reduce the greenhouse gas emissions.
There is a certain interrelation between Kyoto Protocol and EU ETS. First, the European Trading
System bases its emission reduction aims on the Kyoto Protocol, and, second, the EU ETS allows that
European firms offset credits from JI and CDM projects to cover their own emissions. The latter will
be possible also after 2012, when the Kyoto Protocol expires. That means that the EU ETS will go on
including projects of the JI and CDM type independently from the agreements that follow the Kyoto
Protocol.28

Effects on the competitiveness of CSP

The mentioned climate protection instruments have a twofold effect on the competitiveness of CSP:
First, they tend to increase the costs of combustion-based electricity generation, which is one of the
most important competitors of CSP power technology, and, second, they allow the financial support of
CSP projects:
• In the EU ETS, the majority of the emission rights are still distributed for free. However, the
gratuitous share is reduced more and more and the companies have to buy more and more
emission rights. This makes the electricity that is generated by means of combustion-based
technologies more and more expensive. Especially fossil-fuel technologies will be confronted
with higher costs. However, as fossil-fuel-based electricity generation represents in many
countries a very large or even the largest part of the electricity generation capacity, it is one of
the most important competitors of CSP. If such an important competitor is confronted with
higher costs, then these higher costs result in an important comparative advantage of CSP.
This advantage will make an increased investor interest in this technology at least more
probable. However, it has to be taken into account that all low-carbon technologies in the
electricity sector, i.e. all renewable energy technologies as well as nuclear power, enjoy this
comparative advantage.
• The flexibility mechanisms of the mentioned climate protection instruments allow that
companies with emission caps can comply with these limitations not only through the
reduction of their own greenhouse gas emissions, but also through the investment in emission
reduction projects outside their own business area and outside their home country or through
the purchase of emission credits that result from such projects. The installation of a CSP
power plant in a Sun Belt country normally has an emission reduction effect and is, hence,
appropriate for the allocation of CERs (CDM) or ERUs (JI). That’s why the installation of
CSP generates an additional value: tradeable emission certificates. This additional value helps
to make the CSP technology more competitive.
Neither this advantage is specific for CSP. Other renewable energy technologies enjoy the
same advantage. Nuclear power projects, on the contrary, which have also a greenhouse gas
emission reduction potential if they replace combustion-based power plants, are excluded
from the allocation of emission certificates.

28
This was recently confirmed by the German Government.
See http://dip21.bundestag.de/dip21/btd/17/047/1704701.pdf.
30
Rising fuel costs
A common general expression for the levelized electricity costs is the following one:

Fuel costs are represented explicitly in this equation and independently from the operation and
maintenance costs. This is the case because in many technologies the fuel costs constitute a very
important part of the electricity generation costs and because in most countries a large share of the
electric energy is generated on the basis of fuels. These fuels can be fossil materials, nuclear material,
biomass or waste.
The following diagram illustrates the importance of the fuel costs for the LCOE of different fossil fuel
based technologies as well as of nuclear power.29

Figure 17: LCOE composition of fossil fuel and nuclear driven electricity generation technology
(source: EIA)

In the case of fossil fuel based electricity generation, the fuel costs determine the LCOE to a large
extent. In some technologies, more than 50% of the electricity costs are constituted by fuel costs.
Now, at the global level, fossil fuels are by far the most important primary energy source for the
electricity generation. The following diagram shows the vast dependency of the electricity sector on
fossil fuels:

29
The LCOE refer to a reference scenario for 2016. Emission credit costs are considered. See
http://www.scstatehouse.gov/citizensinterestpage/EnergyAdvisoryCouncil/CommentsByMembers/Leve
lizedCostOfNewElectricityGeneratingTechnologiesEIA.pdf.
31
Figure 18: Primary energy supply for electricity generation in 2007 (source: IEA 2009, p. 24)

In the year 2007, fossil fuels represented more than 68% of the primary energy sources for the
electricity generation. The numbers did not change much until now. Nuclear fuel represented
additionally about 13.8% of the primary energy sources.
Now, fossil fuels are fossil fuels. That means that they are formed over a very long time (long in
relation to the human lifetime and to time spans that can be handled by human planning). They are not
renewable at a human time scale. They are exhaustible energy storages and not reliable long-term
energy sources. Their depletion is possible. The same holds for nuclear fuel.
What is important in our context is not so much the possibility of depletion of certain types of fuels,
but, first, the foreseeable “peaking” of their exploitation and the subsequent decline and, second, the
fact that the most accessible reserves and the reserves with the best quality are more and more
exploited. Finite fuels will be scarcer in the future and the remaining reserves will be more difficult to
exploit. Both will lead to higher prices.
The “peak theory” describes the peaking of the exploitation of a finite resource. Sometimes the
development of the exploitation is idealized in the form of the so-called Hubbert curve.30

Figure 19: Prototypical Hubbert curve

We should not expect the reality to follow exactly such an idealized curve. However, the core idea of
the peak theory does not depend on that. The central idea is that the exploitation of a non-renewable
resource starts at a certain moment, grows up to a maximum and falls after that back to zero. This

30
M. King Hubbert was a geophysicist who worked at the Shell Oil Company laboratories. He
presented his peak theory in 1956.
32
curve is sometimes analyzed as the superposition of the exploitation curves of individual deposits of
the respective resource as illustrated in the following figure, which takes the example of oil:

Figure 20: Total resource exploitation as superposition of the exploitation rates of different deposits
(source: Energy Watch Group, Oil Report 2007)

