Click on all small graphs to enlarge them.
All sources listed at the end of the diary
Now, the main alternatives for power generation are well known: coal-fired plants, gas-fired plants, nuclear, hydro and wind. There are other renewables sources, and various subcategories in the above, but they represent most of the installed capacity. Hydro, being a mature industry with few prospects in the West, will not be discussed here.
Coal-fired plants are one of the oldest ways to generate power, and they still represent most of the generation capacity in a number of countries, including the USA (more than 50%) and China (more than 80%).
- initial investments are moderate, typically 1000-1200 $/kW, but plants can be of many different sizes, so the absolute level of investment is quite variable;
- fuel costs have historically been low, and are expected to remain so to an extent, as coal is considered to be plentiful in a number of countries;
- externalities are the big outstanding issue for coal, as it is a highly polluting source of energy (both during mining and during generation), and the worst producer of greenhouse gases;
Gas-fired plant has been the big story of the last decade, with massive investment in a number of countries, especially the USA (see graph below), and it has reached a significant share of generation (20% in the USA) and often acts as the price setter for wholesale electricity as it usually is the marginal cost producer (i.e. that with the highest short term cost, and thus the one setting the price to provide a given number of kWh at any given moment)
- initial investments are low, typically 500 $/kW, and size is quite flexible, which makes it possible to amortise that investment fairly easily, making the technology a favorite of the financial markets and thus of private power producers;
- fuel costs are linked to the price of natural gas (duh!), which, until recently, was quite low. In the past 2 years, that price has suddenly shot up enormously, making the sector much less competitive (see more about that further down);
- pollution is much less than with coal as natural gas is mostly methane and burns pretty cleanly, but that combustion generates carbon dioxide and contributes to carbon emissions. The issue of security of supply of gas has come to the forefront recently, with fears of shortages in both the US and the UK, due to faster than expected field depletion (and, in the US, damage to Gulf of Mexico production facilities)
Nuclear power plants were massively developped in the 70s following the first oil crisis, and provide about 20% of power in the rich world (and up to 85% in France). There has been little investment in the sector in the past 20 years as fears of accidents à la Chernobyl or Three Mile Island and concern about waste storage prevailed; the recent energy price hikes are putting nuclear energy back on the agend a of a number of politicians.
- initial investment is heavy, typically 1700-2000 $/kW, and plant size is necessarily big (1,000 MW or more), thus making the absolute investments extremely high (at least $2 bn per plant);
- fuel costs are still fairly low for now;
- externalities are hard to quantify. Direct carbon emissions are negligible (but those linked to construction subject to much more controversy). Pollution is low, but the risk of accident, terrorism, or misuse of fissile materials (low probability, but potentially high impact) is harder to assess, and decommissoning and waste storage push costs onto the future.
Wind is the renewable technology that has developped fastest in recent years, as it is not very far from being cost competitive and its development has been supported by governments in a number of countries.
- initial investments are high, around 1000 $/kW. This is high because a kW of wind power produdes fewer kWh (typically, a third or a quarter as many) than a kW of coal, nuclear of gas)-fired power, due to the intermittent nature of wind. Thus the cost per kWh over the life of the plant of that investment is much higher. On the other hand, it is possible to invest small amounts as individual wind turbines are relatively cheap ($2-3M today for modern models);
- fuel costs are nil, as is the case for most renewable sources;
- externalities are extremely small. There is no pollution, very little impact on the environment (impact on birds and on landscapes can be a issue in some locations), and there are no carbon-emissions. On the other hand, the fact that the supply is intermittent and unpredictable can create a burden on the network that needs to be properly accounted for.
To get back to the main hypotheses listed above the fold, we can see that they have the following impact:
Interest rates / financing costs
The sources most sensitive to the discount rate used are, in decreasing order, wind, nuclear, coal and gas. Thus, making the hypothesis of a high financing cost structurally favors gas and coal against nuclear and wind. Conversely, providing cheap financing is most helpful to wind and nuclear.
It is thus not neutral at all to campaign for private ownership of generation assets, as it will always skew investments towards gas-fired and coal-fired plants, unless you have - gasp - specific regulations or -double gasp - subsidies that encourage investments in other sectors like renewables (or nuclear).
To show you how significant the interest rate is, here are some calculations made by the French Ministry of industry (click to enlarge):
Changing from a 5% rate (typically the rate at which governments or public bodies can use to borrow long term) to 8% (a more typical rate for the private sector) increases costs:
- for gas-fired plants by less than 5%
- for coal-fired plants by a bit more than 10%
- for nuclear plants by more than 30%
- for windpower by just under 20%
Thus equal interest rates are not enough to compare competing power sources, the absolute level chosen matters as well.
This graph tells us where the mental world of most investors in the sector is:
(Note: you need to multiply by approx. 1.5 to have prices in $/mbtu. Sorry for the poor quality of this graph.)
For more than 10 years, the fuel costs for both coal and gas were fundamentally flat, and if there was any trend, it was slightly downwards. Price risk on the fuel supply thus became a non-question for investors and the bankers lending them money. Coal and gas are cheap - and are thus expected to remain so (bankers are human too: depsite writing everywhere disclaimers saying that the past is no indication of future trends, they tend to believe it themselves...)
And as fuel costs constitute a large share of the production cost of coal- and gas-fired plants, the overall cost of the electricity form these sources was thus seen as low and stable, a nice combination risk-wise:
(This is from the French study mentioned above; don't look at absolute levels, but look at the relative importance of the sub-components: fuel is most important for gas, somewhat important for coal and slightly less for nuclear - and that's with 2003 price estimates, i.e. before the recent increases).
The evolution of the past 3 years has thrown out of the window all hypotheses on fuel prices (via Freecharts.com)::
The situation seemed to go back to normal after the Enron-induced crisis in 2000, but since 2002 the price has been going up relentlessly, with additional spikes which never come back down to where they started.
