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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
The Cost of Power Generation
Executive summary 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
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
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
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
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
Structural costs 105
Grid extension 107
Balancing costs 109
Capacity credit 112
Fuel subsidies 120
Tariff subsidies 125
Other distorting mechanisms: quotas and taxes 126
Chapter 7 The cost of power 130
The future of the liberalized electricity market 132
Market trends 134
Levelized cost trends 135
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 (euro/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 (euro/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 (pounds Sterling/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 ($/MWh) 42
Table 2.6: Mean levelized costs from published global figures (pounds Sterling/MWh), 2007 45
Table 3.7: Annual average world oil prices ($/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 (euro/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 (euro/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 (euro/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 ($/MWh) 136
Table 7.34: UK levelized cost estimates (pounds Sterling/MWh), 2010 138
Table 7.35: Levelized cost predictions for plants entering service in 2018 ($/MWh) 140
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