Oil is the most important example of the peak theory. First, at the global level, oil is quantitatively the
most important primary energy carrier. Additionally, it can be converted in particularly valuable fuels.
Second, the reserves-to-production ratio is very low, about 40 years according to estimations of the
German Government.31 There are many indications that suggest that we are currently already near the
peaking of the exploitation rates: Few new large oil fields are found and many large fields are already
quite old and their exploitation is in permanent decline. Additionally, if we consider fossil resource
exploitation rates at national levels, than we can see that in many cases the peak has already been
crossed. The following figure shows the exploitation of crude oil in different countries and indicates
the year when the maximum of the national exploitation was reached:

31
See BMWi 2006. The reserves-to-production ratio indicates for how many years the exploitation of a
given row material can go on if the current annual exploitation rates are maintained. In the indicated
number, only the secure conventional oil reserves are considered. Further so-called unconventional
fields (oil shale, oil sands) and uncertain fields may provide oil for some decades more.
33
Figure 21: Peak of crude oil exploitation in different countries (source: www.gasprices-usa.com)

The peaking is triggered by a limited offer at a continuous demand, which causes higher prices. Maybe
the global oil peak is not a sharp one but something like a plateau. But this would mean that resources
have to be tapped that are more difficult to exploit (fields in the ocean, oil shale and oil sands), which
will also imply higher prices. Anyway, the peaking of the exploitation of crude oil will be
accompanied by higher costs and also higher risks, as the world witnessed in 2010 during the BP oil
platform accident in the Gulf of Mexico.
Indeed, the oil price increased considerably in the last years. Assuming that long lasting market
tendencies are the effect of fundamental market mechanisms, it can be supposed that this tendency has
to do with respective changes of demand and offer levels. The following figure illustrates the general
price tendency over the last ten years:

34
Figure 22: Crude oil cost development in Europe (source: IEA)

There may be doubts about what exactly caused the high price peak in 2008. But, whatever may have
been the causes, the tendency of growing crude oil prices can be recognized at a larger time scale. In
the second half of 2008 and at the beginning of 2009 the price dropped due to the financial crisis in the
USA and in some other countries and the subsequent global economic recession. In 2010 the prices
reached again values above the prices before the 2007/2008 peak, which confirms the general
tendency towards higher oil prices.
The reserves-to-production ratio of other fossil fuels is higher than that of oil: coal 170 years, lignite
220 years, natural gas 60 years.32 However, all of them are limited at quite a small time scale.
Additionally, there is a certain price correlation of these energy carriers with the oil price. As they can
fulfil some substitution function for each other, at least for some applications, the prices are not
completely independent. This could be observed quite clearly in the strong price increments in the
years 2005 to 2008. The prices for coal and natural gas showed a similar behavior like the oil pieces as
to be seen in the following figure, which shows the development of the German import prices of crude
oil, coal and natural gas in the years 1991 to 2009:

32
See BMWi 2006.
35
Figure 23: Development of oil, natural gas and coal import prices in Germany between 1991 and 2009
(source: German Federal Ministry of Economy and Technology)

Additionally, higher prices in the future are probable because, as mentioned above, the general rule
holds that the most accessible deposits with the highest quality are more and more exploited and
deposits with a more difficult accessibility and a lower quality imply higher costs and, consequently,
higher fuel prices.
Finally, also uranium oxide shows a tendency to higher prices. The uranium supply is quite inelastic
and the price responds very sensibly to changes in the market conditions. The sharp price peak in 2007
was the result of some exceptional circumstances. However, uranium prices have a lower effect on the
LCOE of nuclear power plants than fossil fuel prices have on the LCOE of fossil-fuel-fired power
plants. Nuclear energy will face additional and maybe even more important economic challenges
because of growing safety requirements.

Figure 24: Uranium oxide price development (in $/lb, source: www.infomine.com)

The tendency of higher fuel prices, which is based on the growing scarcity of reserves at a constant or
even growing demand as well as on the fact that deposits with more difficult access and lower quality
are tapped, comes along with the tendency of higher LCOE of fuel-dependent electricity. The logic of
36
the economic exploitation of a finite good indicates that this tendency will continue in the future, and
the price charts over the last decade confirm it. Especially in the case of fossil-fuel-driven electricity
generation, increasing fuel costs have a strong impact on the LCOE because they determine them to a
large extend.

Conclusion
The three explained aspects of the expectable cost development in the different electricity generation
technologies, i.e.
• learning effects and economies of scale in the young CSP technology,
• climate protection instruments and their cost effects on fossil fuel electricity on the one hand
and CSP on the other hand, and
• the fuel price tendencies,
imply that the economic perspective of the CSP technology is promising although actual LCOE of
CSP are still higher than the LCOE of many other electricity generation technologies. CSP electricity
can reach a much higher economic competitiveness because their LCOE will fall if the CSP industry
goes on growing and maturing, while the LCOE of many important competitors will be constant or
even increase.
DLR estimated the cost developments for new power plants of different types. The results are
illustrated in the following diagram. According to this estimation, CSP will reach a competitive cost
level in the mid-term.

Figure 25: Comparison of LCOE perspectives (Trieb et al. 2006, p. 11)

However, at present, CSP electricity is still expensive in comparison to some competitors. As

mentioned above, in order to be able to enjoy the potential benefits of the CSP technology it is
important to make possible the further development of the CSP industry. A bridge has to be built in
order to reach lower CSP electricity costs. In the next section we will present possible instruments that
can be applied to promote the application of the CSP technology already now and that make possible
the realization of the efficiency potential that is inherent in this technology.

