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Appendix J
Cost-Effectiveness of Electrical
Generation Technologies
Calculating the cost of electricity is a more complex task than
the capital recovery factor calculations used for conservation and
efficiency improvement options. In addition to the usual discount
rates, one has to be concerned with a number of other parameters in
computing the capital component of COE (cost of electricity). These
include interest on bonds, minimum acceptable return on equity,
depreciation, ad valorem taxes and insurance, and income tax and
credits. In addition, there are different accounting procedures:
normalized accounting, which uses fast depreciation for income tax
calculations but normal depreciation for income statements, and
flow-through accounting, in which the actual taxes paid are used in
the income statements.
In levelizing the cost of electricity over the life of the
plant, different companies may use different depreciation rates and
different assumptions on interest rates and inflation. Thus it is
quite conceivable that different COEs can be computed for the same
technology. In spite of these complications, there is a need to
compare different technologies on a consistent basis. The Electric
Power Research Institute (1989) has issued a technology assessment
guide (TAG), in which they have adopted a set of consistent
assumptions. The Mitigation Panel has decided to use EPRI's
approach and assumptions on capital cost, fixed charge rate, fixed
operating and maintenance costs, variable operating and maintenance
costs, and fuel cost. The calculation method used in the panel's
analysis is shown in Table J.1, and the assumptions used are shown
in Table J.2.
In a few instances, the panel deviates from EPRI's number by
broadening the range. This was done for sensitivity comparisons.
For example, EPRI's estimate as to the cost of nuclear fission
power is presented as the lower of the two figures while the
high-end represents a doubling of the
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TABLE J.1 An Electricity Cost Calculation Method Used for
Energy Supply Options (Constant Dollars)
NOTE: Capital recovery factor = 0.106 (constant
dollar based on EPRI
(1989) for a 30-year plant life and 3.6% real discount rate); CF =
capacity
factor (fraction); mills = 1/10¢ = $0.001; 1 year = 8,760
hours.
EPRI estimate as the cost of building a nuclear power plant
varies a great deal for a wide variety of reasons including the
time it takes for licensing and construction. Recently built
nuclear power plants have cost from just below EPRI's estimate to
twice EPRI's figure (U.S. Department of Energy, 1990). If the
nuclear power plant construction time in France, Japan, and the
United Kingdom can be achieved in the United States, the cost are
likely to be in the low end of the range. However, if current
experience in the United States as to the licensing and
construction time are evidence of what the future will be, nuclear
power costs are more likely to be in the high end of the range.
Therefore, a range of cost from EPRI's estimate to twice EPRI's
estimate was used in the Mitigation Panel's analysis.
Although four discount rates (3, 6, 10, and 30 percent) were
used for the conservation options, only one (6 percent) was used in
the power generation calculations because utility accounting, as
described above, differs from conventional calculation of capital
recovery. To use other discount rates, assumptions on acceptable
return that the panel was unwilling to make would be needed.
Furthermore, in cases such as biomass, only the potential emission
reduction and cost could be estimated. In short, the panel has
attempted to use what it believed to be the most practical and
realistic way of assessing the potential of energy supply
options.
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Representative terms from entire chapter:
fixed operating
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TABLE J.2 Assumptions for Energy Supply Option Analysis
Based on EPRI (1989), SERI (1990), and Wright and Ehrenshaft
(1990)
Technology
Capital Cost ($/kW)
Fixed Operating and Maintenance ($/kW-yr)
Capacity Factor
Variable Operating and Maintenance (mills/kWh)
Fuel Costa
($/106 Btu)
Heat Rate (Btu/kWh)
Total (mills/kWh)
Gas (combined cycle)
518
3.70
0.65
3.70
2.47b
7,740
33–45
Nuclear
1,524–3,048c
61.1–122.2c
0.65
0.6
0.7
10,220
47–86
Solar thermal
2,776
44.4
0.3
0.8
2.47
3,300
143
Biomass
1,500
28.5
0.65
2.7
1–2
12,000
48–60
Wind
1,013
8
0.1–0.3
7.1
0
—
51–139
Solar photovoltaic
2,421
64
0.30
3.1
0
—
103
Geothermal
1,817
58
0.65
4.7
0
—
49
Advanced pulverized coal
1,537
29
0.65
5.7
1.31
9,080
51
Hydroelectric
2,000
0.005
0.45
2.2
0
—
56
aAnnual
average.
bThe high
range estimate for natural gas option assumes fuel price will
escalate by 4 percent per year for 30 years.
cHigh cost
estimate assumes capital and fixed operating and maintenance cost
twice that of EPRI.
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Comparison of Costs, Carbon Dioxide
Emissions, and Relative Carbon Taxes
Figure J.1 and Table J.3 summarize costs and CO2 emissions of electricity generation
technologies. In order of increasing cost per kilowatt-hour, the
cheapest but dirtiest technology is a fully depreciated coal plant
(2.0 to 3.5 cents/kWh), followed by an advanced gas plant (gas
turbine combined cycle GTCC), which emits less than half as much
CO2 per kilowatt-hour at 3.3 to 4.5
cents/kWh. Next is geothermal (4.9 cents/kWh), the average 1989
U.S. mix of sources for electricity generation (5 cents/kWh), then
advanced coal (5.1 cents/kWh) and nuclear plants (4.7 to 8.6
cents/kWh). The high end of the nuclear energy cost range of 8.6
cents/kWh was for a capital and fixed operating and maintenance
cost twice that quoted in the EPRI guide. As discussed earlier, the
panel believes this to be more realistic. Last are renewable
technologies, ranging from biomass (4.8 to 6 cents/kWh) to
hydroelectric (5 to 6 cents/kWh) to solar thermal-gas hybrid (14.3
cents/kWh), all of which have supply or economic limitations.
