TRANSITION TOWARDS AN "ALL-ELECTRIC WORLD" - DEVELOPING A MERIT-ORDER OF ELECTRIFICATION FOR THE GERMAN ENERGY SYSTEM - FFE GMBH
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10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Transition Towards an “All-electric World” - Developing a Merit-Order of Electrification for the German Energy System Strom- und Wärmeerzeugung sowie Speicher Andrej GUMINSKI1(1), Serafin VON ROON(1) (1) Forschungsgesellschaft für Energiewirtschaft mbH Abstract: Implementing vast amounts of renewable energy sources, to decarbonize the electricity supply-side is frequently perceived as the central element of the German energy system transition. To achieve the set greenhouse gas emission reduction target levels, it is, however, inevitable to also decarbonize the energy demand-side. An emission-free electricity supply- side facilitates demand-side decarbonization via the electrification of fossil-fueled processes and applications. This paper analyzes the costs of electrifying Germany’s final energy demand on a sector-by-sector basis. Costs are determined from a private project cost perspective and are stated as specific annualized additional or avoided costs of electrification, compared to a set of conventional reference systems. The analysis shows that the electrification of 1265 TWh of fossil final energy consumption leads to additional costs due to electrification of €58 bn in 2050. This value exceeds the annual spending on the German renewable energy levy of €~24 bn by a factor of three and results in an increase of the gross electricity consumption by ~70 %, to approximately 970 TWh in 2050. Keywords: Electrification, Merit-order of electrification, Demand-side electrification, Power- to-heat, Energy system transition, Cost of electrification 1 Introduction In Germany, it is the Energiewende that should ensure a transition from a currently fossil fuel based and therefore emission-intensive society, towards an energy system based on emission-free renewable energy. Implementing vast amounts of renewable energy sources (RES), to decarbonize the electricity supply-side is thereby frequently perceived as the central element of this transition [1, 2]. It is however only one step towards achieving the over-arching national goal of reducing greenhouse gas (GHG) emissions by 80 - 95 %, with respect to the level of 1990 [3]. With most of the focus on the energy supply-side, decarbonizing the energy demand-side is an often neglected key aspect of the Energiewende. A clear path towards an emission-free energy demand-side has yet to be defined. It is, however, inevitable to substitute currently fossil-fueled applications through low-carbon-emitting alternatives, to achieve the defined GHG emission targets. Under the precondition that, in 2050, at least 80 % of Germany’s electricity will be produced by RES, electricity will become an almost emission-free fossil fuel substitute. Replacing applications such as conventional cars, oil and gas boilers or fossil- fueled industrial processes with electrical alternatives can therefore be considered a decarbonization strategy. 1 Jungautor, Am Blütenanger 71, 80995 München, +49 89 15812134, aguminski@ffe.de, www.ffegmbh.de Seite 1 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 The electrification2 of the demand-side requires the active participation of the domestic sector (DOM), vehicle owners in the transport sector (TP) and decision makers in the industry (IND), and small and medium enterprise (SME) sectors. These players will only exchange fossil-fueled processes and applications for electrical substitutes if this is economically beneficial for them. This is the case if the electrical substitute, with or without government support, can provide an equally satisfying service at a lower lifetime cost. Recently published, government issued policy papers such as the Climate Action Plan 2050 and the Green Paper on Energy Efficiency acknowledge, that demand-side electrification will play a vital role in achieving Germany’s GHG emission targets [4, 5]. Hence, policymakers will require a clear picture of the costs that electrification entails for the individual players. Holistic knowledge about these costs can reveal which sectors are best suited for electrification and where further incentives are necessary to enable the transition. Taking the visionary goal of an All-electric World as a starting point, this paper calculates the theoretical (section 2) and technical electrification potential (section 4), explores how electrification costs can be assessed (section 3) and determines the costs of realizing the identified potential across all end-user sectors in Germany, by 2050 (section 4 and 5).3 2 Electrification – current state and potentials Basis for the development of the electrification cost methodology is the analysis of the current state of electrification, using final energy consumption (FEC) data. The sectoral analysis reveals that the majority of applications and processes which are currently not powered electrically are heating and hot water (H&HW) in the domestic, industry and SME sector as well as mechanical energy in the transport sector.4 The latter build the theoretical electrification potential (TEP), which is defined as the maximum possible FEC which can be supplied by electrical appliances and is currently not supplied electrically or through RES.5 Figure 1 visualizes the sectoral TEP and shows that the total TEP amounts to 1880 TWh in 2013, or ~74 % of total FEC. The TEP depends on the energy consumed in each sector and therefore varies over time. The FE consumed varies depending on factors such as the weather, the state of the global economy or demographics. To determine the adjusted TEP, the effect of such influences should be quantified. However, between 2008 and 2013 the total FEC varied less than 5 % above or below the average FEC of 2501 TWh in this time frame. Considering the time frame of this study, fluctuations caused by the effects mentioned are not drastic and are therefore not considered in the further analysis. Figure 1 shows that after deducting the FEC currently powered by RES and electricity, three electrifiable forms of energy remain: H&HW, process heat and mechanical energy. The electrification of means of transport accounts for 706 TWh or 38 % of the total TEP. 62 % of the total TEP can therefore be attributed to converting power to heat. Technologies 2 Electrification is hereby defined as “expanding the use of electricity at the point of energy service demand” [1]. 3 The following paper is based on the Master’s thesis: “Transition Towards an “All-electric World” – Developing a Merit-Order of Electrification for the German Energy System” [6]. 4 Following Gruber et al. [7], FEC for H&HW is considered jointly in this paper. 