37
15.4 Market introduction of CSP
15.4.1 Support schemes for CSP development
The last section has shown that the economic perspectives of CSP are promising, but that it still needs
support to reach competitiveness. CSP plants require high initial investments that are paid back over
quite a long timespan. Insecure future revenues may make a CSP plant a risky project. Support
schemes are needed that create a CSP market, which makes possible that the CSP industry grows and
develops its efficiency potential. These support instruments are bridges that allow that a new
technology reaches its competitiveness. In the short term, they have the objective to make CSP
investments economically reliable already now. In the long term, they have the aim to make CSP
competitive. When this aim is reached, the support schemes become superfluous.
In the younger history, CSP development was and is strongly related to the implementation of support
measures. Support measures for CSP were applied in the USA after the high oil prices in the 1970s
and the beginning of the 1980s. The result was the construction of the Californian SEGS plants with a
total power of 345 MW. In the second half of the 1980s and during the 1990s, oil prices were quite
low again. After 2005, when the oil prices started to grow again, the CSP industry (together with other
renewable energy industries) received a strong impetus through new political support measures. A
large number of CSP projects in several countries were started, especially in Spain and in the USA,
but also in other countries.

Figure 26: Oil price development (yellow line: prices in 2008 dollars, blue line: nominal prices, source:
Energy Information Administration)

Support schemes that motivated the construction of the SEGS plants were federal and state investment
tax credits, solar property tax exclusion and accelerated depreciation.33 The construction of the
Spanish CSP plants from 2006 on was supported by a national feed-in tariff/feed-in premium system.

Support schemes for renewable energy technologies ought to fulfill the following criteria34:

33
See http://www.nrel.gov/csp/troughnet/power_plant_data.html. “Accelerated depreciation” means
that a company depreciates a fixed asset in such a way that the amount of depreciation taken each
year is higher during the earlier years of an asset’s life, which may have financial accounting and/or
tax advantages.
38
 • Efficiency: An efficient support scheme supports the development of renewable energy
technologies just as much as necessary. The costs of an efficient support scheme are lower
than the costs of an inefficient one (at the same support effect). Static efficiency means that
the costs are and remain low, dynamic efficiency means additionally that the support leads to
future cost reductions.
• Effectiveness: An effective support scheme contributes more to the development of additional
generation capacities than an ineffective one. One approach to measure effectiveness is to
compare the induced generation capacities with the technical potential. An effective support
scheme leads to a small gap between the technical potential and the installed capacity.
• Certainty for investors: The investments in renewable energy projects imply economic,
technological and political risks. Economic risks are for instance changing energy market
conditions. Technological risks concern the reliability of the considered technology and the
development of new competing technologies. Political risiks exist for instance because of the
possibility of changing policies of new governments. Support schemes should be designed in
such a way that they reduce these risks.
• Long-term competitiveness: The long-term aim of support schemes is to contribute to the long-
term competitiveness of the CSP sector. It is, hence, a central criterion of support schemes
whether they comply with this objective or not. The central indicator is the built-up of a
dynamic industry that achieves cost reductions.
• Governance (political feasibility): This criterion deals with the question whether the support
scheme is easy to implement or not. There are many factors that influence governance, such as
legal compatibility, practical feasability, transparency and financial viability.
• Market compatibility: This criterion applies to countries where the energy market is intented to
have or to get liberalized market characteristics. If this is the case, then the support schemes
are applied as a bridge to an energy market in which renewable energy technologies can
compete with other electricity generation technologies. In particular for advanced renewable
energy technologies and markets it is important that the support instruments are compatible
with a smooth change to market mechanisms.

In the following, five different categories of support instruments are presented: Feed-in tariffs, feed-in
premiums, quota obligations, fiscal incentives and tenders. All instruments focus on the
commercialisation stage of CSP or other renewable energy technologies (see figure 27). Instruments
that focus rather on earlier stages of technology development (e.g. research grants) and project
financing mechanisms are not considered here.35

Figure 27: Technology development stages (de Jager et al. 2011, p. 224)

34
Most of the outcome of this section is a summarisation of a thorough study that has been ordered by
the European Commission and that was conducted by Ecofys and others (de Jager et al. 2011,
chapters 2 and 5 including the respective appendix).
35
For more information see de Jager et al. 2011.
39
Feed-in tariff
A feed-in tariff (FIT) is a guaranteed price of electricity for the power that a producer feeds into the
grid. This price can be fixed for a long time (15 to 20 years) or some scheduled price degression can
be included. Additionally, the price can be adapted to unexpected cost developments in order to
maintain the revenues for the investor in a reasonable range.
In this way, FITs contain a high level of long-term certainty for investors of receiving a fixed
remuneration, which lowers investment risks considerably. This is also the reason why the capital
costs for investments in renewable energy systems in countries with feed-in tariffs are significantly
lower than in countries with other instruments that involve higher risks of future returns on
investments. As the interest rates that are offered by banks are low, the LCOE are directly affected.
This leads to high efficiency of the support scheme and, hence, low costs for the society.
The cost-efficiency of tariffs decreases when policy makers overestimate the cost of the electricity
generation. The tariffs are based on expectations about the future cost of electricity generation from
renewable sources. When the costs turn out to be lower than expected, then producers receive overly
high profits. It is therefore important to review the tariffs regularly and to adjust them according to
new cost developments.
Additionally to the efficiency of feed-in tariffs, the vast experience with this support scheme in a large
number of EU countries is an advantage for future implementations.
A disadvantage of FIT systems is a low market compatibility: Single producers are generally not
stimulated to adjust their production to the price signals of the market because it is usually the
transmission system operator who fulfils the role of selling the generated electricity. If the electricity
generation is not encouraged to react to different peak and off-peak tariffs, than the advantage of the
thermal storage of CSP plants cannot be played off against other electricity generation technologies
that do not dispose of storage possibilities.

Figure 28: Independence of the FIT price from the variable electricity price (Couture et al. 2010, p.22)

However, FITs have proven to be an effective support scheme for all renewable energy technologies,
including CSP.

