Abstract
Since the publication by Business Insights of the last report into the cost of
electricity there has been a massive change in global economic conditions as a
result of the ramifications of the 2008 banking crisis. This has caused fuel
and commodity prices to fall, as well as leading to a severe tightening in
lending. The power sector still remains an attractive area for investment but
investors are now more cautious than previously. Global warming continues to
be a dominant theme but alongside that there is a new pragmatism about fossil
fuel combustion which will continue to dominate the power sector for another
generation at least. Meanwhile renewable sources of generation continue to
advance, led principally by wind power but with solar capacity growing rapidly
too, though from a small base.
Electricity is the most important energy
source in the modern age but also the most ephemeral, a source that must be
consumed as fast as it is produced. This makes modeling the economics of
electricity production more complex than carrying out the same exercise for
other products. Accurate modeling is important because it forms the basis for
future investment decisions. In the electricity sector two fundamental
yardsticks are used for cost comparison, capital cost and the levelized cost
of electricity. The latter is a lifecycle cost analysis of a power plant that
uses assumptions about the future value of money to convert all future costs
and revenues into current prices. This model is widely used in the power
industry but has some significant failings, particularly in its ability to
handle risk. Even so these two measures, together, are the first consulted
when power sector investment and planning decisions are to be made.
Key features of this report
* Analysis of power generation costs concepts, drivers and components.
* Assessment of the electricity sectors two fundamental yardsticks
used for cost comparison, capital cost and the levelized cost of electricity,
in analysing power generation costs.
* Insight relating to the most
innovative technologies and potential areas of opportunity for
manufacturers.
* Examination of the key power generation
technologies costs.
* Identification of the key trends shaping the
market, as well as an evaluation of emerging trends that will drive innovation
moving forward.
Scope of this report
* Realize up to date competitive intelligence through a comprehensive
power cost analysis in electricity power generation markets.
*
Assess power generation costs and analysis - including capital costs,
overnight costs, levelized costs and risk analysis.
* Identify which
key trends will offer the greatest growth potential and learn which technology
trends are likely to allow greater market impact.
* Compare how
carbon costs will effect the industry in direct comparisons or renewable and
conventional technologies using financial and life cycle analysis .
* Quantify structural costs of grid extension, the effect of drivers,
legislation and tariffs, installation costs, and the cost of electricity.
Key Market Issues
* Environmental requirements:- The volume of fossil fuels burnt for
power and heat generation have continually grown in line with economic,
infrastructure and population growth. The resulting growth of carbon dioxide
emissions globally has been linked to global warming and thereon climate
change. Political, environmentalist and consumer pressures to lower carbon
emissions is creating a path for lower carbon emitting power generation
technologies.
* The cost of power:- The levelized cost of power
remains an imperfect tool for comparing generating technologies but it is
probably the best available provided its limitations are taken into account.
Current levelized costs and levelized cost trends show overall prices rises
over the past decade but some changes in relative cost too. Meanwhile the
liberalized energy markets of the world have shown increasing signs of the
type of cyclical behavior notable in financial markets. This and other factors
have led to questioning of the fitness of the open market model to the
provision of low cost stable electricity supplies.
* Life cycle
analysis:- Lifecycle energy analysis shows how efficient a power plant is at
using resources in order to produce electricity. Meanwhile lifecycle emission
analysis shows how much pollution a power plant produces for each unit of
electricity it generates. Among these latter analyses, lifecycle CO2 emissions
have become a subject of global interest.
* Carbon dioxide emission
management costs:- Carbon emissions are becoming part of the economic
equation, and the cost of emitting a tonne of CO2 will be an important factor
in determining future power plant economics. The introduction of carbon
capture and storage to conventional technologies such as coal effect the cost
of power generated by these plants, where renewable technologies such as wind
and solar have no fuel costs, but require additional structure and balancing
costs.
Key findings from this report
* Wind power has continued to expand rapidly with installed global wind
capacity reaching 159GW at the end of 2009.
* The overnight cost of
a simple gas turbine power plant may be as low as $600/kW.
* The
cheapest technology to install is an open cycle gas turbine. An advanced unit
of this type has an installed cost of $617/kW while a conventional unit of the
same type has an installed cost of $653/kW.
* The installed cost of
the peak load distributed generation is $1,601/kW while base load distributed
generation will cost $1,334/kW based on these predictions.
* A solar
thermal plant is expected to cost $4,798/kW while a solar photovoltaic plant
is the most expensive of all with a capital cost of $5,879/kW.
Key questions answered
* What are the drivers shaping and influencing power plant development
in the electricity industry?
* What are the life cycle carbon
emissions of the various power generation technologies?
* What is
power generation going to cost?
* Which power generation technology
types will be the winners and which the losers in terms power generated, cost
and viability?
* Which power generation types are likely to find
favor with manufacturers moving forward?
* Which emerging
technologies are gaining in popularity and why?