5 The definition excludes the replacement of RES by electrical appliances. This follows the logic that CO2 reductions cannot be reduced further if the application is already powered by RES. Seite 2 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 necessary to perform the electrification of the demand-side are therefore power-to-heat technologies as well as technologies which enable electrical transportation. Transport Domestic Industry SME FEC [TWh] 800 720 723 Process heat 715 675 Mechanical energy 94 % H&HW 600 503 % TEP as percentage of FEC 476 70 % 66 % 389 400 226 200 58 % 0 TEPTP TEPDOM TEPIND TEPSME Figure 1 – Sectoral theoretical electrification potential 2013 in TWh [8, 9] The lack of an electrical substitute which can supply the energy service at the same quality and quantity can be one of several factors which reduce the TEP. This calls for the definition of the technical electrification potential (techEP) which is a subset of the TEP [10]. Currently prevailing technical, ecological, infrastructural and other limiting factors reduce the TEP to the techEP. The derivation of the techEP is the first step of the methodology implemented to derive electrification costs. The techEP is subject to sector-specific assumptions and is therefore analyzed in section 4. In the following section, the general methodology and costing approach are discussed. 3 Merit-order of electrification methodology and assumptions The general procedure, used to calculate and visualize the specific differential costs of electrification for each sector, involves 4 steps and is depicted in Figure 2 on the following page. In step one, a top-down approach is used to derive the techEP. The TEP is sub- divided into classes, which are then analyzed to reveal if electrification is technically possible. In step two, fossil reference technologies and electrical alternatives are defined for the technically electrifiable processes and applications. In step three, the costs of electrification are calculated. In step four sectoral costs are displayed using a merit-order curve. Lastly, the sectoral merit-order curves are combined in the Merit-order of Electrification 2050, which allows for inter-sectoral cost comparisons. Seite 3 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Sectoral analysis: Step 1 Step 2 Step 3 Step 4 TEP refined to give Conventional Costs of The merit-order of techEP reference and electrification are electrification is electrical alternative determined assembled technology defined • Processes and • Type, size and • Specific • Specific applications costs of reference differential costs differential costs suitable for and alternative of electrification are visualized in a electrification are system are are determined for merit-order defined defined considered replacements Figure 2 – General procedure for the sectoral analysis Table 1 shows which classes are created for each sector, in steps one and two. Furthermore the selection of conventional and electrical technologies used to model the electrification procedure in each class is displayed. Size, type and characteristics of technologies and therefore costs differ across, but not within classes. Where possible, the most efficient electrical technology and most common reference technology are implemented. The most common technology is used as a reference technology because technology adoption rates of systems with high market shares are significantly higher than those of other systems [11, 12]. The selection of the technologies considered is discrete and limited to technology solutions which are commercially available to end-users and for which cost parameters exist. Sector TEP energy type Classes Technologies used distH H&HW Industrial and Currently installed distH mix household/SME Industrial heat pump Domestic H&HW 7 Building Gas condensing boiler, Air & ground types source heat pump, Electrical boiler Industry Process heat and 8 segments and Low&high pressure gas boiler, H&HW H&HW Electrode boiler, Industrial heat pump, Flat, container and electrical glass furnace, Blast & Electrical arc furnace SME H&HW, process heat 7 segments Gas condensing boiler and mechanical Ground source heat pump energy Transport Mechanical energy 19 vehicles Lead free, diesel and electrical vehicles types Table 1 – Sectoral class types and implemented technologies Since this paper aims to reveal the costs of following the path towards an all-electric world, it assumes that, where technically possible, all processes and applications are electrified. It is assumed that electrification commences in 2015 and ends in 2050. All cost results and merit- order curves reflect the year 2050. As is frequently the case in energy system transformation scenarios natural technology exchange rates are used as an opportunity to implement new technologies [12 - 14]. This means that electrification only takes place if an appliance reaches its end-of-life (EOL). The replaced system is termed the previously installed system and is not necessarily identical to the reference system. These assumptions enable costs to be expressed as additional or avoided costs resulting from the installation of the electrical system, when compared to the reference system. The reference system therefore forms a base line against which the costs of the electrical system are measured. Seite 4 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 In this paper the electrification rate, which is “the ratio of electricity to final energy (FE) demand,” is independent of the costs of electrification which are presented as specific differential costs of electrification and are assessed from a private project cost perspective [1]. Private project costs are monetary total costs incurred by investors as a result of the electrification. In order to obey the private project cost perspective, the costs of electrification of district heat (distH) are allocated to the distH provider because distH is mainly supplied by vertically integrated companies responsible for the production and distribution of distH [15]. Hence, distH is treated as a separate end-user sector. Specific differential costs of electrification for a process or application are calculated using a costing method referred to as relevant costing. Relevant costs can be defined as “(…) costs that will be different between alternatives” [16]. Relevant costing applies a total cost approach to a decision situation, which ensures the comparability of costs for technologies with different lifetimes and allows different discount rates to be applied across sectors. In this case the two alternatives are always a defined conventional reference system and an electrical alternative system. Costs are split into relevant operating expenditure ( ) and relevant capital expenditure ( ). In mathematical terms, this can be expressed as follows: ∑ =1( , , , − , , , )+∑ =1( , , − , , ) (1) , , = = = = = sec = sector = = = = = = . = The numerator calculates absolute differential costs, which are interpreted as avoided or additional costs incurred by using an electrical ( ) instead of a fossil fuel powered application ( ). The red term is used to derive annualized ( ) differential of electrification. are treated as real annual costs and are therefore not discounted. are mainly fuel costs, which can differ according to the technology, the sector ( ) and the application or process ( ) electrified within a sector. The blue term is used to calculate annualized differential of electrification. are annualized using an annuity factor, which is calculated for each fossil reference and electrical technology in every sector. Basis for calculations are technology cost curves, lifetimes and sector dependent interest rate assumptions. Total differential costs are divided by the fossil FEC which is displaced due to electrification, to derive specific electrification costs. Using specific costs allows for cross-sectoral cost comparisons. In the analysis, Germany is viewed as a single region and uniform costs and operating parameters are assumed over time. It is assumed that the supply-side does not restrict the electrification rates and possible system rebound effects are not considered. Germany is considered a copper plate; transmission and distribution constraints which might arise due to the electrification are therefore irrelevant. The FEC in 2050 is only affected by the modeled electrification processes. The interpretation of the merit-order curve is therefore restricted due to cost assumptions and by the fact that each class summarizes numerous unique Seite 5 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 replacement processes, which can differ in cost due to site-specific parameters. These limitations are partially alleviated by the inclusion of sensitivity analyses, which complement the results. 