Feed-in premium
In a feed-in premium system, a guaranteed premium is paid in addition to the income producers
receive for the electricity that is sold on the electricity market. Premium systems provide a secure
additional return for producers, while exposing them to the electricity price risk. There are different
design options for premium systems. Premiums that are linked to electricity price developments, e.g.
limited by cap and floor prices, provide higher certainty and less risk of over-compensation than fixed
premiums.
40
Figure 29: Feed-in premium and electricity price (Couture et al. 2010, p. 22)

Compared to feed-in tariffs, premiums provide less certainty for investors. This leads to higher
financing costs. In consequence, the cost efficiency of premium systems tends to be a bit lower than
that of feed-in tariff systems.
The level of premiums is based on future expectations regarding the generation costs of renewable
electricity and the average electricity market revenues. Therefore premium systems also embody the
risk of inducing additional costs for society and overly high profits for producers when production
costs are over-estimated or electricity prices and learning rates are underestimated by policy makers.
In premium systems, renewable electricity producers participate in the wholesale electricity market.
The advantage of premiums in comparison to fixed FITs is that the electricity generation on the basis
of renewable energy sources is stimulated to be adjusted to the electricity demand of the market. In
relation to CSP, this allows to make effective the advantage of CSP plants to generate electricity on
demand.

Figure 30: Andasol 1, financed under the Spanish feed-in tariff/feed-in premium system (source: Solar
Millennium)

Quota obligations
Quota obligations create a market for renewable electricity by means of the obligation on suppliers to
generate a minimum percentage of the electricity from renewable sources. These minimum shares can
increase over time. If obligations are not met, financial penalties are to be paid. Obligations are often

41
combined with renewable obligation certificates that can be traded. The tradeable certificates represent
the market value of renewable electricity at a certain time.
An advantage of quota obligations compared to premium systems is the fact that the support is
automatically phased out once the technology manages to compete. Once this is the case, the actual
renewable energy quotas of utilities will be higher than the quota obligation. When the costs of
renewable technologies come down through learning and mass production, this is represented by the
adjustment of certificate prices.
On the other hand, the decreasing certificate prices might be a challenge for plants already in operation
that did not profit from technological learning. Furthermore, certificate prices are volatile to other
market influences (e.g. exercise of market power). As producers do not only sell their electricity on the
market, but also their certificates, the risk on the certificate market is added to the risk on the
electricity market. This uncertainty increases the level of risk premiums and the cost of capital. That’s
why the LCOE under a quota obligation are usually higher than under feed-in tariff and premium
systems, i.e. the efficiency of quota systems is normally lower.36
Sometimes quota obligations refer to renewable energies without specifying determinate technologies.
In this case, they tend to stimulate the development and deployment of lower-cost technologies (such
as wind energy) and generally discard innovations in more costly options (e.g. photovoltaics or CSP).
If a determinate technology is to be supported then the quota obligations have to be designed
appropriately.

Fiscal and other support incentives

There are many different kinds of fiscal policies to support renewable energy technologies. They are
often complementary to other support schemes. Here are some possibilities:
• Investment grants predominately support renewable energy projects with high capital costs.
This may be the case if grants accompany a support scheme that offers little certainty for
investors, e.g. quota obligations. High capital costs also exist in young technologies, where
banks and project developers have few experiences concerning the technology and its risks.
• Soft loans subsidize specific technologies or customers with low-interest loans that also reduce
capital costs considerably.
• Tax reductions or exemptions are powerful and highly flexible policy tools that can be applied
to encourage specific renewable energy technologies and to support selected renewable energy
market participants.
The most important shortcoming of fiscal incentives is their instability: They usually rely on
government budgets and are thus subject to frequent political negotiations and changing budget
constraints. Frequent policy changes increase risks in the project development phase and hinder the
development of a renewable energy industry.

Tenders
An invitation to tender (call for bids) is a procedure to generate competing offers from different
bidders. This support scheme is typically used for larger-scale projects, e.g. for offshore wind projects.
Tenders usually specify the capacity and/or production to be achieved and can be technology specific
or even site specific. The winning parties are usually offered standard long-term purchase contracts
while the price is determined competitively within the tender procedure.
Advantages of tenders are the attention they draw on determinate investment opportunities and their
competitive character. That’s why the static efficiency of tenders is high.

36
Exceptions have been experienced in off-shore wind energy.
42
Disadvantages are the risks that the real project realisation costs turn out to be higher than predicted
when the bid was drafted or that the project is not bankable at all. In these cases the granted project
may not be realized and project initiatives may have been prepared in vain. The overall effectiveness
depends on the frequency of tender procedures.
If tenders are applied in an isolated manner, then they do not develop a dynamic efficiency. However,
they could be combined with long-term power purchase agreements, the tariffs of which could be
gradually reduced in order to reach dynamic efficiency (following the learning curve, which is
supposed to be realized in the further development of the respective technology). Additionally, the
public control possibility, which is implied by the tender system allows that technologies are applied
that are useful for the national grid development; and high quality offers can be selected. This may be
important for smaller grids in developing countries, where national grid management and power
capacity planning are important. In MENA countries, for instance, some of which have quite limited
electricity generation and transmission systems, a general liberal feed-in tariff may be less practical
because it does not allow the same public control of the grid development like a tender system. In
Germany, for instance, a liberal feed-in tariff system is possible because the installation of large
amounts of wind turbines and also of PV capacity does not threaten the grid stability. The grid has
sufficient means to balance the fluctuating wind energy input. In MENA countries, where grids are
smaller, the situation is normally different.
A support scheme for the MENA countries that combines a tender system with long-term power
purchase agreements is proposed in Trieb et al. (2011). According to this proposal, MENA countries
should promote first peak load CSP plants, which are competitive already now because current peak
electricity supply in the MENA countries implies costs that are not below the costs of CSP-generated
peak electricity. Subsequently, when CSP electricity has become cheaper (and fossil-fuel electricity
more expensive) medium and base load CSP power plants can be promoted.
A summarization of the mentioned support schemes and their characteristics is provided by the
following figure. The matrix shows a qualitative assessment according to the six criteria efficiency,
effectiveness, certainty for investors, long term competitiveness, governance and market compatibility.
Since this evaluation does depend on the detailed policy design, ranges are shown for each criterion.
However, given the wide range of design options, the characteristics of the mentioned instruments can
vary from one application case to the other.

