Some time ago in Brave New Climate Peter Lang wrote an interesting post on the CO2 abatement costs in Australia. He found that nuclear power is not the cheapest abatement method under Australian circumstances. His post was followed by interesting discussion and several wondered that can one arrive at sufficiently decarbonized electricity supply by always choosing the lowest cost alternative, should we not only include options that actually get all the emissions reductions we need, and what is the proper way to account for and discount costs. Since I have wanted to understand cost calculations better for quite some time, I decided to use this problem as one of my own exercises. For background you might want to read my earlier postings on related things (here and here, or in finnish here and here). Here I attempt to sketch system wide cost and CO2 abatement consequences of wind and nuclear based options. (In case you want to play and have access to Matlab, you can download some poorly documented macros I used.)
Throughout I will use the discount rate of 7.5%, a payback period of 20 years for wind power, 50 years for hydro and nuclear (this is longer than usual, but assumption is not hugely important for my needs), and 40 years for natural gas and coal. I won’t bother to list all the input parameters here, but most of them I have picked up from the typical market prices for different fuels as well as from the National Renewable energy laboratory. As a calibration I find following levelized costs of energy:
Source | Capacity factor | LCOE ($/kWh) |
---|---|---|
Coal | 0.85 | 0.066 |
Gas | 0.85 | 0.071 |
Wind | 0.29 | 0.102 |
Hydro | 0.5 | 0.046 |
Nuclear | 0.9 | 0.063 |
Few remarks are in order. There is no single LCOE since the costs are different in different places and different cost components keep changing. In Asia, for example, the costs of nuclear can be considerably lower than the above estimate, but under American style regulatory framework maybe higher. For gas prices I used a value of 8$/MMBtu. This is higher than the current gas prices in US, but lower than the European ones. The LCOE for wind power is lower than the typical feed-in tariffs in Europe and electricity spot price in the Nordic regionfluctuates around 7.5 cents/kWh. The fact that Finnish utilities want to build nuclear power also suggests that compared with alternatives economics for it are favorable in our circumstances. Changing the assumptions can of course change the above values somewhat, but overall I think the numbers pass the sanity check. In what is to follow the figures above are not even that important since they mainly set the starting point and after that the cost trends are determined by the changing energy mix and the capacity factors.
I will now compare two different scenarios for decarbonizing the electricity supply. In the first scenario we start with the fossil fuel dominated system where coal provides baseload power corresponding to the minimum yearly demand (as before I take the demand pattern from the Bonneville power authority load). I make drastic approximation that the output power of coal burning power plants does not vary at all and that the load following is only done with hydro (with capacity of 15% of average demand) and natural gas. Somewhat unrealistically I also assume that the hydrocapacity is always available. (This assumption makes the systems appear to have somewhat lower emissions than in reality where hydro power might have a capacity factor of around 50%.) I then start increasing the amount of electricity generated with wind. The production profile of wind power is derived from combining the Irish, south-eastern Australian, and Bonneville power authority wind production. The details are explained in an earlier posting. The wind production is taken to have a priority access to the grid. To generate the remaining electricity, we use coal at a power corresponding to the minimum demand once the contribution of wind power has been subtracted from the demand. The rest is generated with hydro and natural gas in that order. I further assume that production can always respond so rapidly that no capacity has to be in the spinning mode. (Our imaginary state has an average demand of 10000MW.) In the first movie, I demonstrate how the mix of different sources of electricity evolve under this scenario. (link to the 1st movie).
In the second scenario the starting point is the same, but rather than increasing the amount of wind power, we increase the amount of nuclear power. Like coal, this nuclear power is taken to produce constant power so that it first displaces baseload coal and then starts replacing natural gas. When nuclear power starts to replace gas used for load following its capacity factor starts to take a hit. The 2nd movie illustrates the mix of different sources of electricity in this scenario. (link to the 2nd movie).
These two scenarios are naturally not the only ways to satisfy electricity demand, but they are possible ways and with the numbers shown in the movies production always matches demand. Since the required capacities and capacity factors change with increasing wind or nuclear penetrations, the LCOE for different sources do not stay the same. For the society (although not necessarily for the individual investor) what matters most is the cost of typical kWh rather than the LCOE for each individual component of the electricity supply. I will take the cost of typical kWh to be the weighted average of each separate LCOE. The weights are given by the relative amounts of electricity produced from each source.
I think one clear error in what I do, is to implicitly assume that the underlying energy infrastructure stays the same over the payback period. As we decarbonize the electricity generation, capacities and capacity factors change with time and this should, in principle, be taken into account. On the other hand, since we do not live in a planned economy postulating construction plans decades in advance would also be dubious. The best the society might be able to do, is to try to reduce uncertainty and ensure that the market pressures always act in the right direction of ever lower GHG emissions.