4 Sectoral merit-order curves In this section, methodology explained in section 3 is applied to each individual sector. For every sector, the TEP is split into classes according to its energy consumption structure. The classes allow a detailed analysis of the sectoral fuel consumption. Classes which contribute less than 1 % to the sectoral TEP are excluded from the analysis. The remaining classes are subsequently reviewed to determine the techEP of each class. If a techEP is identified, the electrical and conventional technologies are selected and the size of each system is estimated based on the characteristics of the class. Technology cost information, obtained in literature research, is then used to determine the annualized specific differential costs of electrification for each technology set. Assumptions concerning technology costs, lifetimes, efficiencies and fuel prices are summarized in Appendix A. 4.1 Electrifying district heat The analysis of the TEP shows that FEC for process heat and H&HW is a major source of electrification potential. A share of this energy for process heat and H&HW is covered by distH (see Figure 3). Domestic Industry SME [TWh] 500 453 Process heat 418 Mechanical energy 400 H&HW District heat 300 213 200 100 50 58 13 0 Figure 3 – Theoretical electrification potential excluding district heat [9] Figure 3 builds on Figure 1 on page 3 and shows the amount of district heat in each sector and the TEP excluding distH, . . It shows that the TEP for district heat amounts to 121 TWh. Electrical distH network projects have not surpassed the pilot project phase in Germany. In Sweden, Switzerland and Denmark a partial electrification of distH networks using electrode boilers and ground source heat pumps (GSHP) has been performed [2, 17]. This proves that electrification is not only theoretically, but also technically possible. The techEP for distH therefore equals the total TEP of 121 TWh. Seite 6 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 An industrial GSHP is selected as the electrical alternative system. A seasonal performance factor (SPF) of 2.7 is selected to model the GSHPs in the context of distH, to take possibly higher temperature levels in distH networks into account. The conventional reference technology is set to a mixture of the currently installed distH supply technologies [18].6 The age and state of the existing infrastructure permits the assumption that the entire techEP is electrified until 2050. The additional or avoided costs incurred by the electrification of distH in any of the relevant sectors are calculated by subtracting the levelized cost of heat production (LCOH) for the reference system, from the LCOH after a full electrification of distH. The Working Group on District Heat (AGFW) provides an average value of 53 €/MWh for the LCOH of the current reference distH technology mix [19]. To derive the LCOH of the electrical system, it is necessary to determine the installed power and energy provided by these heat pumps. The installed power is used to determine . The energy is required to derive . Synthetic distH load profiles in hourly resolution, created at the FfE, form the data basis for the cost calculation [20]. DistH in the domestic and SME sector are considered jointly. Electrification costs are calculated based on the values for thermal energy and power and the technology and fuel cost. The resulting LCOH values are shown in the following table: Industry [ct/kWh] Domestic & SME [ct/kWh] 6.8 9.2 ∆ 1.5 3.9 Table 2 – District heat electrification costs [6] The differential LCOH, ∆ , for the industry sector of 1.5 ct/kWh and of 3.9 ct/kWh for the domestic & SME sector indicate additional costs due to electrification. The values differ due to the difference in the ratio of peak load to thermal energy demand in the sectors. Although the amount of distH produced is similar in each sector, the ratio is three times higher in the domestic and SME sector compared to the industrial sector. Heat pumps are characterized as baseload technologies due to their high specific investment costs and high efficiencies. Low peak loads at high annual energy demands and consequently high full-load hours (FLH) improve the economics of a heat pump. The electrification costs in the industrial sector are therefore lower compared to the domestic and SME sector due to a lower ratio of installed thermal power to thermal energy demand in the industry. The Table 3 on the following page summarizes the results of a ceteris paribus sensitivity analysis. A reduction of 100 % or more indicates a shift from additional to avoided costs. Reducing the specific investments of HPs by 50 % is not sufficient to make the electrification of distH attractive to private investors. Both sectors react more sensitively to changes in the SPF and electricity price because the share of of the total annualize cost is higher. Ceteris paribus, an electricity price of ~11 ct/kWh leads to a cost equilibrium between the electrical and reference system. The implemented electricity price of 15 ct/kWh, is above the levelized cost of electricity production of most power plants and RES [21]. It is therefore possible that utilities can produce distH at lower electricity prices, thereby lowering electrification cost towards the break-even point. 