Cost of Power 2010 vFinal

[Pages:147]ENERGY

The Cost of Power Generation

The current and future competitiveness of renewable and traditional technologies By Paul Breeze

Paul Breeze

Dr Paul Breeze has specialized in the electricity sector for the past 25 years. He is contributing editor for the monthly international magazine for the power industry, Modern Power Systems, and as freelance writer he has contributed to The Financial Times, The Guardian, The Daily Telegraph, The Observer and The Economist. In addition to the power sector, Paul Breeze's interests include science and the computer industry.

Copyright ? 2010 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved. Reproduction or redistribution of this Management Report in any form for any purpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not of Business Insights. Business Insights Ltd accepts no liability for the accuracy or completeness of the information, advice or comment contained in this Management Report nor for any actions taken in reliance thereon. While information, advice or comment is believed to be correct at the time of publication, no responsibility can be accepted by Business Insights Ltd for its completeness or accuracy

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Table of Contents

The Cost of Power Generation

Executive summary

10

Introduction

10

Capital cost and levelized cost

10

Risk, volatility and liberalized electricity markets

11

Historical costs

11

Lifecycle analysis, CO2 emissions and the cost of carbon

12

Factors which distort the price of electricity

12

The cost of power

13

Chapter 1

Introduction

16

Chapter 2

Capital cost and levelized cost:

the traditional approach to

estimating the cost of power

20

Introduction

20

Capital costs

23

Regional capital cost fluctuations

31

Capacity factor

32

Financing capital cost

34

The levelized cost of electricity model

35

Interest, discount rate and present value

36

Levelized cost estimates

38

Chapter 3

Risk, volatility and liberalized

electricity markets

48

Introduction

48

Fuel prices and fuel price volatility

50

iii

Fuel price risk and risk modeling

60

Electricity price spikes

63

Risk hedging

66

Portfolio planning theory

66

Chapter 4

Historical costs of electricity,

capital cost and the technology

learning effect

72

Introduction

72

Historical costs of electricity

72

Retail cost and levelized cost

78

Technology costs, the learning effect and economies of scale

80

Chapter 5

The environment: lifecycle

analysis, CO2 emissions and the

cost of carbon

90

Introduction

90

Lifecycle energy analysis

91

Lifecycle CO2 emissions

94

Placing a price on carbon

98

Actual carbon costs: the European Trading Scheme

100

Chapter 6

Introduction Structural costs Grid extension Balancing costs Capacity credit Externalities Subsidies Fuel subsidies Tariff subsidies

Factors which distort the price of

electricity

104

104 105 107 109 112 114 119 120 125

iv

Other distorting mechanisms: quotas and taxes

Chapter 7

The cost of power

Introduction The future of the liberalized electricity market Market trends Levelized cost trends Index

126

130

130 132 134 135 144

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List of Figures

Figure 2.1: Figure 2.2: Figure 2.3: Figure 2.4: Figure 2.5: Figure 3.6: Figure 3.7: Figure 3.8: Figure 3.9: Figure 3.10: Figure 3.11: Figure 3.12: Figure 4.13: Figure 4.14: Figure 4.15:

Figure 4.16: Figure 4.17: Figure 4.18: Figure 4.19: Figure 5.20: Figure 5.21: Figure 5.22: Figure 6.23: Figure 6.24: Figure 6.25: Figure 6.26: Figure 6.27:

Figure 6.28: Figure 6.29: Figure 7.30: Figure 7.31: Figure 7.32:

EIA overnight capital cost of power generating technologies (2008$/kW), 2009 26

Lazard capital cost comparison for generating technologies ($/kW), 2009

28

Present value of one million dollars as a function of discount rate

37

Lazard levelized cost comparison for generating technologies ($/MWh), 2009

40

EIA levelized cost of electricity for new plants entering service in 2016 ($/MWh) 43

Annual average world oil prices ($/barrel), 2010

52

Annual coal prices ($/tonne), 2009

54

Steam coal for electricity generation ($/tonne), 2008

55

Annual gas prices ($/107kcalories), 2009

57

Natural gas prices for electricity generation ($/107kilocalories), 2008

58

US natural gas prices for electricity generation ($/thousand cubic meters), 2009 60

