Clean Energy Business and Policy Beijing Institute of Technology - - PowerPoint PPT Presentation

Clean Energy Business and Policy Beijing Institute of Technology School of Management and Economics Fall 2014 Lecture #3 (Supplement): Indicators for Economic Comparisons October 25, 2014 Professor Eric Martinot

Relative Costs of Energy

Form Typical International Price (US$) Conversion Factor Cost (US$) Coal $60-100/ton 1 ton coal = 30 GJ $2-3/GJ Gas $200-400/tcm 1 tcm = 38 GJ $5-10/GJ Oil $40-150/barrel 1 barrel oil = 6 GJ $7-25/GJ Electricity $0.10/kWh 1 kWh = 3.6 MJ $77/GJ Gasoline $0.70-1.20/liter 1 liter = 33 MJ $21-36/GJ Chocolate $0.50/bar 1 bar = 240 kCal $520/GJ

TABLE 2 Cost components for various current electricity technologiesa Overnight Variable Heat rate costs in 2003 Fixed O&M O&M ($2002 in 2003 Technology ($2002/kW)b ($2002/kW)c mills/kWh)c (MJ/kWh)d Scrubbed coal new technology 1,168 24.81 3.1 9.5 Integrated coal-gasification 1,383 34.11 2.07 8.4 combined cycle (IGCC) IGCC with carbon sequestration 2,088 40.47 2.53 10.1 Conventional gas/oil 542 12.4 2.07 7.9 combined cycle Advanced gas/oil combined 615 10.34 2.07 7.3 cycle (ADVCC) ADVCC with carbon 1,088 14.93 2.58 9.1 sequestration Conventional combustion turbine 413 10.34 4.14 11.5 Advanced combustion turbine 466 8.27 3.1 9.8 Fuel cells 2,162 7.23 20.67 7.9 Advanced nuclear 1,928 59.17 0.43 11.0 Distributed generation, base 813 13.95 6.2 9.9 Distributed generation, peak 977 13.95 6.2 11.0 Biomass 1,731 46.47 2.96 9.4 Municipal solid waste 1,477 99.57 0.01 14.4 landfill gas Geothermale,f 2,203 79.28 39.3 Wind 1,015 26.41 10.9 Solar thermalf 2,916 49.48 10.9 Solar photovoltaicf 4,401 10.08 10.9

aValues in this table are from Reference 5, table 38, p.71. They are not based on any specific technology, but rather are meant

to represent the cost and performance of typical plants under normal operating conditions for each plant type. Key sources reviewed are listed on p. 86.

bCosts reflect market status and penetration as of 2002. cO&M represents operation and maintenance. dConversion factor applied: 1 Btu = 1,055.87 J (5). eBecause geothermal cost and performance characteristics are specific for each site, the table entries represent the cost of

the least expensive plant that could be built in the Northwest Power Pool region, where most of the proposed sites are located.

fCapital costs for geothermal and solar technologies are net of (reduced by) the 10% investment tax credit.

Indicators for Economic Comparisons

• 1. Simple payback time (SPT) = Investment ($) / Annual Savings ($)
• 2. Cost of conserved energy (CCE) = Investment ($) * CRF / Annual Energy Savings
• 3. Cost of electricity (COE) – also called “levelized cost”
• 4. Internal rate of return (IRR)
• 5. Net present value (NPV)

Investment ($) = capital investment; if for efficiency, then added investment above baseline CRF = capital recovery factor = annual share of investment amortized over lifetime “Annual Energy Savings” = how much energy is saved per year, i.e., kWh or liters of petrol

Time Value of Money $1 placed in a bank yields 3% return each year. Next year you have $1.03. “Discounting” means calculating the “present value” of $1 available at some point in the

• future. Example: $1000 available in 5 years from now is worth how much to you now?

You discount $1000 to the present according to the formula: I $1000

• ---------- = -------------- = $784

(1 + i)N (1 + 0.05)5 i = interest rate N = time period of discounting

Comparing Technologies with Both Capital Costs and Annual Costs How do you compare energy costs including both capital costs and annual costs (or annual savings)? You borrow $800 million to build a coal power plant at 5% interest. The loan lasts 30 years. How much do you pay back to the bank each year for 30 years? This is called the “amortized capital cost.” Answer: $52 million per year. Note: total payments over 30 years come to (30)($52 million) = $1.56 billion, or twice the capital cost. Annual cost of the power plant = amortized capital cost + fuel cost + O&M cost Annual cost of the power plant ($)

• ---------------------------------------------------------------------- = cost per kWh ($/kWh)

Annual electricity production of the power plant (kWh)

• Cost of lectricity (COE) = “levelized” or “lifecycle costs” = (I * CRF)/E + OM + fuel

I = capital investment ($) I * CRF = amortized capital cost ($) CRF = capital recovery factor E = energy produce (kWh) OM = operation and maintenance cost ($/kWh) fuel = fuel cost ($/kWh)

Coal power plant Wind power plant Invest in more efficient refrigerator Invest in CFL, not incandescent light bulb Capacity / size 1000 MW 1500-kW

• 100W 20 W

Lifetime (N) 30 years 20 years 10 years 5 years operated 5 hours per day (8000hr life) Capacity factor 80% 30%