6 The mix includes peak load boilers, combined heat and power plants and waste-fueled heat plants. Seite 7 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Affects… Variable change Fuel cost SPF Spec. investment Discount rate from to 15.0 7.5 [ct/kWh] 270 540 [%] 400 200 [€/kW] 10.5 5.3 [%] Percentage change -191 -191 -41 -27 ∆ Percentage change -72 -72 -47 -31 ∆ & Table 3 – Sensitivity analysis for electrification costs of district heat 7 Simultaneously, higher electricity demand can necessitate investments in grids and power plants. This could put an upward pressure on the electricity price. The degree to which the electricity price is affected depends on the rebound effects of the distH electrification on the electricity supply and distribution side. 4.2 Electrifying the domestic sector The starting point is the domestic TEP of 454 TWh, excluding district heat. Electrification in the household sector is confined to the electrification of H&HW. As derived in Gruber et al., the supply of H&HW is fully electrifiable [7]. The TEP therefore equals the techEP in this sector. The domestic techEP is sub-divided into building classes to allow for a more precise estimate of the electrification costs (see Figure 4). [TWh] 550 509 509 Statistical error 500 6 24 Heating & Hot water 32 453 Double house (DH) 450 14 35 Terraced house (TH) 23 400 41 31 Semi-detached house (SDH) 33 Multi-family house (MFH) (>12) 350 84 31 MFH (3-6) 300 63 MFH (7-12) 250 503 90 Single family house (SFH) 66 200 150 100 203 193 0 Segmented Figure 4 – Classification of domestic techEP according to FfE building typology in TWh [22, 25, 26] The thermal energy demand for H&HW differs amongst building classes and affects the size of the electrical and reference heating system and thereby the electrification costs. The distribution of the domestic techEP for H&HW according to building classes is shown in Figure 4 page. The depicted building classes are a map of the current building infrastructure in Germany [22]. Additionally, two further classes are defined to map the construction of new 7 OPEX are fuel costs only. Hence, effects of changes in SPF and fuel costs are identical. Seite 8 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 single and multi-family houses in Germany by 2050. Predefined building classes are used, which are constructed to meet building standards according to the German Energy Saving Ordinance 2012 [23]. Finally, the effect of decommissioned buildings/systems on FEC in 2050 is considered. The average annually decommissioned building area from 1995 to 2010 is used to model the projected annual decommissioned area by 2050 [24]. Based on the characteristics of the building classes a conventional reference and an alternative electrical technology are defined. Different types of HPs are implemented as electrical technologies in all classes. The conventional reference system is set to a gas condensing boiler for the building stock [27]. For new builds the reference system is set to a combination of gas condensing boiler and solar thermal plant. This combination is sized to meet the minimum share of 15 % renewable H&HW in German new builds starting from the year 2013 [28]. The electrified techEP in the domestic sector is calculated under the assumption of heating system exchange rates. The latter are boiler exchange rates determined on the basis of the age distribution of existing boilers. The assumed annual exchange rates are 3 % for oil and gas boilers [27, 29, 30]. Based on the FfE building model data the thermal energy demand and installed thermal power are calculated per building class and then disaggregated to the technology level. Cost data obtained from literature research is used to calculate annualized and for each technology. The annualized specific differential costs of electrification are determined according to the costing methodology described in section 3.The following figure shows the domestic merit-order curve. Specific differential costs of electrification [ct/kWh] DH Double house 25 TH Terraced house SDH Semi-detached house MFH (#-#) Multi-family house (units) SFH Single family house 20 newMFH Multi-family house new build newSFH Single family house new build Ob Oil or coal boiler Gb Gas boiler 15 ST Solar thermal 10 5 8 7 5 5 5 5 5 5 6 D 6 3 3 3 3 3 3 Electrified 0 A C final energy 0 40 80 120 160 200 240 280 320 360 400 440 [TWh] B Figure 5 – Domestic merit-order of electrification in 2050 The classes are labeled according to the following logic: , , , . Subscript, , indicates the currently installed system, which can differ from the reference system. Squares A, B, C and D mark critical points on the merit-order curve and are therefore used as a guideline for analysis. Seite 9 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Square A: The domestic merit-order shows no potential for avoided costs. This results from the significantly higher initial investment of the electrical technologies. The effect of operating costs of electrification costs is low, as the ratio of utilization of the gas boilers to the seasonal performance factor of the heat pumps is similar to the ratio of gas to electricity price (approximately 3:1). Initial investments in the implemented heat pumps are higher than investments in the gas boiler. Consequently electrification imposes additional costs. Square B: Two main aspects are visible in the merit-order. Firstly, the MFH exhibit lower electrification costs than the remaining buildings because of the lower specific in MFH compared to the remaining building stock. A second finding is that electrification costs of new builds are higher than comparable buildings of the building stock. This results from the installation of a solar thermal plant, which leads to a reduction of the annual gas consumption. Consequently, the electrical system cannot realize its efficiency advantage to the same extent compared to systems in the building stock. Square C&D: The electrification of households displaces 428 TWh of conventional FEC. This results in an additional electricity demand of 110 TWh and annual additional costs of €~21 bn, which corresponds to an additional cost of €~500 per household [25]. The current average annual household spending for H&HW is €~1200 [9]. Electrification would therefore result in significant cost increases for H&HW on a household level. The sensitivity analysis in the domestic sector shows that the order of classes in the domestic sector is robust. This results from the fact that altering parameters such as the gas to electricity price ratio, the interest rate or the technology cost parameters simultaneously affects all building classes. Hence, position changes mainly occur with respect to new builds, because the reference system differs from that implemented in the building stock. For instance: halving the gas price from 7 ct/kWh to 3.5 ct/kWh causes new MFH to shift several positions to the right. This results from the fact that only 85 % of the thermal energy demand of new builds is covered by the gas boiler. In relation to the other classes, the new MFH therefore does not benefit as much from this price reduction. On average, electrification costs increase by €~300 per household, compared to the original merit-order, as conventional systems become more attractive. Furthermore, doubling the discount rate in the domestic sector from 3.5 % to 7 % results in an electrification cost increase of €~200 per year and household, compared to the original merit-order. 