If you consider that the fraction above of the cost of gas-fired power that came from fuel cost was based on gas costing around 3$/mbtu, you immediately understand how gas-fired power has suddenly become a hell of a lot more expensive. You need to more than double the fuel component, which basically doubles the total cost... (and the current lowish prices after the Katrina peaks last autumn are due to the unseasonably warm winter so far).
Coal and uranium prices have also doubled, and, while the impact is not as massive, it is not trivial either.
The fact is that fuel prices have changed so much in the past 3 years that it has become really, really hard to make long term estimates of what these costs will be over the next 10-20 years, the period necessary to assess actual kWh production costs. Most available studies (all the links are provided throughout or at the bottom of the diary) still use pre-spike prices for natural gas and coal, and thus underestimate fuel costs for them.
Again, a very important hypothesis to keep in mind.
Externalities: carbon costs
One of the biggest uncertainties today on the price of electricity in a number of countries, especially those that use a lot of coal or gas, is how to take into account the impact of global warming. As pretty much everybody now agrees that it is caused by greenhouse gas emissions, and that the main culprit is carbon dioxide, power generation is right in the middle of it as coal- and gas-fired plants are amongst the biggest emitters of the stuff.
The numbers below come form one study, which may not be the final say on the topic, but it gives an idea of the orders of magnitude we are talking about: 1 MWH of electricity causes the emission of 1 ton of CO2 in a coal plant and half a ton in a gas-fired plant:
If we want to limit carbon emissions, as everybody seems to agree is a good idea, the solution will be to tax or to trade carbon emissions. Europe, as part of the Kyoto protocol, has set up a market for carbon emissions which has begun to trade last year.
With these prices, we are already adding 20 $/MWh to the cost of coal-fired electricity, and 10$/MWh to that of gas-fired power. Again, not an unsignificant change...
The above graph, which comes from an English study by the Royal Academy of Engineering in 2004 (The Costs of Generating Electricity), shows that the carbon cost essentially negates the cost difference between coal-fired or gas-fired and wind (at pre-2003 fuel costs!). Do note however that this would be for a price of carbon double today's price, which is probably more than the actual estimated impact of carbon emissions on the environment, as estimated below.
This fascinating table from a comprehensive study conducted for the European Commission External Costs - Research results on socio-environmental damages due to electricity and transport, pdf) shows the estimated cost of externalities caused by various power sources:
(1 cEUR/kWh = 10 EUR/MWh and 10$/MWh, approximately)
Global warming has a large impact, but the health impact of hydrocarbon-fired plants is, again, by no means negligible. who pays for it? The power consumer, in cash, or the citizen, in degraded health?
Externalities: network costs
Wind has one thing going against it: its intermittence does not make it a fiable power source, which is a problem in so far as electricity cannot be stored and production has to match demand all the time. When production changes in random fashion, like windpower tends to do, the network must be able to absorb these variations, and this has a cost.
Various studies have been made, and they have been contradictory. some, as that by the Royal Academy of Engineers have extremely high values for that cost, while others (see box below) have concluded that costs would be quite low, i.e. no more than 2-4 $/MWh altogether for wind power below 20% of total production.
reports on the cost of connecting windfarms to the network
- GE Power systems energy consulting, the effects of integrating wind power on transmission system planning, reliability and operations, draft report phase 1, january 2004 ;
- California wind energy collaborative, California RPS integration cost analysis phase 1, december 2003 ;
- ESB national grid, impact of wind power generation in Ireland on the operation of conventional plant and the economic implications, february 2004 ;
- LEPII-EPE, l'intégration de la production intermittente dans les marchés électriques libéralisés, mars 2003 ;
- D. Milborrow, penalties for intermittent sources of energy, 2001 ;
- D. Millborow, the real costs and problems of intergrating wind, 2001 ; Pacificorp, modeling wind energy integration costs, june 2003 ;
- The Royal Academy of Engineering, the costs of generating electricity, march 2004
- Ilex consulting, quantifying the system costs of additional renewables in 2020, octobre 2002
That question will most likely be studied further in coming years as the share of wind power goes up; it should be noted that the UK electricity market is one of the few that imposes balancing costs (i.e. producers are penalised if their actual production deviates from their announced numbers at any moment of the day), and some players make money out of this balancing mechanism (by providing easily switched on or off capacity) and have an interest to see prices be high...
In any case, the fundamental questions are:
- what's the financing cost hypothesis?
- what's the fuel cost hypothesis?
- what externalities are priced in?
which coincide, explicitly or nor with a number of eminently political questions:
- is the sector State-owned, or strongly regulated? Are any sub-sectors encouraged by easy financing or similar schemes?
- what long term price hypotheses are you making? Who do you rely upon to provide security of supply?
- what regulations are applied with respect to pollution and carbon emissions?
And that's where we come to play. Our political campaigns to impose regulations or relax them will have real impacts on the cost of various sources, and on the investments made.
Speaking of which, here's a final, fun graph to feed your thoughts...
And with all this in mind, I'll post the various graphs that I have comparing prices in a future diary...
Electricity Production costs - centralised plants (DGEMP - French Ministry of industry, pdf, full study in French)
Electricity Production costs - decentralised plants (French Ministry of industry, pdf, English summary)
Electricity Production costs - decentralised plants (DGEMP - French Ministry of industry, pdf, full study in French)
Ten Steps to a Sustainable Energy Future (by Rudolf Rechsteiner)
The Costs of Generating Electricity (The Royal Academy of Engineering)
Energy subsidies in the EU: a brief overview (European Environmental Agency)
External Costs - Research results on socio-environmental damages due to electricity and transport (European Commission)