So what do I find? In Figure 1, I summarize how the system evolves under the first scenario while Figure 2 summarizes the costs involved. For the wind based solution increasing share of wind power first lowers the space occupied by the base load power plants. This implies shutting down coal power plants and replacing them with gas plants.If methane leakage is bravely assumed not to be an issue, at this phase some CO2 emissions are avoided due to swapping for somewhat cleaner fuel. At higher penetrations capacity factors of wind, gas, and hydro power are reduced and costs continue to increase. (Btw. Getting someone to invest in new gas infrastructure might be tricky if the investors expect the demand growth early on the decarbonization path to be short lived. Presumably they do not believe this to be the case which, if accurate, would be bad news for the climate.) Even with very large wind power capacity one needs a reliable backup that can produce almost all the power consumed. For this reason after rapid rise in the capacity of power plants burning natural gas, their capacity declines only very slowly with increasing wind penetration.
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Figure 1: Capacities, capacity factors, and the share of fossil fuels as the fraction of wind generated electricity increase. |
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Figure 2: LCOE under the wind based scenario. |
For the nuclear based scenario 2, the corresponding results are shown in Figures 3 and 4. Now the system wide LCOE actually decreases slightly until nuclear power produces around 75% of the demand (at this point around 10% is produced with natural gas). After this the cost increases with the reduced capacity factors in NPPs. However, the kind of cost escalation apparent in the wind power based solution is absent since there is no need to maintain large amounts of reliable capacity running at low capacity factors. In these examples I made no assumptions about learning curves. If the capital costs of nuclear power are reduced by about 10% for each doubling in capacity until 10000MW (around 30% reduction in capital costs in total), the final LCOE of the decarbonized system is actually lower than the starting point. Similar cost reductions of wind power over the decarbonizing pathway used here do not avoid escalation of costs since cost increases are largely caused by the reduced capacity factors. It seems that one can also make a plausible case that the increased cost at high nuclear penetrations is an artifact of the simplifying assumptions I made. Eventually smart grid solutions can increase the share of base load power, NPPs can load follow, and lower capital cost NPPs which are better suited for load following can be engineered.
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Figure 3: Capacities, capacity factors, and the share of fossil fuels as the fraction of nuclear generated electricity increase. |
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Figure 4: LCOE under the second scenario. |
Finally in Figure 5, I compare the most relevant metrics of both scenarios. The costs diverge dramatically with the fraction of chosen carbon free energy. Nuclear based solution ends up with fairly constant LCOE over the pathway leading to decarbonization, while costs escalate with wind based solution. The installed carbon free capacity is drastically higher in wind based solution, suggesting greater challenges in construction and grid design. Finally, the fraction of electricity generated from fossil fuels is higher in the wind based solution. Together with increasing costs this implies dramatically lower “bang for the buck” at large wind penetrations. In contrast by the time nuclear power produces the same amount of electricity as the yearly demand, share of fossil fuels has dropped to less than 2%.
It should be noted that in the above in addition to many simplifying assumptions I ignored the additional transmissions costs for the wind based scenario. I am quite clueless as to what kind of grid upgrades are needed, but it seems clear that with wind capacity in excess of 5 times the average demand changes would be substantial. Where I live the transmission costs amount to around one third of my electricity bill so changes in transmission costs would have a large impact on the cost of electricity.
In this post I also focus on electricity production only. To decarbonize our societies we will also have to decarbonize heating and transport. If we were to use excess wind power to heat water, it is easy to see that the rise in the cost of warm water would be even greater than the cost increases in electricity (home work exercise). In case of nuclear power warm water could be a by-product of electricity generation (although this reduces the electrical power somewhat). Furthermore, if this warm water is produced close to the wind turbines, transporting it to consumers will cost more than moving electricity around. Similar conclusions apply for liquid fuels.
Do these kind of cost differences matter? I find it shocking that so many (typically wealthy westerners) seem to have an attitude that energy costs are almost irrelevant and that the question is basically analogous with a choice of buying a PC or a Mac. Some even seem to view rising energy costs as a good thing. We spend roughly 8% of our GDP on energy and this energy use pretty much makes all the rest possible. It is useful to remind how much we actually spend on some things that are widely valued. I will take the figures from my home country of Finland, but they are probably quite representative of industrialized countries in general.