4.3 Electrifying the industry sector The industrial TEP amounts to 476 TWh, of which 62 TWh are H&HW and 414 TWh are process heat. In a first step, the TEP is subdivided into classes. This enables a detailed analysis of the underlying technology structure [31, 32]. The classes analyzed in this paper are shown in the pie chart in Figure 6. Seite 10 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Industry TEP according to segments Analyzed industrial classes [TWh] 500 476 476 62 62 4 Blast furnace & 400 4 rolled steel; 25 % 12 Not covered; 42 % 34 19 36 300 Total 46 476 [TWh] 200 414 106 DH; 12 % 100 H&HW; 11 % 153 Dairy products; 1 % Pulp&Paper; 6% 0 Sugar; 1 % Flat glass; 1 % TEPIND Segmented TEPIND Container glass; 1% H&HW Other segments Quarrying, other mining Process heat Glass and ceramics Chemical industry Manufacture of machinery & transport equipment Food and tobacco (Non-ferrous) Metal manufacture and processing Rubber and plastic products Paper DH Figure 6 – Classification of industrial TEP according to segments in TWh [6] The FfE defines 8 industry segments [33]. Each segment encompasses numerous individual processes. Industrial segments which account for less than 1 % of process heat TEP are excluded from the analysis. Furthermore, the segments Quarrying, other mining, Chemical industry and Other segments are excluded from the analysis as a result of low cost data availability for industrial process technologies. The H&HW TEP is considered fully, as the supply of H&HW is not subject to process specific parameters [7]. In order to determine the techEP, each class in the pie chart of Figure 6 is analyzed in detail. Based on process-specific knowledge, a conventional and an electrical technology are defined, where electrification is technically possible. The selection of the electrical alternative in the industry sector is contingent upon the temperature level at which a process is operated [7]. The following table summarizes the techEP and the technology choices made for H&HW and the industrial processes. Electrified class Electrical system Reference system techEP [TWh] H&HW Industrial GSHP Low pressure gas boiler 51 Paper Industrial GSHP High pressure gas boiler 27 Sugar Electrode boiler High pressure gas boiler 4.5 Dairy products Electrode boiler High pressure gas boiler 6.1 Steel Electric arc furncace Blast furnace steel 52 Flat glass Electrical glass furnace Flat glass furnace 6.0 Container glass Electrical glass furnace Container glass furnace 6.6 Table 4 – Summary of technology sets and techEP in the industry [6] Based on the selected technology sets and the cost parameters in Appendix A, electrification costs are calculated. Figure 7 on the following page summarizes the results in a merit-order curve. Seite 11 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Specific differential costs of electrification [ct/kWh] 25 BF Blast furnace EAF Electric arc furnace HPGb High pressure gas boiler 20 LPGb Low pressure gas boiler CG(F) Container glass (furnace) 15 FG(F) Flat glass (furnace) EGF Electrical glass furnace IGSHP Industrial GSHP 10 5 9 6 6 2 2 3 D Electrified 0 A C final energy 40 60 80 100 120 140 160 [TWh] -5 B Figure 7 – Industrial merit-order of electrification in 2050 Square A: In the paper industry, the high thermal energy demand at low temperatures favors the use of HPs to supply process heat. Compared to the reference system, the HP has a significant operating cost advantage which, under the given assumptions, outweighs the higher initial investment. The latter results from a low electricity price in the paper industry. In general, the energy-intensive industry is more susceptible to electrification than industry segments in which the ratio of electricity to gas price is higher. The paper process represents 27 TWh of techEP at avoided costs of €~0.3 bn. In 2013 the total 2013 revenue in the paper industry was €~14 bn [34]. Considering that reductions of the energy bill have a direct effect on profit, the cost savings through electrification are noticeable. The additional electrical FEC in 2050 is 23 TWh, which equals ~10 % of the industrial electricity consumption in 2013. Square B: The order of processes is best explained by paired comparison. Both the sugar and dairy products processes require steam as process heat. In both cases assumptions concerning the technologies and prices are identical. This results in identical specific differential for each process. The electrification cost difference originates from a higher ratio of peak load to thermal energy demand in the sugar industry compared to the dairy products industry. Consequently, specific differential in the sugar industry are higher. This effect occurs due to low FLH of 3000 hours in the sugar industry and comparably high FLH of 6000 hours in the dairy products industry [35]. This in turn results from production- specific parameters. Sugar is produced in sugar campaigns which require high power over a short time frame, while dairy products are produced continuously throughout the year. Square C&D: ~160 TWh of fossil-fueled FE is displaced by 2050. This results in an additional electricity demand of ~63 TWh. Total additional costs amount to €3.7 bn. The entire energy-intensive industry in Germany has annual energy costs of €16 bn [36]. Total annual industry energy costs in 2013 amounted to €~38 bn [9]. When compared to these figures, the additional costs are significant. Seite 12 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 The sensitivity analysis shows that halving the interest rate from 10.5 % to 5.25 % leads to a shift of the H&HW costs to the left end of the curve. This shift results from a noticeable cost decrease of the heat pump compared to the low pressure gas boiler. The effect outweighs the cost reduction in the dairy products class because the IGSHP exhibits a higher capital cost compared to the electrode boiler. Furthermore, adjusting fuel costs has a stronger effect on the electrification costs than adjusting specific investments because the majority of the annualized costs are , with playing a secondary role. Avoided electrification costs of €~1 bn are the result of halving the electricity to gas price ratio. 4.4 Electrifying small and medium enterprises In this section, the costs for the electrification of the SME sector are calculated. The SME TEP amounts to 213 TWh, of which 164 TWh is H&HW, 31 TWh is mechanical energy and 18 TWh is process heat. In line with the implemented methodology in the other sectors, the TEP is sub-divided into classes. This step is significantly impeded by the lack of FEC data on an SME segment level. The Working Group on Energy Balances divides the SME sector into 14 segments [37]. However, there are no statistics that show the FEC for the SME segments on an end-use application level. An exact determination of the TEP on a segment level is therefore not possible. It is, however, possible to estimate the FEC on an end-use level within each SME segment by combining the segmental FEC by energy-carrier and the segmental FEC by end-use. The resulting TEP split is shown in the following diagram. SME TEP according to segments Analyzed SME classes [TWh] 220 213 213 Not covered; 8 % 200 19 19 Office style Process heat; 9 % 180 31 31 businesses; 23 % 160 Excavators; 2 % 8 140 12 Tractors; 12 % Total 120 23 213 100 Textiles, clothing, [TWh] 28 80 164 Freight; 1 % Trade; 15 % 31 60 Manufacturing; 2 % 40 Construction; 4 % 20 50 Hospitals, schools, Lodging, guesthouses, 0 public swimming pools; 11 % homes; 13 % Segmented Process heat Textiles, Clothing, Freight Construction Lodging, Guesthouses, Homes Mechanical energy Other Farming Trade H&HW Manufacturing Hospitals, Schools, Public swimming pools Office style businesses Figure 8 – Classification of SME TEP according to segments in TWh [38]8 The classes depicted in the pie chart in Figure 8 are analyzed with respect to their technical electrification potential. 