From Causal Loop Diagram to Stock
and Flow Diagram
For the presentation in Ph.D Colloquium
Namsung Ahn
Solbridge International School of Business
Woosong University. korea
A concise overview of developments in business strategy
Key events and publications (Kim Warren, 2005)
Discipline
Long-range
planning
Corporate
planning
SWOT
Product
portfolio
matrix
Experience
curve
Publication
Scenario
planning
Value-based
management
Schwartz:
The Art of the
Long View
Ackoff:
Redesigning
the future
Penrose:
Theory of
the Growth
of the Firm
Forrester
Industrial
Dynamics
1955 1960
Senge:
The Fifth
Discipline
Business
dynamics
Warren:
Wernerrfelt:
“A resourcebased view
of the firm”
Resourcebased view
System
dynamics
Core
competency
Kaplan &
Norton:
The Balanced
Score Card
Scenario
planning
Systems
Thinking
Competitive
strategy
dynamics
Value
chain
Porter:
Competitive
Strategy
Strategy
Practice
Competitive
Strategy
Dynamics
Meadows:
The Limits
to Growth
1970
Meadows:
Beyond
The Limits
1980
1990
o
Steman:
Business
Dynamics
2000
What is systems thinking
?
•
System thinking is a way of thinking about and
describing dynamic relationships that influence the
behavior of systems.
•
As a language, systems thinking provides a tool for
understanding complexity and dynamic decision making.
•
System thinking language is visual and diagrammatic;
has a set of precise rules; translates perceptions into
explicit pictures; emphasize closed interdependences
What is systems thinking
•
The essence of the discipline of systems thinking lies in
a shift of mind:
Interconnected Circular
relationship (Loop) rather than Linear relationship.
seeing processes of change rather than snapshots.
Approach to see the Structure rather than Event
•
The Key in CLD lies in identifying the structure of
system. It helps to identify the Policy Leverage
and mental models of clients for easy
communication
 , tan, 
cos, sin,
?
Interconnection and Interrelation
Level of Understanding
We view the reality from the following multiple levels of perspective
The Iceberg
Events
Patterns
Structures
Because structures generate events and
patterns – but are very difficult to see- we
can image these three levels as a kind of
iceberg, of which events are only the tip.
Because we only see the tip of iceberg,
the events, we often let those drive our
decision-making. In reality, however, the
events are the results of deeper patterns
and systemic structures.
Structures are the ways in which the parts
of system are organized. These structures
generate the events and patterns we
observe
Why Boom and Bust Cycle in 1980s?
1980s
2000s
How can we explain this ? Causal Loop Diagram is enough?
Vendor's Capacity
Expansion in
Renewable
+
+
Economy of Scal, Learning Effect Loop
Order of
Renewable
Economics of Scale,
Learning Effect in
Renewable
+
+
Investment in
Renewable
Energy
Economics of
Renewable
Oil Price in
1980s
Utility Order Loop
+
Financial Crisis
in 2008
Demand in
Renewable by
Utilities
Regulatory
Driver like FIT
Expected
Renewable
Market such as
RPS
FIT: Feed in
Tariff
RPS: Renewable
Portfolio Standard
Economy of Scale, Learning Effect in Renewable Energy?
It is a “Chicken and Egg” Problem
Investment in
R&D
The industry believes that
standardization and “learning curves”
coupled with R&D investment will
drive cost lower over time.
R&D Investment Loop
Economics of
Scale
Revenue
But there are “Chicken and Egg”
problems with this conclusion
Vendor's Capacity
Expansion
Cost
Learning Effect Loop Loop
Government
Subsidies
Order of New
Renewable Energy
Economics of
Renewable Energy
Developer Order Loop
Demand of
Renewable
Energy
CO2 Pricing is very important for Grid Parity
Wind Power Cost
Electricity Price
Technology
Breakthrough
Economy of Scale
(Business Model)
Oil Price
Carbon Pricing
(CO2 Tax, Cap and
Trading)
Systems Thinking vs System Dynamics
•
Systems Thinking
System Dynamics
•
•
Soft Methodology
Qualitative Analysis
Casual Loop Diagram
•
Peter Senge: “The Fifth Discipline”
•
Hard Methodology
•
•
•
Quantitative Analysis
Stock and Flow Diagram
J. Forrester: Industrial Dynamics
System dynamics is grounded in control theory and the modern
theory of nonlinear dynamics. It is designed to be a practical
tool that policy makers can use to help them solve the pressing
problems they confront in their organizations.
