Cost-Effectiveness of Electrical
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
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.
TABLE J.2 Assumptions for Energy Supply Option Analysis Based on EPRI (1989), SERI (1990), and Wright and Ehrenshaft (1990)
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
TABLE J.3 Cost-Effectiveness of CO2 Reduction for Different Sources of Electricity Supply
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
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.
1. Throughout this report, tons (t) are metric; 1 Mt = 1 megaton = 1 million tons.
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.