8 Segments < 1 % of TEP are categorized as not covered. Seite 13 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Heating and hot water As mentioned in the previous sections, H&HW is considered technically electrifiable. The H&HW techEP excluding distH is 145 TWh. A GHSP is selected as the electrical alternative. A gas condensing boiler is used as the conventional reference technology. Mechanical energy Non-electrical mechanical energy in the SME sector is used for special purpose vehicles in the segments Construction, Farming and Airports [37]. This means fuel consumption by excavators, tractors, aircraft movers, freight haulers and baggage movers. Literature research shows that full-electric excavators, tractors, freight haulers and baggage movers have not passed the trial stage [39, 40]. The electrification of aircraft movers is, however, possible, has reached a commercial stage and cost data is accessible [39]. Together these vehicles consume an equivalent of 0.02 TWh/a of fuel and thus do not pass the 1 % relevancy criterion. No technical electrification potential is calculated for mechanical energy in the SME sector. Process heat Due to low data availability in the SME sector it is not possible to determine the underlying technology for the identified process heat TEP [41]. The reason for this is the extreme heterogeneity of the sector, which results from the fact that it captures the amounts of energy which could not be allocated clearly to any of the other sectors [42]. Process heat in the SME sector is therefore considered non-electrifiable. The supply of H&HW is consequently the only end-use for which electrification costs are calculated. The resulting average electrification costs for heating and hot water in the SME sector are 9.2 ct/kWh. This results in total electrification costs of €~13.3 bn, a displaced amount of conventional FEC of 145 TWh and an additional electrical FEC in 2050 of 33 TWh. These average costs are higher than the industrial average of 2.8 ct/kWh and the domestic average of 4.9 ct/kWh. The difference compared to the industrial sector is mainly due to the fact that the SME sector is not free of the taxes, levies and surcharges on the electricity price. The ratio of electrical to conventional fuel prices is consequently higher. Furthermore, the FLH in the SME sector are lower compared to H&HW in the industry and domestic sectors. Consequently, the share of installed power to thermal energy demand is higher. As electrical systems are more capital-intensive than conventional systems, this results in higher specific differential CAPEX than in the industry and domestic sectors. 4.5 Electrifying the transport sector The TEP in the transport sector amounts to 675 TWh of mechanical energy. Non-electrical means of transportation are mainly airplanes, ships, cars and trucks. Classes in this sector are constructed based on means of transportation. Similar to the SME sector, energy end- use balances on a class level do not exist in the transport sector. Hence, it is not possible to determine the class specific TEP. Classes are therefore constructed based on the FEC. Figure 9 on following page shows the FEC in the transport sector is segmented. The bar chart shows a broad categorization of the transport sector according to transport types [43]. In the second bar, the category Road transport is sub-divided into passenger Seite 14 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 transport by fuel type and Road freight. A similar division of the air transport and rail transport sector is possible, but not depicted for visualization purposes. A further class refinement step is depicted in the pie chart in Figure 9. Transport TEP class overview Analyzed transport classes [TWh] 800 726 3 700 16 Not covered; 27 % Lead free medium; 19 % 104 104 600 Road 500 190 freight 190 Total Lead free small; 7 % 400 726 602 Passenger Rail transport; 2 % [TWh] 174 transport 174 300 diesel Lead free large; 6 % 200 Air transport; 14 % Passenger 100 239 transport 239 Diesel large; 11 % lead free 0 Diesel small; 2 % Diesel medium; 7 % FECTP FECTP Diesel other; 5 % Coastal&inland-waterway transport Air transport Road freight Rail transport Road transport Diesel Figure 9 – Classification of transport TEP according to means of transportation in TWh [39, 43 – 47] To divide the passenger road transport by fuel type into classes, car categories are created and calibrated to reproduce the total FEC in the sector, using the following procedure [6, 39, 43, 45 – 47]: 1. The total number of cars is divided into the classes small, medium, large and other, based on the type of car 2. Each class is split into diesel and lead-free fueled cars 3. Average annual driving distances for diesel and lead-free cars are adapted to give average driving distances for each car size and fuel type 4. The classes small, medium and large are further sub-divided into average, below average and above average driving distance classes for each car size and fuel type 5. Average fuel consumption is used to calculate the FEC in each class. The following table shows a selection of the constructed classes. Annual driving Fuel consumption FEC Class Vehicles performance [km] [L/100km] [TWh] Diesel small (avg.) 1,080,008 16,442 5.0 9 Diesel small (> avg.) 74,866 42,000 5.0 2 Diesel medium (avg.) 4,696,751 21,194 6.0 60 Lead-free large (avg.) 538,527 25,000 8.9 11 Table 5 – Exemplary vehicle classes and techEP [6] Table 5 illustrates the differences between the constructed car classes. To derive the techEP in the transport sector, the three dominant fuel-consuming transport types, rail, air and Seite 15 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 passenger road transport are analyzed, with respect to their electrification potential. Road transport is addressed as one category. Road freight and road public transport are not analyzed. Rail transport Rail transport FEC amounts to 15 TWh. Of this, 75 % is electrical FE, leaving ~3.6 TWh of fossil FEC in the rail transport sector. The share of fuel consumption of total TEP (675 TWh) in the transport sector is therefore less than one percentage point. The electrification of rail freight is consequently not considered in the further analysis [48]. Air transport Air transport is responsible for 15 % of the FEC in the transport sector and ~2 % of global GHG emissions [44]. Pilot projects, such as the Airbus S.A.S, prove that electrical flying is possible [49]. It is, however, currently not a commercial application and therefore non- electrifiable according to the criteria laid out in this paper. Passenger road transport The number of electric vehicles (EVs) reached 19,000 at the beginning of 2015 [50]. The dominant limiting factor to vehicle adoption is the concern that not all trip lengths can be covered using commercially available EVs [51]. A paper by Plötz et al. shows that approximately 90 % of the vehicles in Germany drive less than 140 km per day [52]. This is a distance which can be covered with commercially available electric vehicles. Consequently this barrier to adoption, which could limit the TEP of private passenger road transport in Germany, is irrational to a large extent and not considered a limiting factor for the widespread electrification of the transport sector. For the purpose of this paper it is assumed that sufficient charging infrastructure for electric vehicles exists, so that all journeys