Spending on | Share of GDP |
---|---|
Public health care | 7% |
Education | 6% |
Pensions | 12% |
Pensions (2030 esimate) | 15% |
Development aid | 0.5% |
Ministry of environment | <0.2% |
In the past few decades the income differences have increased also in Finland so that today our richest 10% have around 2-3% greater share of the GDP than in 1990. My impression is that most environmentalists find this terrible. The aging population causes our pension costs to increase and this increase is cause of anxiety for many both left and right. So we can very easily see that the energy costs in our society are comparable to many big spending categories for which it is already hard to find resources. Large increases in energy costs can easily have far greater social consequences than most people probably realize. Fantasizing that this is something to be promoted not only borders on insane, but is morally dubious. I have yet to find an explanation for why a society that spends more on energy rather than, for example, on education and health care is a better place for its inhabitants?
You might try to rescue the fantasy by somehow assuming that the same GDP could be produced with so much lower energy consumption that the total costs remain the same. However, as is clear from the above estimates this would require so drastic reductions in energy use that it cannot be taken seriously as a basis for responsible climate policy. There is nothing to suggest that this is doable and especially in the case of poorer countries that this is desirable. (Also, why would economically justified energy savings measures be incompatible with nuclear power is not clear to me.) Once the discussion strays into this territory, I often end up confused by the inconsistency of the arguments in favor of the paleogreen consensus. Construction of ideologically favored energy sources is typically touted (not entirely convincingly) as being good for the economy, but the same people might in a different context condemn economic growth and express desire for degrowth. Which one is it? Surely one cannot have it both ways?
Do I seriously believe that the societies will choose the path of ever increasing energy costs? Of course not. As soon as the effects of cost increases become apparent and start to affect other priorities people have, different choices will be made. As I see it, choosing the wrong way initially implies wasteful spending and unnecessary CO2 emissions since it delays the day when we eventually do choose policies that can eliminate the GHG emissions from the energy sector for good.
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01/02/2012 at 12:34 PM
peterlang11
This is a very interesting. We have a very similar view. There are many good points. Here is one:
“Some even seem to view rising energy costs as a good thing. We spend roughly 8% of our GDP on energy and this energy use pretty much makes all the rest possible.”
I’d add, the more we spend on energy the less we have to spend on everything else society wants – like better health, education, infrastructure and expenditure on improving the environment.
And the higher we raise the cost of energy in the wealthy western democracies, the harder we make it for the developing countries to implement low cost, low emissions electricity generation. These are the countries that will implement massive amounts of electricity over the coming decades. If the west cannot make low cost low emissions electricity technologies, the developing countries will burn fossil fuels.
Therefore, I conclude, our emphasis should be on reducing the cost of nuclear, not in raising the cost of fossil fuels. Raising the cost of fossil fuels in the west will not reduce global emissions. It will just damage economies and make all of us less able to implement the best policies.
01/02/2012 at 12:49 PM
peterlang11
You commented: “[Peter Lang] found that nuclear power is not the cheapest abatement method under Australian circumstances.”
This is correct – under existing government policies and the mass of impediments the western democracies and Australia have imposed to make nuclear higher cost that it could and should be. I was laying the groundwork for an post to determine what are all the impediments to low cost nuclear, quantify their effect on LCOE, prioritise them, and indentify the consequences of removing them. Next step would be to define how they could be removed.
01/02/2012 at 12:49 PM
Jani-Petri Martikainen
@Peter: I agree. I can imagine a case for making fossil fuel users pay for the externalities they cause, but then the cost of these external things should be balanced against the damage caused by higher energy costs. Furthermore, any unilateral move to increase the fossil fuel costs is probably counter productive unless you show at the same time an alternative which produces the same energy services with lower costs.
02/02/2012 at 5:02 AM
peterlang11
I agree 100%
02/02/2012 at 5:11 AM
peterlang11
Jani-Petri, your analysis is excellent.
I wonder if you would be able to reproduce (or close to) the simulation by Elliston, Diesendorf and MacGill here:
Click to access Solar2011-100percent.pdf
Succinct summary on Slides 5 to 12 here:
Click to access Solar2011-slides.pdf
I am writing a critique of this study and soon to be posted on BNC (I think). I’ve estimate the capital cost, cost of electricity, and CO2 abatement cost for their baseline scenario, plus three variants of the baseline.
By the way, you linked to two of my papers, but you missed what might be one that is time phased over the transition period – so perhaps more similar to your analysis.
“Emission cuts realities”
http://bravenewclimate.com/2010/01/09/emission-cuts-realities/
02/02/2012 at 6:26 AM
Jani-Petri Martikainen
Thanks for the links. I will have a look soon.