System Dynamics
•
One of the most important limitations of causal diagram
is their inability to capture the stock and flow structure
of systems and to see the dynamics of the system
•
Stocks and flows, along with feedback, are the two
central concepts of dynamic systems theory.
•
A major strength of the stock and flow representation is
the clear distinction between the physical flows through
the stock and flow network and the information
feedbacks that couple the stocks to the flows and close
the loops in the system
Why the distinction between stocks and flow is
important?
•
Stocks create delays by accumulating the
difference between inflow and outflow.
•
Stocks decouple rates of flow and create disequilibrium dynamics in systems.
•
Failure to understand the difference between
stocks and flows often leads to underestimate
time delays, a short term focus, and policy
resistance
Challenges in Renewable Energy (Problem Statement)
• The penetration of renewable energy in Korean
electricity market
• The impact of renewable energy on wholesale
electricity price
• The total cost of Subsidy to renewable energy
• How to bring up wind power industry as an engine
of green growth
Impact of CO2 Pricing on Market Clearing Price
Causal Loop Diagram for Renewable Energy penetration in Korean market
+
Geenration from New
CC and Coal
Generation from Must
Run Units (Hydro,
Nuclear)
Construction of
CC and Coal
+
+
+
Expected
Profit
Electricity
Generation
Generation from
renewable energy
+
+
-
+
Electricity
Price
Cost of Fossil
Technologies
+
Total Cost of FIT
Construction of
renewable energy
+
Fraction of
Operation in Fossil
Technologies
Generation from
Fossil Technologies
Degree of FIT
FIT
+
Marginal Cost of
Existing Units
Behavior of Power Plant Investors
Behavior decision theory
Each producer can estimate, albeit imperfectly, whether a
new investment is profitable. As long as producers believe
new capacity will be profitable, new producers will enter the
market. When the industry is expected to be unprofitable,
producers seek to reduce their capacity and some will exit.
The utilization decision responds to the expected
profitability of current operations. In case that the current
market price is expected higher than the marginal cost of
existing plants, producer starts to operate the existing
plants for sale.
Business Dynamics, John Sternman, 1998
The Theory of Investor Behavior on Existing Capacity Utilization
Energy Price
Variable O&M
Cost of Coal
Fuel Cost of
Marginal Coal
Unit
Fraction of Coal in Operation
Heat Rate for
Marginal Coal
Plant
Price of
Imported Coal
Generation
Imported Coal
Imported Coal
Capacity
Under
Retirement
Construction
The Theory of Investor Behavior on New Investment
Market Assessment
Fraction Starting Construction
Investors estimate the future market price
The estimated market price is compared to the estimated based on their estimate of the future reserve
cost of a CC to determine the fraction of investors with
margin. They have production costing models
application permits that will start construction. In this example, the
which will lead to higher market prices.
construction starts would probably be zero
A nonlinear curve is used to represent their
128
market assessment.
CCs Under
As an example, they may foresee 15%
Review
reserve, and they use the curve to estimate
1
Cost Assessment
the future price at 44.3$/mwh
approvals
Investors estimate the
levelized cost of a new CC.
This assessment includes a
CCs in the Site
fixed charge rate and and
Bank
estimate of future gas prices.
If gas prices are expected at
3.82$/MMBTU, for example,
construction
the full cost might be
start
estimated at 37.17$/mwh
CCs Under
Construction
construction
completion
CCs on Line
Supply Assessment
Investors prepare an assessment of
the capacity that will be available
in the future. They estimate outage
of thermal units, and they assume
average weather for hydro
generation. As an example, they
may foresee 150GW of capacity
62
52.9
44.3
33
Investors Expected RM (%)
-3
0
5
15
29
Demand Assessment
Expected
Investors prepare an assessment
Reserve Margin of peak demand around the time
would be 15% in that a new CC would come on
this example line. Their forecast is based on the
growth over the past few years.