can be covered. The techEP for road transport equals the FEC for road transport for lead-free and diesel cars, which amounts to 413 TWh. The electrification process entails the replacement of a conventional vehicle by an electrical vehicle of equal size and annual driving distance. The calculation of electrification costs for personal road transport is performed under the assumption that the entire techEP is realized by 2050. Considering that vehicle lifetimes rarely exceed 25 years, this assumption is justified. The electrification cost calculation presented in this section is based on a total cost of ownership (TCO) study for electric vehicles conducted by Plötz et al [39, 46]. Cost components included in the calculation are vehicle, battery, wall box, fuel and operation and maintenance costs. Detailed assumptions are listed in Appendix A. An extensive discussion concerning the implemented costs and sensitivities can be found in the study by Plötz et al. The following figure shows the transport merit-order curve. The classes are labeled using the following logic: , , . Subscript, , indicates the conventional fuel, which is either diesel, , or lead-free, . , explains the size of the vehicle which is either , , or ℎ . Subscript, , shows if the vehicle drives the annual average, , or above, > , or below, < , average driving distance. Seite 16 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Specific differential costs of electrification [ct/kWh] 30 25 20 15 26 10 5 7 8 A 4 5 5 6 D 3 4 Electrified 0 -1 C final energy 50 100 150 200 250 300 350 400 [TWh] -5 B Figure 10 – Merit-order of electrification for the transport sector in 2050 Square A: The resulting negative electrification costs for large lead-free cars with above average driving distances (25,000 km or more) are -1 ct/kWh. Negative costs occur for this car class due to the operating cost advantage of the electrical vehicle compared to this conventional class. The latter is largely a result of higher fuel costs and consumption in comparison to the diesel equivalent. The resulting annual avoided electrification costs amount to €0.1 bn or €~200 per annum and car in the class. Square B: The order of classes shows three major trends. Firstly, below average driving distances result in high electrification costs. This is the case because the operating cost advantage of electric cars is not realized to the same extent in comparison to average and above average driving distances. Secondly, electrification costs of lead-free cars are lower compared to diesel cars for average and above average driving distances. And thirdly, the electrification of below average driving distance imposes higher costs on the owners of lead- free compared to diesel cars due to the relative advantage of diesel cars compared to lead- free cars when driving longer annual distances. The latter results from lower diesel costs and lower per kilometer fuel consumption. Compared to the electrification of lead-free cars, the electrification of diesel cars is therefore not as attractive for large annual driving distances. By the same logic, the electrification of lead-free cars with below annual driving distances is more costly compared to the electrification of the diesel equivalent. Square C&D: Total electrification costs amount to €16.8 bn. This is equivalent to additional costs of ~400 €/a per vehicle. Total annual household spending on fuel in 2013 was €~1200. Although this figure does not include the conventional vehicle cost it is sufficient to benchmark the additional costs for the electrical vehicle. The total displaced conventional FEC is 413 TWh. The additional electrical FEC in 2050 is 133 TWh. As the sensitivities of battery and electricity price changes are explored in Plötz et al., Table 6 shows the effect that changing the electricity price, battery cost and discount has on the total and per vehicle electrification cost in the transport sector. Seite 17 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Affects… Variable change Electricity price Spec. investment battery Discount rate from to 28.8 14.4 [ct/kWh] 380 190 [€/kW] 3.5 7 [%] Electrification cost [bn €] -2.3 -5.3 26.0 Electrification cost [€/vehicle] -56 -126 612 Table 6 – Sensitivity analysis for electrification costs in the transport sector The sensitivity analysis shows that negative electrification costs are possible, if the electricity or battery prices are reduced. Plötz et al. project a decrease of the battery price to 280 €/kW by 2020 [46]. Continuing this price development could enable negative electrification costs in 2050. However, the annual per vehicle avoided electrification costs are low. As mentioned in section 3, there are other non-monetary costs exist which can hinder electrification even though negative costs are observed. Further research is needed to quantify these costs. The transport sector concludes the sectoral analysis. The results are summarized in a total merit-order curve of electrification in section 5. Seite 18 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 5 Merit-order of electrification in 2050 The results from the sectoral analysis are summarized and combined in a total merit-order curve (see Figure 11). Specific differential costs of electrification [ct/kWh] 30 INDPH CG,CGF,EGF Households (HH) TPD,l,>avg DOMnewMFH,GCB+ST,ASHP,GSHP DOMnewSFH,GCB+ST,GSHP Transport (TP) 25 TPD,other TPD,s,avg Industry (IND) DistHDOM&SME,GSHP TPD,m,avg District Heat (DistH) TPL,s,avg 20 DOMTH,Gb,GCB,GSHP Small & Medium DOMMFH (3-6),Gb,GCB,ASHP TPD,s,>avg Enerprises (SME) DO;MFH (3-6),Ob,GCB,ASHP TPD,m,>avg 15 DOMMFH (7-12),Gb.GCB,ASHP INDPH sugar,LPGb,Eb DOMMFH (>12),Gb,GCB,ASHP DOMMFH (>12),Ob,GCB,ASHP DOMSFH,Gb,GCB,GSHP 10 DOMMFH (7-12),Ob.GCB,ASHP DOMTH,Ob,GCB,GSHP INDH&HW casses,Gb,GSHP 5 TPL,m,avg D A Electrified 0 C final energy INDPH FG,FGF,EGF [TWh] INDPH Steel,BF,EAF SMEH&HW,GCB,IGSHP -5 DistHIND,GSHP DOMSFH,Ob,GCB,GSHP TPD,m,avg DOMSFH,Ob,GCB,GSHP B DOMSDH,Gb,GCB,GSHP TPD,s,avg TPD,l,
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 2050. The technical potential for electricity production from wind and solar power in Germany is 300 and 400 TWh respectively [54, 55]. Domestic Industry SME Transport Total Electrified FEC [TWh] 428 157 145 413 1,143 Percentage of [%] 94 38 68 61 67 Additional electrical FEC 2050 [TWh] 110 63 33 133 339 Total cost [bn €] 21 4 13 17 58 Avoided cost [bn €] - -0.3 - -0.1 -0.4 Table 7 – Electrification cost overview The comparison shows that the electricity demand would exceed the potential of renewables in 2050. Furthermore it is probable that the evolving peak load, which is not quantified in this paper, would require a significant amount of additional production and network capacity. Figure 11 shows that 43 of 45 displayed classes exhibit additional electrification costs. Avoided costs through electrification total to €0.4 bn and occur solely in the paper industry and for large lead-free vehicles with above average driving distances. Including distH, total additional costs of €58 bn accrue for the electrification of 1265 TWh of fossil-fueled energy. The calculated annual additional costs due to electrification exceed the annual spending on the German renewable energy levy of €~24 bn by a factor of three [56]. Assuming that private investors only pursue electrification at an avoided cost, a significant amount of government support is required to realize electrification under the current cost conditions. 