Table of Contents
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
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 Factors which distort the
price of electricity 104
Introduction 104
Structural costs 105
Grid extension 107
Balancing costs 109
Capacity credit 112
Externalities 114
Subsidies 119
Fuel subsidies 120
Tariff
subsidies 125
Other distorting mechanisms: quotas and taxes 126
Chapter 7 The cost of power 130
Introduction 130
The future of the
liberalized electricity market 132
Market trends 134
Levelized cost
trends 135
Index 144
List of Figures
Figure 2.1: EIA overnight
capital cost of power generating technologies (2008$/kW), 2009 26
Figure
2.2: Lazard capital cost comparison for generating technologies ($/kW), 2009
28
Figure 2.3: Present value of one million dollars as a function of
discount rate 37
Figure 2.4: Lazard levelized cost comparison for
generating technologies ($/MWh), 2009 40
Figure 2.5: EIA levelized cost of
electricity for new plants entering service in 2016 ($/MWh) 43
Figure 3.6:
Annual average world oil prices ($/barrel), 2010 52
Figure 3.7: Annual
coal prices ($/tonne), 2009 54
Figure 3.8: Steam coal for electricity
generation ($/tonne), 2008 55
Figure 3.9: Annual gas prices
($/107kcalories), 2009 57
Figure 3.10: Natural gas prices for electricity
generation ($/107kilocalories), 2008 58
Figure 3.11: US natural gas prices
for electricity generation ($/thousand cubic meters), 2009 60
Figure 3.12:
Spot prices for electricity in California ($/MWh), 2001 65
Figure 4.13:
Domestic retail electricity prices ($/MWh), 2007 74
Figure 4.14:
Industrial retail electricity prices ($/MWh), 2007 75
Figure 4.15:
Predicted prices for gas and electricity in 2008 from earlier US Annual Energy
Outlooks (%), 2009 79
Figure 4.16: Global solar photovoltaic module costs
($/W), 2008 82
Figure 4.17: Global solar cell production (MW), 2009 83
Figure 4.18: US wind turbine installation costs ($/kW), 2008 85
Figure
4.19: Annual wind turbine capacity additions (MW), 2009 86
Figure 5.20:
Energy payback ratios based on lifecycle assessment 93
Figure 5.21: CO2
emissions from power generating technologies (t/GWh) 97
Figure 5.22: EU
Emission Trading Scheme carbon prices (€/tonne CO2), 2010 101
Figure
6.23: Grid extension costs as a function of wind penetration 108
Figure
6.24: Balancing costs for 20% grid wind penetration with energy storage
111
Figure 6.25: Typical renewable capacity credits in California (%)
113
Figure 6.26: External costs of power generation (€/MWh) 116
Figure 6.27: Australian external cost estimates for power generation
technologies (US$/kW), 2009 118
Figure 6.28: Economic value of fuel
subsidies in non-OECD countries ($bn), 2006 123
Figure 6.29: US energy
subsidies ($m), 2007 124
Figure 7.30: California Energy Commission
levelized cost ($/MWh), 2009 136
Figure 7.31: UK levelized cost estimates
(£/MWh), 2010 139
Figure 7.32: Levelized cost predictions for plants
entering service in 2018 ($/MWh) 141
List of Tables
Table 2.1: EIA
overnight capital cost of power generating technologies, 2009 25
Table
2.2: Lazard capital cost comparison for generating technologies ($/kW), 2009
28
Table 2.3: EIA overnight capital cost trends for power generating
technologies ($/kW), 2010 30
Table 2.4: Lazard levelized cost comparison
for generating technologies ($/MWh), 2009 39
Table 2.5: EIA levelized cost
of electricity for new plants entering service in 2016 ($/MWh) 42
Table
2.6: Mean levelized costs from published global figures (£/MWh), 2007
45
Table 3.7: Annual average world oil prices ($/barrel), 2010 51
Table 3.8: Annual coal prices ($/tonne), 2009 53
Table 3.9: Steam coal for
electricity generation ($/tonne), 2008 55
Table 3.10: Annual gas prices
($/107kcalories), 2009 57
Table 3.11: Natural gas prices for electricity
generation ($/107kilocalories), 2008 58
Table 3.12: US natural gas prices
for electricity generation ($/thousand cubic meters), 2009 59
Table 3.13:
Spot prices for electricity in California ($/MWh), 2001 64
Table 4.14:
Domestic retail electricity prices ($/MWh), 2007 74
Table 4.15: Industrial
retail electricity prices ($/MWh), 2007 75
Table 4.16: Retail electricity
prices in EU, first quarter 2009, excluding taxes (€/MWh) 77
Table
4.17: Predicted prices for gas and electricity in 2008 from earlier US Annual
Energy Outlooks (%), 2009 79
Table 4.18: Global solar photovoltaic module
costs ($/W), 2008 81
Table 4.19: Global solar cell production (MW), 2009
83
Table 4.20: US wind turbine installation costs ($/kW), 2008 84
Table 4.21: Annual wind turbine capacity additions (MW), 2009 86
Table
5.22: Energy payback ratios based on lifecycle assessment* 93
Table 5.23:
Lifecycle emissions from power generating technologies 96
Table 5.24: EU
Emission Trading Scheme carbon prices (€/tonne CO2), 2010 101
Table
6.25: Grid extension costs as a function of wind penetration 108
Table
6.26: Additional annual transmission and distribution costs in 2020 associated
with increasing UK renewable contribution above 10 per cent after 2010 109
Table 6.27: Balancing costs for 20% grid wind penetration with energy storage
111
Table 6.28: Typical renewable capacity credits in California (%)
113
Table 6.29: External costs of power generation (€/MWh) 115
Table 6.30: Australian external cost estimates for power generation
technologies, 2009 118
Table 6.31: Economic value of fuel subsidies in
non-OECD countries ($bn), 2006 122
Table 6.32: US energy subsidies ($m),
2007 124
Table 7.33: California Energy Commission levelized cost ($/MWh)
136
Table 7.34: UK levelized cost estimates (£/MWh), 2010 138
Table 7.35: Levelized cost predictions for plants entering service in 2018
($/MWh) 140
