Monday, January 26, 2015

Real cost of coal-fired power (update)

In April 2011, I made a blog post about the real cost of coal-fired power, particularly when the social cost of carbon (SCC) is included.  Since then, there have been a couple of big developments – (1) the cost of coal has fallen (not increased as I expected in 2011) and (2) there is increasing economic evidence that the SCC should be higher.  It’s time for me to update the previous post.
Let’s take the cost of coal first of all.
Here’s the cost (USD/tonne) of Australian thermal coal, 12,000 BTU/lb (27.912 GJ/t), less than 1% sulphur, 14% ash, FOB Newcastle or Port Kembla (source).    The past few years have not been good for coal miners, even allowing for the recent fall in the Australian dollar, and the price of coal is still in a downtrend.
What about the SCC?

In evaluating the SCC, the sort of issues to be considered are
  • land disturbance
  • methane emissions from mines
  • carcinogens
  • public health burden of communities
  • fatalities due to coal transport
  • emissions of air pollutants from combustion
  • effects of mercury emissions (lost productivity, mental health, cardiovascular)
  • climate damage from combustion emissions (CO2, N2O, soot)
Let me now refer you to a recent excellent article by Dana Nuccitelli.  Citing work by Moore & Diaz of Stanford University, he argues the costs of climate change have been underestimated because climate change will slow the rate of GDP growth in developing countries.  Moore & Diaz argue that the SCC is between USD 70/t and USD 400/t depending on assumptions in their model, with a best estimate of USD 200/t CO2.

(Meanwhile, the US Government has recently set the SCC as USD 37/t, increased from USD 22/t and accompanied by outraged protest from the Republican party.)

I’ll now calculate the Levelised Cost of Electricity (LCOE) for coal-fired power for different Capacity Factors and different Social Costs of Carbon.  This will be done under my standard assumptions:

  • there is no inflation,
  • taxation implications are neglected,
  • projects are funded entirely by debt,
  • all projects have the same interest rate (8%) and payback period (25 years),
  • all projects have the same annual maintenance and operating costs (2% of the total project cost), and
  • government subsidies are neglected.

Given the risk of future stranded assets and hence the difficulty in obtaining finance for new coal-fired power generation (see this reference to Bloomberg), the assumed cost of finance above is probably on the low side.  
The LCOE calculations are made under the following additional assumptions

  • specific capital cost Rankine-cycle steam plant: AUD 1,500,000/MW
  • thermodynamic efficiency: 0.39
  • cost of coal: USD 65/t currently equivalent to AUD 81.25/t
  • fraction of coal that is carbon: 0.737
  • energy content of coal: 27.9 GJ/t
The LEC is then calculated for
  • SCC in the range AUD 0 to AUD 200 per tonne
  • Capacity Factors in the range 0.7 to 1.0 (the Capacity Factor is the fraction of time that the generator is active)
Here are the updated results for the LCOE in AUD per MWh (click for a clearer image):

For these parameters, 894 kg CO2 is emitted per MWh.  So, as a rule of thumb, every $ increase in the SCC translates to almost one extra $ on the LCOE when expressed in $/MWh.
If the official US SCC of $37/t were to be adopted in Australia, the cost of coal-fired power would be increased by about $35/MWh.  If the best-estimate (USD 200/t) for the SCC is applied, then coal-fired power would be completely uncompetitive with renewable forms of energy such as wind and solar.  The risk of stranded assets would further weaken the case for coal-fired power generation.



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