43
Figure 31: Analysis of renewable energy support schemes (de Jager et al. 2011, p. 103)

The following figure shows the implementation of support schemes in the EU. Feed-in tariff systems
are dominating in the EU. They are used in the following member States: France, Germany, Spain,
Greece, Ireland, Luxembourg, Austria, Hungary, Portugal, Bulgaria, Cyprus, Malta, Lithuania, Latvia
and Slovakia. Most countries use a differentiation according to technology, which facilitates the
development of a range of technologies due to the different level of tariffs they receive.
Feed-in premium systems have gained ground over the last years and are used as main support
instruments in Denmark and the Netherlands. In Spain, Czech Republic, Estonia and Slovenia
premiums exist in parallel to the tariff system. Renewable obligations have been introduced in
Belgium, Italy, Sweden, UK, Poland and Romania.

44
Figure 32: Main renewable energy support schemes in the EU (de Jager et al. 2011, p. 28)

15.4.2 Temporality of support schemes and cost of market introduction

The application of support schemes, which are necessary to introduce CSP in the energy market and to
finally reach market competitiveness, implies costs. However, these costs can be seen as a social
investment that helps to transform the energy system towards environmental, social and also economic
sustainability. If the political aim is the transition to an energy system that is based on renewable
energies, which sooner or later will be inevitable, than the application of support schemes for
renewable energy technologies that still are economically disadvantaged is not to be considered to be a
subsidy in a non-competitive technology, but as an investment in a smooth transition to a new
technological stage. The mentioned support schemes are essentially different from subsidies that are
paid for economic activities that are not competitive any more, but that shall be supported in order to
preserve determinate economic structures.
The support schemes should be applied with the aim to dispense with them in a conceivable time
frame. An important successful example of the last decades is the public support of wind energy,
which already now has led to a well-developed wind energy sector that is competitive at good
locations with good wind conditions.
It is very complex to estimate the cost that has to be afforded to lead a determinate new industry with
positive economic expectations to competitiveness. There are many parameters that have to be fixed in
order to carry out such estimation. The Centre for Global Development undertook an estimation of the
necessary public investment in CSP in the MENA countries in order to make CSP competitive for
business cases in EU-MENA.37 The assumed scenario is based on the Mediterranean Solar Plan that
considers the installation of a CSP capacity of 20GW in the MENA countries until 2020. The study

37
See Ummel et al. 2008.
45
was realized in 2008 and supposed the development of the mentioned capacity between the years 2010
and 2020. The first 500MW would start operation in 2012. The authors considered a complete
exportation of the generated electricity to Europe. Plant sites in Morocco, Libya and Jordan were
selected with respective transmission lines through the Strait of Gibraltar to Spain (from Morocco),
over Sardinia and Corsica to the Italian mainland (from Libya) and over Syria to Turkey (from
Jordan). The main results of the study are that the progress rates that can be assumed for the
development of the CSP industry and the considered CSP growth until 2020 are sufficient to make
CSP electricity export to Europe competitive with the electricity production in gas and hard coal plants
in Europe. The total public cost that would have been afforded until 2020 would be between 8 billion
and 19 billion Euros. The large range results from different assumptions concerning progress ratios
and CDM supports. These amounts can be translated into abatement costs of CO2 of 10 to 20 Euros
per ton (due to the avoidance of emissions that is reached with the constructed CSP plants and the
expected subsequent further CSP development).

46
 15.5 Macroeconomic impacts from constructing and operating CSP
plants
The market introduction of CSP has costs that have to be borne by societies. The long-term benefit is
the contribution to the transition from an old energy system, which is more and more considered to be
unsustainable, to a new, sustainable one. The benefit of an early investment in renewable technologies
is a smoother transition, which in the end is less expensive than a transition that is forced by acute
economic and environmental crises, which are unavoidable if the global community does not take
appropriate measures before.
Additionally to this benefit, which reflects the main objective of the development of renewable energy
technologies, a large-scale development of CSP in the MENA countries will also give a new stimulus
to both the job market and the economic growth rates of the participating countries. The distribution of
these macroeconomic impacts depends largely on the question, whether the production of the power
plants and their components is done in the MENA countries themselves or rather in other countries.
At the moment, the technical CSP know-how in EU-MENA is concentrated in European firms and
investigation institutions. That’s why CSP development in the MENA countries would imply
technology transfer. There are different strategies how such a technology transfer can be realized:
There is a more vertical type of technology transfer and a more horizontal type of technology transfer:

Vertical technology transfer

• Technology transfer via investment to a host country

• Limited know-how transfer to local manufacturers and limited technological spill over
• Managers and technical staff are nationals of the investing country, general workforce from
the host country

Horizontal technology transfer

• Formation of joint ventures between foreign and local companies, including technical and
business training
• Embedding of technology within local population and economy
• Skilled work is done by nationals of both sides

A positive stimulus for the MENA job markets and for growth rates would be achieved in both
strategies, but the effect is stronger and especially more sustainable if a horizontal technology transfer
is achieved. The same applies for the impact on economic growth. Whether the transfer is done more
horizontally or more vertically depends, among others, on the volume of the future CSP development.
High CSP growth rates will be favourable for an increasing horizontal technology transfer, while low
growth rates will rather prevent it.