As an example, they may foresee
130GW of peak demand
In case of Renewable Energy
•
The same Behavior decision theory can be
applied
•
The current market price and the degree of FIT
are crucial to the profit of investors in renewable
energy
Example: SFD for the Wind Power Capacity Acquisition Supply Line
Construction of New Offshore Wind Capacity
Delayed
Windcompleted
Offshore Wind
construction
starts
New Offshore
Wind under
construction
<Market Share
Offshore Wind>
<OK to start
Construction?>
Offshore Switch
Wind Construction
delay in years
OffshoreWind starts
if keeping pace
<Construction Starts
to keep pace>
<Offshore wind
expected cap factor>
OffshoreWind
complete
construction
New
OffshoreWind
Capacity
Market Shares of New Construction
Market Shares of New
Construction
construction market
shares diversity
parameter
return
L
<biomass total
levelized cost>
<Solar total
levelized cost>
<CCs total
levelized cost>
<Coal total
levelized cost>
<Offshore
wind total
levelized cost>
Cb
Cb to L
Cs
Market share
biomass
Market Share
Solar
Cs to L
Ccc toL
Market Share
CCs
Ccc
<Cs>
<Ccc>
Sum of Cost to L
power
Ccoal to L
Ccoal
Cw to L
Cw
Cmhy
Cmhy to L
<Fuel Cell total
levelized cost>
<Offshore
Switch>
Market Share
Coal
Market Share
Offshore Wind
Market Share Fuel
Cell
Weighted Aver Cost
of New Capacity
<Ccoal>
<Cw>
<Cmhy>
Market Prices ($/mwh)
100
80
60
40
20
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Year
Price : FIT
Price simulated in previous Qr : FIT
Price simulated over previous Yr : FIT
Weighted Aver Cost of New Capacity : FIT
Capacity Under Construction (endogenous)
Feed in Tariffs & the Gov. Estimate of the SMP
10,000
100
7,500
5,000
50
2,500
0
2004
0
2004
2006
2008
2010
Year
2012
2014
2006
2008
2016
2010
Year
2012
2014
2016
New CCs under construction : FIT
New Coal under construction : FIT
New Wind under construction : FIT
New Mini Hydro under construction : FIT
New Biomass under construction : FIT
Feed In Tariff for Biomass : FIT
Feed in Tariff for Mini Hydro : FIT
Feed in Tariff for Wind : FIT
Government estimate of SMP : FIT
Market Shares of New Constrution
Renewable Gen. as Fr of Total
1
0.4
0.3
0.5
0.2
0
2004
0.1
2006
2008
Market Share CCs : FIT
Market Share Coal : FIT
Market Share Wind : FIT
Market Share Mini Hydro : FIT
Market Share Biomass : FIT
2010
Year
2012
2014
2016
0
2004
2006
2008
2010
Year
Fr of Gen from FIT Renewables : FIT
2012
2014
2016
Cumulative Cost of Wholesale Electricity and the FIT
400,000
300,000
200,000
100,000
0
2004
2006
2008
2010
Year
2012
Cumulative Cost of Wholesale Electricity and the FIT : Base Case
Cumulative Cost of Wholesale Electricity and the FIT : FIT
Cumulative Cost of Wholesale Electricity and the FIT : 3 % annual growth
Cumulative Cost of Wholesale Electricity and the FIT : Gas CCs
2014
2016
Change in Government Policy for
Renewable Energy: RPS Adaptation
instead of FIT from 2012
Economies of Scale,
Scope, Learning Effect
in Wind Power Vendor
In case of Wind Power,
•
Government policy is pursuing Wind
Market expansion and bring up the
Competitive Wind TBN Vendors in Korea
•
Domestic market is developed to have
generation companies fulfill their
obligations of RPS and for the test bed
for domestic vendors
•
REC (Renewable Energy Certificate) is
being developed to compensate the
economics of Renewable Energy
Producers
Unit Cost of
Renewable
+
Order of
Renewable
Energy
+
Economics of
Renewable
+
Investment in
Renewable
+
+
RPS
-
Market Size in
Renewable
Market Share of
Renewable
REC (Renewable Energy Credit), RECs (Renewable Energy Certificates), Green Tags,
TRCs (Tradable Renewable Credits), Renewable Energy Attributes
FIT
REC
Economics of
Fossil Fuel
Oil Price
Wind Power Market Environment in Korea :
Total Installation and Annual MW addition
14
Analysis
Wind Target (GW-Year)
12
Drivers
RPS Target (GW-Year)
10
8
•
RPS Enforcement to Generation
Companies: 3% of total
Generation until 2012 and 10%
until 2030 (Government Police
Goal)
•
Possible Supply Technology for
this requirement is Offshoring
Wind Power
6
4
2
50
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
0
Annual Capacity Addition (GW)
Total Wind Capacity (GW)
40
Insights
30
20
•
Annual 400MW addition in 2010,
annual 800MW new addition in
2012.