• Produced/conser

ved electricity per year (E) (1000 MW)(1000kW/ MW)(8760 hours/yr)(80%) = 7 billion kWh (1500 kW)(8760 hours/yr)(30%) = 4 million kWh 150 kWh month (50

• vs. 200 for less eff
• ne) * 12

= 1800 kWh (80W)(150 hours/month(12 mo./yr) = 144 kWh Capital cost (I) $800 million $1.8 million $300 ($800 vs. $500 for less efficient model) $10 ($15 minus $5 for regular bulbs) O&M cost 0.5 cents/kWh 0.8 cents/kWh Fuel cost (coal @$80/ton) 3.0 cents/kWh CRF (@i=5%) 0.065 0.080 0.130 0.231 Amortized capital cost per year (CRF * I) $52 million = 0.8 cents/kWh produced $145,000 = 3.6 cents/kWh produced $39 = 2.2 cents/kWh saved $2.31 = 1.6 cents/kWh saved COE/CCE 0.8 + 0.5 + 3.0 = 4.3 cents/kWh 3.6 + 0.8 = 4.4 cents/kWh 2.2 cents/kWh 1.6 cents/kWh Electricity price (p) 5 cents/kWh wholesale 5 cents/kWh wholesale 8 cents/kWh retail 8 cents/kWh retail SPT I=$300 R=(1800kWh/year) ($.08/kWh) = $140/year SPT=300/140 =2 years I=$10 R=(144 kWh/yr) ($0.08/kWh) =$12/year SPT=10/12 =1 year NPV $810 million $0.7 million $800 $42 IRR 13% 9% 46% 118% All prices and costs in USD. All values given in table are typical or assumed values, except for CRF which comes from a table based on N and i, and values for E, COE/CCE, SPT, NPV, and IRR, which are calculated. Points for lecture: (1) If CCE > retail price, then it “costs” you to save energy (NPV < 0); otherwise NPV > 0 (2) Interest rate > 5% has a profound effect. Debates over which interest rates to use (3) IRR of 9% for wind is too low; if electricity sales price is 6 cents, IRR goes to 12% (4) Add 2 cents to coal costs and revenue shrinks to (7 bil)(0.005)= $35 mil./yr, for IRR=2%

barrier to investments in energy efficiency. Although such an investment may be

Note: Percentages are annual internal rates of return. Continuous energy saving is assumed over the entire useful life of the plant. Profitable invest- ment possibilities are eliminated by a four-year payback time requirement. TABLE 6.13 PAYBACK CALCULATIONS AS A RISK INDICATOR LEAD TO UNDER- INVESTMENT IN PROFITABLE, LONG-LASTING ENERGY EFFICIENCY INVESTMENTS Useful life of plant (years) Payback time requirement (years) 2 3 4 5 6 8 3 24% 0% 4 35% 13% 0% 5 41% 20% 8% 0% 6 45% 25% 13% 6% 0% 7 47% 27% 17% 10% 4% 10 49% 31% 22% 16% 10.5% 4.5% 12 49.5% 32% 23% 17% 12.5% 7% 15 50% 33% 24% 18.5% 14.5% 9% Unprofitable

Figure 2 Cost of conserved energy for different end uses in the residential and commercial sectors (8).

Economic vs. Financial Analysis Economic analysis: (constant $) Financial analysis: (constant or nominal $)

Energy production or savings Energy production of savings Investment cost Investment cost, start-up cost Discount rate Interest rate, cost of capital, borrowing rate Fuel, operation and maintenance costs Fuel, operation, and maintenance costs Infrastructure lifetime Project lifetime; book lifetime; tax lifetime Construction period; interest during construction Inflation rate Fuel and O&M escalation rates Capital depreciation rates and structure Tax rates and structure

Result: economic IRR, NPV, COE Result: annual cash flow, financial IRR, COE

But…. Direct Cost-of-Electricity Comparisons Are Not “Fair”!

Renewables more competitive considering subsidies, external costs and fuel-price risk

• Subsidies: to competing fuels or technologies, or from one type of customer to another
• Subsidies to fossil fuels worldwide estimated at $150 billion/year (UNEP 2004)
• Subsidies to nuclear power in OECD countries estimated at $16 billion/year (UNEP

2004). Also government reactor accident insurance (indemnity) and waste disposal are forms of subsidies (1-3 cents/kWh?).

• Military costs of protecting oil supplies and shipping routes?
• External costs:
• Damages to human health, agriculture, fisheries, ecosystems, and infrastructure.
• EC (2003) estimates external cost of coal power generation at 2-15 eurocents/kWh
• Costs of nuclear waste disposal and risk of radioactive contamination of ground

water over next 10,000 years?

• Costs of climate change are potentially huge – how to value? (“Avoidance costs”?)
• What is the Cost of Future Fossil-Fuel Price Risk?
• Can estimate from market-based hedging costs – futures, swaps, options
• California in 2004: added 0.5 cents/kWh for natural-gas hedging cost
• Long-term physical storage costs

TABLE 3 Classification of subsidies Direct Indirect Payment from government to Insurance producers or consumers Loans or loan guarantees Tax expenditures: Provision of services: Tax credits Environmental and health safety Measures that reduce taxable income Regulatory framework Preferential tax rates Energy services below market price Tax deferrals Defense Excise taxes Research and development: Basic research Applied research—existing technologies Trust funds

Figure 7 Electricity price discrimination between residential and industrial sectors (8).

Figure 12 Electricity costs.