Spot prices for electricity in California ($/MWh), 2001

65

Domestic retail electricity prices ($/MWh), 2007

74

Industrial retail electricity prices ($/MWh), 2007

75

Predicted prices for gas and electricity in 2008 from earlier US Annual Energy

Outlooks (%), 2009

79

Global solar photovoltaic module costs ($/W), 2008

82

Global solar cell production (MW), 2009

83

US wind turbine installation costs ($/kW), 2008

85

Annual wind turbine capacity additions (MW), 2009

86

Energy payback ratios based on lifecycle assessment

93

CO2 emissions from power generating technologies (t/GWh)

97

EU Emission Trading Scheme carbon prices (/tonne CO2), 2010

101

Grid extension costs as a function of wind penetration

108

Balancing costs for 20% grid wind penetration with energy storage

111

Typical renewable capacity credits in California (%)

113

External costs of power generation (/MWh)

116

Australian external cost estimates for power generation technologies (US$/kW), 2009

118

Economic value of fuel subsidies in non-OECD countries ($bn), 2006

123

US energy subsidies ($m), 2007

124

California Energy Commission levelized cost ($/MWh), 2009

136

UK levelized cost estimates (?/MWh), 2010

139

Levelized cost predictions for plants entering service in 2018 ($/MWh)

141

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List of Tables

Table 2.1: Table 2.2: Table 2.3: Table 2.4: Table 2.5: Table 2.6: Table 3.7: Table 3.8: Table 3.9: Table 3.10: Table 3.11: Table 3.12: Table 3.13: Table 4.14: Table 4.15: Table 4.16: Table 4.17:

Table 4.18: Table 4.19: Table 4.20: Table 4.21: Table 5.22: Table 5.23: Table 5.24: Table 6.25: Table 6.26:

Table 6.27: Table 6.28: Table 6.29: Table 6.30: Table 6.31: Table 6.32: Table 7.33: Table 7.34: Table 7.35:

EIA overnight capital cost of power generating technologies, 2009

25

Lazard capital cost comparison for generating technologies ($/kW), 2009

28

EIA overnight capital cost trends for power generating technologies ($/kW), 2010 30

Lazard levelized cost comparison for generating technologies ($/MWh), 2009

39

EIA levelized cost of electricity for new plants entering service in 2016 ($/MWh) 42

Mean levelized costs from published global figures (?/MWh), 2007

45

Annual average world oil prices ($/barrel), 2010

51

Annual coal prices ($/tonne), 2009

53

Steam coal for electricity generation ($/tonne), 2008

55

Annual gas prices ($/107kcalories), 2009

57

Natural gas prices for electricity generation ($/107kilocalories), 2008

58

US natural gas prices for electricity generation ($/thousand cubic meters), 2009 59

Spot prices for electricity in California ($/MWh), 2001

64

Domestic retail electricity prices ($/MWh), 2007

74

Industrial retail electricity prices ($/MWh), 2007

75

Retail electricity prices in EU, first quarter 2009, excluding taxes (/MWh)

77

Predicted prices for gas and electricity in 2008 from earlier US Annual Energy

Outlooks (%), 2009

79

Global solar photovoltaic module costs ($/W), 2008

81

Global solar cell production (MW), 2009

83

US wind turbine installation costs ($/kW), 2008

84

Annual wind turbine capacity additions (MW), 2009

86

Energy payback ratios based on lifecycle assessment*

93

Lifecycle emissions from power generating technologies

96

EU Emission Trading Scheme carbon prices (/tonne CO2), 2010

101

Grid extension costs as a function of wind penetration

108

Additional annual transmission and distribution costs in 2020 associated with

increasing UK renewable contribution above 10 per cent after 2010

109

Balancing costs for 20% grid wind penetration with energy storage

111

Typical renewable capacity credits in California (%)

113

External costs of power generation (/MWh)

115

Australian external cost estimates for power generation technologies, 2009

118

Economic value of fuel subsidies in non-OECD countries ($bn), 2006

122

US energy subsidies ($m), 2007

124

California Energy Commission levelized cost ($/MWh)

136

UK levelized cost estimates (?/MWh), 2010

138

Levelized cost predictions for plants entering service in 2018 ($/MWh)

140

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