Sunday, February 8, 2009

Capital Cost Information

Over the past few weeks in class we have started to gain a sense of the energy resources available to us here in the United States and, more important, how long these resources could last if the United States were to consume them at our current rate of consumption. One of the more interesting sources we have covered is the abundance of natural gas trapped in shale rock formations across the US. Two of these major shales, the Barnett and the Marcellus, could continue to provide a huge source of our electricity for decades to come. To the fans of renewable resources, this is probably a mixed bag result: it's great that we have a cleaner fuel source than coal but nonetheless carbon dioxide will still be emitted. So why not more renewables for the grid?

One thing we have not covered in class (as of yet) are the capital resources required for generation technologies. One of the more interesting things I learned while working for El Paso corporation this summer was the wide swath of capital costs for generation technologies. In other words, what does it cost per dollar (in construction costs) to generate a megawatt hour of electricity from different generation sources? The Federal Energy Regulatory Commission put together a nice report this summer when energy prices were skyrocketing to address some of these issues. A presentation of this report can be found here. So let's take a look at some of the figures:

First off, we need to keep in mind that these figures were generated before the recession was in full effect but the major point still stands: it is very cheap to build a combined cycle nat gas plant relative to other generation technologies. In 2004 dollars we can see a CC gas plant had a very narrow range of estimated costs over just over $600/kW. Compare this to a wind turbine where costs range from $1000/kW to $1300/kW. These figures represent the costs for nameplate capacity- the maximum power deliverable. We must not forget to slap the requisite capacity factors on the costs. A good wind farm in the panhandle might have a capacity factor of roughly 35%, whereas a combined cycle plant in ERCOT may hit 70% (ERCOT is a heavily gas-fired generation ISO). So in layman's terms, the combined cycle plant is generating nearly twice the power on average of nameplate capacity that a wind farm will. Or to put it another way, divide the cost estimates above by respective capacity factors and you start to see why natural gas is a very desirable source for power going forward.

One may argue that the variable costs of renewables are nearly zero and in the long run this will be enough to recover the costs of a high capital investments. This may be true in an uncertain commodity environment but after the commodity bubble burst this summer it's going to be hard to beat natural gas:

Finally, and most important, the Achilles heal hampering renewable sources like wind and solar is their intermittent generation. Grid operators dispatch power as it is needed in a security constrained economic order. What this means is that the operator will continually dispatch the most cost effective generator that can meet load without compromising the integrity of the grid. We cannot call on wind and solar to dispatch power as needed; we simply manage a net load (load minus renewables) Power is consumed as it is generated; we do not have the ability to store this energy cost effectively in most balancing areas of the US grid. Admittedly, this is becoming easier for grid operators with advanced IT solutions, but there is simply a limit to how much renewable penetration we can attain with such small geographical balancing areas. I intend to cover this in another post sometime down the road that covers the challenges of major transmission buildouts.



rmk said...

It is great to have the discourse on why we cannot immediately or in the near-term cut ourselves off from conventional power plants. Perhaps the next question is, how far ahead will we look? While there are numerous conventions for the time scale of cost-benefit analyses, do we really think that we and the rest of the world can produce and consume energy in 20, 30, 50 years the way we do today?

How should we arrange a balanced approach between near-term cost effective solutions and the real need for fundamental changes?

While I have more questions than answers, it seems that we can easily identify the weaknesses of our current renewable technology and develop an appropriate strategy for ongoing innovation.

Chris Smith said...

When comparing power generation technologies it is very important to find the most recent and transparent cost estimates. The report released by FERC this past summer regarding capital costs of power technologies is one of the better reports that I have seen that captures the skyrocketing costs of builiding new power generation facilities. Rising capital costs have been felt industry-wide for all power generation technologies due to rising construction, material and labor costs. Policymakers and the public commonly look towards the Energy Information Administration for cost estimates. The EIA is the statistical research agency within the Department of Energy and is in charge of providing "policy-independent data, forecasts, and analyses to promote sound policy making, efficient markets, and public understanding regarding energy and its interaction with the economy and the environment." However, the EIA's cost estimates are consistently outdated and traditionally underestimate capital costs. This provides a major disservice to policymakers and the public. The following link provides EIA's most recent cost estimates (in 2007 dollars) for costs associated with power generation technologies and facilities, including capital costs:

For example, capital costs for a new advanced nuclear plant are estimated at $2,143/kilowatt nameplate capacity. However, the FERC report estimates nuclear plant capital costs lying somewhere between $4,500 and $8,000! This is a gross difference in estimation and one that can seriously confuse policymakers and the public. With so much discussion regarding nuclear expansion in the US we need a more clear representation of the true costs of nuclear expansion. The following is the best report that I have seen regarding costs (including capital costs) associated with new power generation technologies:

This report was released by the Congressional Research Service this past fall and estimates capital costs based upon actual recently completed or proposed power plant projects. Their analysis estimates new nuclear plant capital costs at $3,930/kW.

Another helpful report on the compartive costs of power generation technologies is a report released by the California Energy Commission in 2007 that compares these technologies using the measure for levelized costs of electricity. Levelized costs of electricity (measured in $ per Megawatt-hour or cents per kilowatt-hour: actual electricity generated) is an industry term that represents the constant annual cost that is equivalent on a present-value basis to the actual annual costs, which are themselves variable. Therefore, levelized cost of electricity provides a comprehensive measure to compare power generation technologies with all costs included (capital, variable costs, and a host of other factors). Here is the report from the CEC:

Comparing the costs of power generation technologies is a difficult task and the methodologies behind these comparisons need to be transparent and adequately capture all of the cost factors that influence the cost of electricity. Policymakers and the public should be wary of EIA estimates and continue to look for more recent reports such as the FERC report acknowledged in the original post and the CEC and CRS reports that I have referred to in this comment posting.