15.5.1 Example 1: Mojave Desert/California

The economic impacts of the first large-scale commercial CSP plants, the SEGS plants in California
(nine plants built in the 1980s with a total capacity of 354 MW), on the US economy were studied in
depth and are therefore well known. In contrast, very few long term experiences have been made with
the construction and operation of solar thermal plants in EU-MENA. For this lack of experience, the
impacts of the Californian plants – as analysed by the NREL38 – shall be briefly presented.

38
Stoddard 2006, pp. 5_10-5_18.
47
The economic impacts can be divided into the impacts during the construction phase and during
operation:
• During the construction phase, there is a direct economic impact from the goods and services
purchased from local vendors. Local labour is used for construction; concrete is purchased
from a local concrete plant, etc. Additionally, there are indirect economic impacts in the
regional economy (multiplier impacts), which include for example the employment that is
created by rising purchases from local vendors.39
• During the operation phase, there is a direct impact from permanent jobs created by the plant
and annual purchases of goods and services for the plant operation and maintenance.
Additionally, there are multiplier impacts created during construction and operation.
These impacts were measured in relation to their effect on the gross state output, earnings,
employment and state tax receipts. The gross state output is defined as the total value of goods and
services produced within the state. It is equivalent to the GDP, but on State level and not on national
level. Earnings relate to the value of wages and benefits earned by workers in the region, while
employment considers the total number of jobs.
The economic impacts of CSP deployment were compared to the economic effects of the construction
and operation of simple cycle gas power plants and combined cycle power plants.

Gross State Output

The total construction impact of CSP on gross state output was calculated to be about 626 million US$
per 100 MW. This is significantly higher than the respective value for combined cycle or simple cycle
combustion turbine plants. The primary reason for the difference is the much larger total investment
cost of CSP plants compared to gas fired power plants. The investment on its part creates an additional
regional demand for goods and services that also account for the gross state output.
However, the effect on the gross state output may also vary depending on how much of the investment
sum is spent regionally and how much is spent abroad. If the complete investment is done regionally,
the direct effect of each dollar invested is to raise the local demand by one dollar, so that the demand
created would equal the investment sum. Due to indirect effects the regional demand may also rise by
more than one dollar for each dollar invested: Regional suppliers pay their employees, which also will
raise the local demand, and they might have their own regional suppliers as well. The ratio of money
invested to its total effect on the demand is called the multiplier effect. In case of the Californian CSP
plants there was an impact on the gross state output of 1.4 US$ per dollar spent for the CSP plant. The
ratios for the combined cycle and simple cycle plants are only in the range of 0.90 to 1.00 US$ per
dollar, which means that considerably more of the total investment cost was spent outside California.
A similar development can be observed for the operation period of the CSP plants. There was a yearly
output of roughly 13 million US$ per 100 MW (corresponding to 36 million US$ per GWh). These
values are also higher than the values for corresponding natural gas fired power plants. This is
partially the effect of higher plant operation and maintenance expenditures.

48
Employment and earnings
Also the employment impacts of CSP plants are very favourable in comparison to the considered fossil
fuel plants. As shown in the following figure, CSP plants create much more jobs both during the
construction and the operation phase. CSP plants create almost 4,000 job-years per 100 MW for the
construction and about 90 long-term jobs for operation, which is much more than the job-years that are
created through the construction and operation of corresponding combined cycle or simple cycle
power plant capacities. The following figure shows the different impacts on the job market of the
construction and operation of the different types of power plants (job-years per 100 MW for the
construction phase and jobs per 100 MW for the operation).

Figure 33: Employment impacts of the SEGS plants in California in comparison to the employment
impacts of conventional power plants (Stoddard 2006, p. 5_13)

The total earnings correspond to the number of jobs. For the construction of a 100 MW CSP plant,
workers received almost 200 million US$ of wages and other benefits. The subsequent operation led to
earnings of close to 6 million US$ yearly. In combined cycle power plants the yearly earnings are less
than half and the earnings for construction are only about one eighth of that. In other fossil-fuel-fired
plants the differences are even bigger.

Fiscal impacts
Fiscal impacts include the sales taxes during construction and the individual income taxes due to
directly as well as indirectly created jobs during construction. During operation, individual income
taxes due to directly and indirectly created jobs are considered as well as corporate income taxes.
For the case of California, the total potential tax revenues are about 60 million US$ per 100 MW. This
was calculated with an individual state and local tax rate of 8.7 % and a corporate state income tax rate
of 8.84 %. Again, the revenues were much higher than for the construction and operation of fossil fuel
fired power plants. The larger fiscal impacts of the CSP plants are a result of the higher capital cost as
well as of more labour-intensive operation and maintenance.

49
 Dependence on domestic value creation
The macroeconomic impact always depends on where the value is created. As the material that is
purchased and the labour that is engaged have a significantly different effect on the direct and indirect
economic impacts depending on whether they are purchased or engaged inside or outside of
California, the study distinguishes between a “Low California Expenditure” and a “High California
Expenditure” scenario and compares them to the base case. The base case is the observed case of the
real construction of the SEGS plants40:
• The Low California Expenditure scenario assumes that only low manufacturing capacities
were built in California to support the CSP development. This scenario also assumes that most
of the balance of plant equipment (small pumps, motors, small bore piping, etc.) is purchased
from out of state suppliers. Construction and installation are provided by in-state suppliers
(like in the base case).
• The High California Expenditure scenario assumes that more manufacturing capacities were
built in California than in the base case. It is also assumed that most of the balance of plant
equipment is purchased from in-State suppliers. All construction, installation, and most
engineering are provided by in-State suppliers.
It is obvious that the macroeconomic impacts of the CSP development are significantly different
depending on whether more or less value creation takes place within the State. However, besides this
evident result the maybe more interesting result is that even at the Low California Expenditure
scenario the investment in CSP would still have much larger macroeconomic impacts than the
investment in conventional power plants. The following figure shows the result for employment and
earnings.