6 Conclusion and ideas for further research This paper provides an overview of the costs incurred to private investors by substituting fossil-fueled processes and applications with electrical technologies, in Germany by 2050.. The first finding of this paper is that determining an electrification cost overview requires an initial audit of the energy end-use balances to show where electrification potentials lie. This analysis reveals that mechanical energy and energy used for H&HW and process heat is theoretically electrifiable and that all four end-use sectors exhibit electrification potentials. In numerical terms, the total TEP amounts to ~1880 TWh. Combining the results of the sectoral analysis in a total merit-order curve shows that none of the sectors exhibits a clear electrification cost advantage or disadvantage. Within each sector a range of electrification costs exist. As effects on the supply-side and distribution network are not considered in this paper, a finite statement about whether or not electrification to this extent is beneficial cannot be made. High annual additional costs of electrification of €58 bn across all sectors, including distH, permit for the conclusion that the transformation towards an all-electric world requires state subsidies. This is supported by comparing these costs to Germany’s annual spending on the renewable energy levy, which is approximately €24 bn. However, these costs have to be viewed in comparison to possible financial and non- financial benefits that electrification imposes on the energy system and society as whole. By comparing the economic value and the investor cost it is possible to determine whether electrification should be pursued actively. The interpretation of the merit-order of electrification is therefore limited. Seite 20 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 Furthermore, the order of classes presented in the merit-order does not necessarily indicate the order in which electrification occurs. Firstly, the end-user does not think in terms of displaced final energy, when judging whether an electrical application should be purchased. This decision occurs based on absolute savings or additional costs. Considering the capital constraints of most end-users, a high initial investment as required for most electrical technologies, can be a barrier to electrification, even if annualized total differential costs indicate cost savings. Ultimately also a variety of non-monetary factors can influence purchasing decisions. The concept of displaying costs in a merit-order curve is nevertheless, useful to attain an initial cost overview, which is the goal of this paper. The sensitivity analysis provided for the sectoral results shows that assumptions concerning the electricity and fuel prices have a significant impact on electrification costs. Due to the high sensitivities in this regard and due to the time frame of the study, the results are subject to a high degree of uncertainty. Ideas for further research can be categorized into aspects which improve the data quality, increase the degree of detail and expand the number of electrified processes and applications. Firstly, the underlying data quality for both the FEC and technology cost data could be improved by the collection of primary data. This is especially necessary in the SME and industry sector where the data basis does not allow for the calculation of accurate electrification results. Secondly, there are a number of ways in which the accuracy of the results can be improved. Examples are: including further cost components as well as technology learning curves and different price scenarios, increasing the technology pool of electrical and conventional technologies and selecting the appropriate technology sets based on cost optimization criteria. Furthermore, the granularity of the approach can be increased by creating more classes and by adding further criteria to determine the fit of a technology within a respective class. Moreover, the interpretability of the resulting cost data can be improved by considering the resulting interactions with other components of the energy system (e.g. rebound effects on the network and generation side) and by estimating the economic benefits of electrification. The latter also entails the quantification of avoided CO 2 emissions. Lastly, the approach could be transferred to other countries. Exploring the option of a high degree of electrification could prove less costly in other regions, making electrification not only a viable, but also a cost-efficient path towards decarbonization. Seite 21 von 31
10. Internationale Energiewirtschaftstagung an der TU Wien IEWT 2017 7 Bibliography [1] Sugiyama, Masahiro: Climate change mitigation and electrification in: Energy Policy (44) 2012. Tokyo: Elsevier Ltd., 2012 [2] Gerhardt, Norman et al.: Potenziale für Strom im Wärmemarkt bis 2050 - Wärmeversorgung in flexiblen Energieversorgungssystemen mit hohen Anteilen an erneuerbaren Energien. Frankfurt am Main: VDE Verband der Elektrotechnik Elektronik Informationstechnik e. V., 2015 [3] Nitsch, Joachim; et al.: Langfristszenarien und Strategien für den Ausbau der erneuerbaren Energien in Deutschland bei Berücksichtigung der Entwicklung in Europa und global - Leitstudie 2011. Bonn: Deutsches Zentrum für Luft- und Raumfahrt, Institut für Technische Thermodynamik, Abteilung Systemanalyse und Technikbewertung, 2012 [4] Klimaschutzplan 2050 - Klimaschutzpolitische Grundsätze und Ziele der Bundesregierung. Berlin: Bundesministerium für Umwelt, Naturschutz, Bau und Reaktorsicherheit (BMU), 2016 [5] Grünbuch Energieeffizienz - Diskussionspapier des Bundesministeriums für Wirtschaft und Energie. Berlin: Bundesministerium für Wirtschaft und Energie (BMWi), 2016 [6] Guminski, Andrej: Transition Towards an “All-electric World” – Developing a Merit- Order of Electrification for the German Energy System in: Masterarbeit [7] Gruber, Anna; Biedermann, Franziska; von Roon, Serafin: Industrielles Power-to- Heat Potenzial in: Vortrag bei der IEWT 2015 in Wien. München: Forschungsgesellschaft für Energiewirtschaft mbH, 2015 [8] Guminski, Andrej; von Roon, Serafin: Dekarbonisierung des deutschen Energiesystems durch sinkenden oder steigenden Stromverbrauch? in: et - Energiewirtschaftliche Tagesfragen 66. Jg. (2016) Heft 10. Essen: etv Energieverlag GmbH, 2016 [9] Bundesministerium für Wirtschaft und Technologie (BMWi): Zahlen und Fakten - Energiedaten - Nationale und Internationale Entwicklung. Berlin: BMWi, 16.3.2015 [10] von Roon, Serafin; Gobmaier, Thomas: Demand Response in der Industrie - Status und Potenziale in Deutschland. München: Forschungsstelle für Energiewirtschaft e.V. (FfE), 2010 [11] The potential to reduce CO2 emissions by expanding end-use applications of electricity. Palo Alto: Electric Power Research Institute (EPRI), 2009 [12] Dieckhöner, Caroline; Hecking, Harald: Greenhouse Gas Abatement Cost Curves of the Residential Heating Market - a Microeconomic Approach. Köln: Institute of Energy Economics at the University of Cologne (EWI), 2012 Seite 22 von 31
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