It is important to note that as the experience with a particular
energy technology in the United States increases, so does the
reliability of the cost estimate. For example, natural gas plants
have been built in the United States for many years and there is a
great deal of experience as to their construction and operating
costs on a massive scale, so the reliability of these numbers is
likely to be higher than that of solar energy where there is
FIGURE J.1 Cost-effectiveness of energy supply
options.
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TABLE J.3 Cost-Effectiveness of CO2 Reduction for Different Sources of
Electricity Supply
Energy Source
Costa
(¢/kWh)
Emissions (kg CO2/kWh)
CO2 Tax Needed for
Indifference with U.S. Fuel Mixb ($/t CO2)
U.S. mix
5
0.7
0
Coal, advanced pulverized
5.1
0.86
NA
Coal, running cost of depreciated plant
2.0–3.5c
0.9
NA
Gas, combined cycle
3.3–4.5d
0.41
NA
Nuclear
4.7–8.6e
0
NA to 51
Hydroelectric
5.6
0
9
Geothermal
4.9
0
NA
Solar photovoltaic
10.3
0
76
Solar thermal/gas hybrid
14.3
0.18
177
Wind
5.1–13.9
0
1 to 127
Biomass
4.8–6.0
0f
NA to 14
NOTE: NA = Not applicable (i.e., cost less than
U.S. mix).
aBased on
assumptions from EPRI (1989), SERI (1990), and Wright and
Ehrenshaft (1990).
b$/t
CO2 = (Option Cost - U.S. Mix Cost)
($/100¢)(1000 kg/ton)
cAssumed
by Mitigation Panel.
dAssumes
50 percent thermal efficiency and no gas price escalation for
low-cost and EPRI efficiency plus 4 percent annual fuel escalation
for high-cost estimates.
eHigh
estimate assumes capital cost twice EPRI value.
fBiomass
sequestered CO2 before it was
burned, so the net carbon emission is zero.
only limited experience in the United States. Therefore, cost
estimates for industries such as wind and solar power that do not
have a developed industry are more speculative. This should be
taken into consideration when reviewing any of the estimates
presented here.
Carbon Taxes to Make Nonfossil
Generation Competitive with Fossil
Figure J.1 allows one to visualize the magnitude of the carbon
tax required to make a nonfossil plant (nuclear or renewable)
competitive with fossil plants (coal or gas). For example, consider
a line sloping down from the top of the nuclear range (8.6
cents/kWh and no CO2) to advanced
coal (5.1 cents/kWh and 0.9 kg CO2/kWh). The slope is the cost difference
(3.5 cents/kWh) divided by the CO2
difference (0.9 kg), which corresponds to
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3.9 cents/kg, or $39/t.1 This
means that a carbon or CO2 tax of
$39/t CO2 would raise the cost of a
kilowatt-hour from advanced coal by 3.9 cents, making this fuel
exactly competitive with nuclear. Conversely, a ''carbon saving"
subsidy of $39/t CO2 paid to nuclear
power would lower its cost and again achieve economic parity with
coal.
The overall effect of a carbon tax is shown by drawing a line
from each technology to the average point labeled "U.S. Mix." For
nuclear power, this line has a slope of $51/t CO2. Thus, if current U.S. plants were each
taxed at $51/t CO2, the average
price of electricity would increase the 3.6 cents/kWh needed to
make new nuclear plants competitive with the fossil fuels that
currently supply the majority of U.S. energy. This would likely
encourage utilities to invest in nonfossil forms of energy supply.
It is not clear at this point, however, how such complex taxing
would affect the cost of electricity and the cost-effectiveness of
nuclear power to shareholders. Similar carbon taxes would make
renewable technologies competitive. For example, a steeper line
joining solar-photovoltaic to the U.S. mix, sloping down at $127/t
CO2, would raise U.S. electricity to
10.3 cents/kWh and make the hybrid competitive today.
In Table J.3, all fossil and nonfossil technologies are compared
with the U.S. mix, and the CO2 tax
needed to make the choice of an alternative economically equivalent
to the current U.S. supply is computed. Negative values (which
correspond to subsidies for emitting CO2) make no sense and are labeled not
applicable in Table J.3.
Note
1. Throughout this report, tons (t) are metric; 1 Mt = 1 megaton
= 1 million tons.
References
Electric Power Research Institute. 1989. Technical Assessment
Guide, Electricity Supply. Report EPRI P-6587-L. Palo Alto, Calif.:
Electric Power Research Institute.
Solar Energy Research Institute. 1990. The Potential of
Renewable Energy: An Interlaboratory White Paper. Report
SERI/TP-260-3674. Golden, Colo.: Solar Energy Research
Institute.
U.S. Department of Energy. 1990. An Analysis of Nuclear Power
Plant Construction Costs. Report DOE/EIA-0485. Washington, D.C.:
U.S. Department of Energy. March/April 1986. Supplemented by Energy
Information Administration staff on December 14, 1990.
Wright, L. L., and A. R. Ehrenshaft. 1990. Short Woody Crops
Program: Annual Progress Report for 1989. Report ORNL-6625. Oak
Ridge, Tenn.: Oak Ridge National Laboratory.