Figure 34: Regional impacts on employment and earnings per 100 MW of CSP capacity (Stoddard
2006, p. 5_17)

15.5.2 Example 2: Spain

A more recent study about the mentioned economic impacts was conducted by the Spanish Research
Centre for Energy, Environment and Technology in 2009.41 As in the case of the Californian CSP
plants, the study is based on construction and operation costs of CSP plants, but then distinguishes
between parabolic trough power plants (50 MW) and solar tower power plants (17 MW).

40
Stoddard 2006, pp. 5_15-5_18
41
Caldés et al. 2009
50
 Direct and indirect effects on Gross Value Added (GVA) as well as employment are analysed. The
GVA is closely linked to the Gross Domestic Product (GDP), as it equals the GDP minus taxes but
adding subsidies on the product. It is commonly used for analysis on regional levels when the amount
of taxes and subsidies is not available. In the case of CSP, the GVA can be interpreted as demand
derived by the construction and operation of the plants.
As shown in the following table, the effect of the construction and 30 years operation of CSP plants on
the national and exterior demand is 18.6 million Euros per MW for parabolic trough plants and 30.7
million Euros per MW for tower plants. In both cases the direct and indirect effects are nearly equal.
Most of the direct demand is generated in Spain, while about one third of the indirect demand is
generated abroad. The multiplier effects are 1.92 and 1.96 for the parabolic and the tower power plant,
respectively, i.e. for each Euro invested during the construction and operation phase nearly two Euros
of aggregated demand are generated.

Table 5: Effect on demand and employment derived from the construction and operation of
CSP plants in Spain (Caldés et al. 2009, p. 6)
Parabolic trough power Tower power
plants plants
Effect on demand (Million Euro / 18.6 30.7
MW)

Direct demand 9.7 15.7

National 8.2 13.7
Exterior 1.5 2.0

Indirect demand 8.9 15.0

National 5.7 9.6
Exterior 3.2 5.4

Employment (Job-years / MW) 192 322

Direct 111 189
Indirect 81 133

15.5.3 Summary of case studies

If we compare the economic impacts of the construction and operation of CSP plants that are
presented in the two studies, then we see that they seem to be quite different for the two considered
cases. For parabolic trough plants it is 18.6 million Euros per MW for Spain and – assuming an
operation period of 30 years – roughly 10.2 million US$ for the Californian CSP plants.42 However, it
has to be taken into consideration that we compare Gross Domestic Products with Gross Values
Added, which is not the same: The Gross Domestic Product is the Gross Value Added plus taxes and
minus subsidies. Additionally, we have to take into consideration that the plants have different sizes,
that they were constructed in different countries and, in particular, in different decades.
For the job market there is also a big difference between both studies: In the Californian setting, 4000
job-years for the construction and 90 jobs for the operation of a CSP capacity of 100 MW are

42
The number for California results from GDP impacts of $ 626 million/100MW at construction and
$ 13 million/100MW/y during operation (see 4.1).
51
registered. Over a 30-year lifetime this would sum up to 6,700 job-years per 100 MW or 67 job-years
per 1 MW. This number is small in comparison to the 192 job-years per MW for the Spanish plants.
Anyway, as the CSP industry is still very young, a high spread of investment costs, levelized
electricity costs and employment impacts are expectable. Moreover, the numbers presented in this
section cannot be utilized for a prediction of the economic impacts that will happen in the future. They
are just to give a rough picture of the economic effects that might accompany the CSP development in
the MENA countries. The real impacts depend largely on how the technology transfer is done, what
are the future technological developments, what are the political and legal frameworks, etc. But, even
if we assume the lower economic impact numbers of the Californian power plants, then the installation
of 20GW of CSP capacity, which is the MSP aim, would create about 1.3 million job-years and the
GDP in the involved countries would rise by 200 billion dollars. In addition, new ultrahigh voltage
national and transnational grids would stimulate growth and employment rates as well. These
macroeconomic benefits have to be taken into consideration if we speak about the cost of market
introduction (not to mention the long-term benefits of an early transformation of our energy
economies, which is the proper objective for the market introduction of CSP and which is important to
prevent future environmental and economic crises).

Figure 35: Possible impact of the installation and operation of 20 GW CSP on GDP in the MENA
countries and comparison to the GDP of MENA countries (IMF 2010)

52
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de Jager, D. et al. (2011): Financing Renewable Energy in the European Energy Market. Ecofys,
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Questions
1.
a) Which general social and economic development parameters determine the future
electricity demand? Mention three of them and specify whether they tend to raise or to
lower the electricity demand.
b) Which of them dominate the future electricity demand in your country?

2. Which effect has the massive utilization of a new technology on its competitiveness
(supposing that there are competitors) and why do they exist?

3.
a) From the point of view of a given country, why can it be interested in spending money to
support the young CSP industry?
b) From a global point of view, what are arguments to support the CSP industry?

4. Why a feed-in tariff or feed-in premium system for renewable energy supply may not be the
appropriate support scheme in small national grids? Which support schemes could avoid
possible problems?