•
Annual 3-4GW Capacity addition
after 2020 will be needed
10
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
0
Korean Wind Turbine Supplier
Challenges to Export
•
•
Lack of Track Record
No Experience to Export
•
•
Active Investment by Ship
Building Companies
M&A and Share Acquisition
World shipbuilding production by Top10 shipyard
Top10 shipyard CGT
0
5000000 10000000 15000000 20000000
Date by Dec 31th, 2007
Shipyard will build Chinese wind plant (April 02, 2010)
Korea’s Hyundai Heavy Industries Co. said yesterday it had signed a deal with a Chinese state-run power comp
any to set up a joint venture to produce turbines for wind power generators in China.
The world’s leading shipbuilder clinched the deal with Datang Shandong Power Generation Co., an affiliate of
China Datang Corp.
The joint venture will be funded 80 percent by Hyundai Heavy and the rest by the Chinese power firm, the shi
pbuilder said.
The plant, to be built in Weihai, China’s Shandong Province, is projected to start producing turbines with a gen
erating capacity of 2 megawatts in January 2011, Hyundai Heavy said.
Shipbuilder signs Canada power deal (March 09, 2010)
Daewoo Shipbuilding & Marine Engineering Co., a Korean shipyard, said yesterday that it plans to esta
blish a joint venture with the Canadian province of Nova Scotia to build a wind farm.
The Korean firm will hold a 51-percent stake in the venture, with the remainder to be owned by Nova
Scotia. The farm will call for the production of 600 wind turbine blades and 250 towers annually. In Aug
ust last year, the shipyard took over DeWind Inc., a U.S. wind power company, as part of efforts to dive
rsify its revenue sources amid falling orders.
Results expected from the Government Policy
• Huge Capital Investment equal to $10 Billion in 2012, $48
Billion until 2030 in Wind Industry until 2012 is required
in Korean Wind Market
• In the wind TBN supply prospective, new ship building
companies such as Samsung, Hyundae, Daewoo, and STX
will play a major role to supply domestic offshoring TBN
and export Wind TBN to foreign demands.
• The government policy to catch two rabbits using two
feedback loops will be optimistic because of the
implementation of RPS and REC.
Key Issues arising from the government renewable energy Policy
•
Can wind power industry play a major role in green
growth?
•
How to overcome the difficulties expected from the
follower position?
•
Is government policy to support wind power industry
such as RPS (test bed) effective?
•
What kind of business model do we need to model
this policy?
Factors to affect TBN Choice
•
•
•
•
Exchange Rate
Vertical Integration
Economies of Scale
Manufacturing Efficiency
•
•
Economies of Scale
Production Portfolio
(Core Model + Track Record)
•
•
TBN Design Spec.
Various TBN Model
(Site Specification)
•
•
•
•
Production
Supply Chain Effectiveness
Economies of Scale
Manufacturing Efficiency
•
•
2-3 years Warranty
O&M Warranty
•
•
Control System
Machine Efficiency
Wind IPP’s Economics Factors
•
Government Policies such as FIT, Goal, Subsidies
•
Wind Velocity
•
Technical Performance
•
Power Sale Price ($/kWh)
•
Investment Volume
•
Grid Connection
•
Land Lease
•
Capital Cost (Equity- ROE- Expectation& Debt- Interest Rate)
•
O & M Service
•
Insurance
•
Administration (technical& Financial/ Insurances/ taxes + Fees)
Demand in
Foreign Market
+
+
Market Share in
Global Market
Wind TBN Cost due to
Economies of Scale, Learning
Effect, R&D Investment
-
-
Track Record of
Wind TBN K-Model
Wind TBN
K-Model Order
+
+
Wind Power Cost Due
to Economies of Scale
+
+
-
Attractiveness of Other
Wind TBN Models
Attractiveness of
Wind Power
K-Model
Construction of Wind
Power in Domestic
Market
+
+
Demand of Wind
Power in Domestic
Market
Market Share
of Wind Power
+
Strength of
Learning Curve
Unit Cost
Initial Cumulative
Operation Experience
Learing Effect
on Cost
O&M Cost
Learning
Curve
Increasing
Rate of
Learning
Capital Cost
Application
Rate
Order Rate in
Domestic Market
Wind TBNs
under
Approval
Approval
Rate
Attractiveness
of K-Model
Wind TBNs
under
Construction
Construction
Completion Rate
Wind TBNs
under
Operation
Retirement
Rate
Sensitivity of
Attractiveness to
Network Effect
Network Size
Attractiveness
Wind TBNs with no
Network Effect
Innovation
Attractiveness
<Unit Cost>
Sensitivity of
Innovation
Attractiveness
Learning
Refernece
Unit Cost