How regional differences in cost of capital influence the optimal design of power systems

Abstract

In order to reduce greenhouse gas emissions of the power sector, high shares of renewable power sources need to be integrated into existing systems. This will require vast amounts of investments. Cost of the capital needed for these investments are unevenly distributed among European regions. They show a clear North-South and West-East divide, which has not exhibited significant signs of narrowing in recent years. Power system studies investigating a continent-wide European power system, however, usually assume homogeneous cost of capital.The objective of this paper is to investigate how regional differences in cost of capital affect the result of these studies with respect to the optimal power system design. Our analysis is based on power system optimization with inhomogeneous cost of capital in Europe. We find that assuming homogeneous cost of capital leads to estimates on the levelized costs of electricity in a highly renewable European power system, which are too conservative. The optimal system design is significantly affected compared to an inhomogeneous scenario. In particular, we show that inhomogeneous cost of capital favors overall wind power deployment in the case of Europe, while the investment in solar power decreases.