5. Why may it be economically more interesting for central European countries to import CSP
electricity from the MENA countries than to generate it in nearer locations?

Answers
1.
a)
‐ Population growth Æ higher electricity demand
‐ Economic growth Æ higher electricity demand
‐ Higher living standards Æ higher electricity demand
‐ Higher energy efficiency Æ lower electricity demand

b) For instance: Egypt: strong population growth, economic growth

Æ strong growth of electricity demand
Kuwait: higher energy efficiency, population growth
Æ quite stable electricity demand

2. The massive utilization generates learning effects and economies of scale, which reduce costs
and improves the competitiveness of the new technology.

3. a) From national point of view:

55
 ‐ Promotion of own natural resources that are not used until now (solar radiation, available
ground)
‐ Promotion of own technological know-how
‐ Protection of fossil fuel resources
‐ Reduction of energy dependencies, diversification of energy supply
‐ Grid stabilization (in case of high share of fluctuating energy sources)
‐ CSP seawater desalination

b) From global point of view:

‐ Transformation to new energy supply systems based more and more on renewable energy
sources in order to mitigate climate change processes and future fossil fuel price
explosions
‐ Smooth transformation to energy supply system based on renewable energies needs
political support for renewable energies, among them CSP, as soon as possible, economic
competitiveness is still quite low, but the competitiveness perspectives are very good

4. Changes in the electricity generation pattern in small grids may have large effects on the grid
stability. In the case of fluctuating electricity sources this may cause problems. Small grids
may need support schemes with more electricity generation management possibilities. For
instance, specified tenders (for example for peak load CSP plants) with associated long term
purchase agreements could be a viable option.

5. The levelized cost of CSP electricity depends quite strongly on the direct radiation availability.
The LCOE differences that result from this dependency between a south European location
and a favourable MENA location compensate the higher transmission costs. The CSP
electricity generation in the MENA countries is not only a new export opportunity for these
countries but represents also an economic opportunity for the central European electricity
supply.

56
Exercises
1. The 50MW CSP plant Andasol 1 has a capacity factor of 41%. The investment was about 300
million Euros. Considering 30 years lifetime, an interest rate of 6% and annual operation and
maintenance expenditures of 2.5% of the investment, what would be the LCOE of the Andasol
plant?

2. In this exercise we want to compare the levelized costs of electricity generated in a parabolic
trough power plant and in a hard coal plant now (a) and, according to given cost development
scenarios, in the year 2025 (b). For the year 2025 the CO2 emission costs are calculated which
permit identical electricity costs of CSP and hard coal plants. It will be distinguished between a
CDM allocation and a direct participation in a CO2 emission market (c).
a) 2011:
(i) What is the levelized cost of the electricity that is generated by a parabolic trough
plant with a capacity factor of 26% (i.e. SM1)? The investment costs are 3400 €/kW
and the annual maintenance and operation costs are 2.5% of the investment cost. The
interest rate is 6% and the lifetime of the plant is 25 years.
(ii) What is the levelized cost of the electricity that is generated by a hard coal plant with
6000 full load hours? The investment costs are 1500€/kW. Annual operation and
maintenance costs (without fuel costs) are 3% of the investment cost. The hard coal
costs in 2011 are at about 85Euros/t and we assume an average price of 100Euros/t for
the plant lifetime. The lower heat value of hard coal is about 8140kWh/t. The overall
plant efficiency is 42%. Interest rate and plant lifetime are the same like in (i).
b) 2025:
(i) According to the CSP growth scenario in section 2.3.1, the investment costs for a
parabolic trough plant with SM1 will be 2000€/kW in 2025.43 Maintaining all other
numbers given in (a), what would be the levelized cost of the electricity generated in a
parabolic trough plant built in 2025 assuming the mentioned growth scenario and the
respective cost degression?
(ii) Assuming that the coal price grows by 3% annually, the price in 2025 would be
around 130Euro/t. We assume an average price of 145Euros/t for the lifetime of a coal
plant built in 2025. The plant efficiency will be 44%. Maintaining the other numbers
given in (a), what would be the levelized cost of the electricity generated by this
plant?

c) We consider the construction of a parabolic trough power plant in 2025 in Morocco. The
generated electricity is sold completely on the domestic market. Currently, the electricity
sector in Morocco emits 718 gCO2/kWhe. We assume that in 2025 the specific emissions will
be lower, say 650 gCO2/kWhe. The emissions of a hard coal plant built in 2025 we consider to
be 920 gCO2/kWhe. The CO2 emissions of a parabolic trough plant, which are generated
principally during the construction phase, are about 30 gCO2/kWhe.
i) European investors build the CSP plant and the project is declared successfully as a
CDM project. What should be the price of CO2 so that the levelized cost of CSP

43
We calculate in Euros2011.
57
 electricity and hard coal electricity are identical? Take into consideration that the
CDM projects take national average emissions as benchmarks.
ii) Instead of the CDM mechanism we consider now a CO2 emission market in which
Morocco participates directly (for instance, Morocco is included in the EU ETS). We
suppose that the Moroccan electricity sector is charged completely with the respective
emission rights. What must be the price of CO2 emissions in this case in order to make
CSP electricity competitive with hard coal electricity?

Solutions
1.

2.

a)

i)

ii)

b)

i)

ii)

58
c)
i) reduction of CO2 emissions through operation of parabolic trough power plant:

Cost difference between CSP electricity and coal electricity (without CO2 costs):

The CO2 cost should be .

ii) Difference between CO2 emissions of CSP plant and hard coal plant:

Cost difference between CSP electricity and coal electricity (without CO2 costs):

The CO2 cost should be .

(Note: The highest CO2 emission prices until now were around 35€/t (in 2006).)

59