02/02/2012 at 6:45 AM
Jani-Petri Martikainen
Your post on emission cut realities is wonderful! I was at first considering of specifying the construction schedule like you did, but since a) I wasn’t too comfortable with my know how on cost calculations even in the static case and b) that would have required much more work and additional parameters to explore, I left that problem among my future plans.
20/03/2012 at 10:17 PM
Proteos
Very nice work. As far as I can see, the most economical spot appears to be 75% nuclear + 15% hydro + 10% fossils. Reminds me of something.
I don’t know if one can assume the average LCOE be the only thing that counts for society as a whole. It is certainly the case with a government regulated monopoly, where average pricing makes economical sense. However, in a liberalized market, prices are closer to the marginal price of the last called means of production … which today is more or less decided by the price of gas. So from an economical point of view some gas & peaker plants should always remain to allow repayment of large investments (which are sunk costs).
Also, I can’t prevent myself from thinking that such a study should be possible for an integrated european energy market. The consumption & wind data is available in some places maybe most. For example, irish, spanish, german TSOs publish data for a whole year… The problem is that transport limits between countries will make the simulation hellish with a lot of wind. But what you have done gives good orders of magnitude already.
21/03/2012 at 7:00 AM
Jani-Petri Martikainen
@Proteos: The EU party line study is online (http://ec.europa.eu/energy/energy2020/roadmap/index_en.htm). My impression is that despite of fooling around with computers it falls far short of what is actually required. The fact that they market the work by stating that their scenarios with large amounts of wind and solar “contain the increase of prices” and how everything is economically feasible tells me that they are more interested in spin that is useful to buttress the conventional wisdom than actually coming up with something that makes sense from an engineering point of view. I wrote some critique on this (03.01.2012), but “unfortunately” that is in finnish. (As a small observation, their numbers suggest that the installed capacity will have to increase from the current 1.9 times the average consumption all the way up to 3.8 for scenario filled with renewables (and this I believe is not enough).) A better and more focused study on fossil generation only can be found at
Click to access jrc_reference_report_200907_fossil_fuel_electricity.pdf
The EU roadmap is mainly useful, I think, as a source of some numbers.
21/03/2012 at 8:18 AM
Jani-Petri Martikainen
@Proteos: and by the way I am not also entirely sure how the results based the LCOE analysis like I did differs from the one based, for example, on the load duration curves. I will probably check this sometimes. (In other words, compute the LCOE as a function of capacity factor and then start filling in energy to the load duration curve so that always the cheapest source is picked. This will give you certain fraction of peaking gas plants.)
21/03/2012 at 9:18 PM
Proteos
The LCOE analysis tells you that if the average price of power over time is over the average LCOE of some generation mix, it is an economically feasible mix. If you run a monopoly you can optimize your means of production like this as you will make some average total cost pricing (that’s generally the point of government regulation), thus you will charge the LCOE, and your analysis will lead to the point where the LCOE is minimal.
Now let us imagine you operate a nuclear plant in a perfect competition market. Your marginal cost is low. If the generation mix is such that nuclear covers consumption at all times, you will not be able to charge the LCOE, but only the marginal price, which is much lower. Here the average price over time will be determined by the mix and the load duration curve. The investment will be repaid only if the ammount of time where the price is over the marginal price long enough (and the price high enough). Thus the economic optimum may not be the point where the LCOE is minimal (the optimization path is different).
The ‘marginal cost’ path has a problem of missing money for peaker plants (as there is no way they can recoup their investment cost) and risk minimization (which leads to build the plants with the lowest investment cost or those with a guaranteed yield). Intermittent renewables also tend to lower prices on these markets as they have a marginal cost close to 0, which make them uneconomic if they take too much importance and force eternal subsidization, as they tend to produce all at the same time.
The monopoly path has the problem of government regulation which can set the price too high (you get a fat cat monopoly) or too low (the monopoly keeps getting bailed out by the taxpayer because it is always bankrupt).
Hope this helps
I’ll try to read the EC documents.
22/03/2012 at 7:12 AM
Jani-Petri Martikainen
@Proteos: Thanks! This thing with the marginal costs vs LCOE is naturally a generic problem. If investments are to be made then in the long run utilities should be getting at least on the average a price that is roughly in line with the LCOE. How that is ensured in the market place is the issue. Low marginal cost production tends to be production with high capital costs and some mechanism must be there to ensure investor can make a profit. If such mechanism is not there, low marginal cost plants will eventually decay to dust and we just have low capital cost plants left. One way or the other a plant that lasts for decades needs a time horizon that is equally long and maybe that is why governments must be involved one way or the other. Probably more knowledgeable people than I have written real papers on the optimal strategies.
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