Sunday, September 27, 2015

Cost of solar power (58)

For some time now, residents of South Australia have been agitating for construction of a Concentrating Solar Thermal (CST) power station at Port Augusta to replace two old coal-fired power stations.  The owner of the coal-fired stations, Alinta Energy, has now released reports describing the financial viability of the project.  These reports were prepared by Alinta with support from the Australian Renewable Energy Agency and the Government of South Australia.

What do the reports say about the Levelised Cost of Electricity (LCOE) for this project?  And why is Alinta walking away from this project that could be built within two years?

As a starting observation, let me say that the Alinta reports are very instructive.  They have been carefully prepared with input from numerous serious players in the industry.  The base case is for a Rankine-cycle 50 MW CST power station at nearly 40% thermal-electrical efficiency and based on heliostat/tower technology with molten salt storage for 15 hours.  Port Augusta has good solar resources and Alinta’s estimate for the annual output is 301 GWh, which corresponds to a Capacity Factor of 301,000 /(50 × 365 × 24) = 0.687.

The problems, however, come in two ways.  First, the Port Augusta CST plant would be expensive.  Alinta’s base estimate, which I will use here, is for a cost of AUD 577 million.  In part, that reflects the recent collapse in the Aussie dollar, thereby making components such as the power block and molten salt storage more expensive.  Another contributing factor is that the Alinta price estimate includes a hefty AUD 68 million contingency, in addition to Balance of Plant costs of AUD 118 million and EPC/owner costs of AUD 53 million.  The estimated cost for the heliostat field is AUD 138 million (AUD 150 per square metre), for the receiver AUD 86 million, for the tower AUD 21.5 million and for the molten salt storage AUD 83 million.  The steam turbine package was estimated at AUD 29 million.

The second big problem for Alinta is that there is currently an oversupply of generating capacity in South Australia.  So, the price achieved for the output would be the electricity wholesale pool price in South Australia, which is not particularly high, even allowing for variations between peak and off-peak prices, as Alinta did.  The study made no allowance for a price on carbon, nor for any other government support.

Let me now estimate the LCOE using 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), which means that the required rate of capital return is 9.4%,
  • all projects have the same annual maintenance and operating costs (2% of the total project cost), and
  • government subsidies are neglected.
For further commentary on my LCOE methodology, see posts on Real cost of coal-fired power, LEC – the accountant’s view, Cost of solar power (10) and (especially) Yet more on LEC.  It should be noted that the Alinta financial model is more detailed than mine.

Note that I am now using annual maintenance costs of 2% of capital cost rather than 3% as in posts during 2011.  As an aside, the Alinta study includes a sophisticated estimate for the annual maintenance costs, namely AUD 8 million, or 1.4% of the capital.  That’s less than my 2% of capital, but I won’t change my methodology at this stage.

The results for the proposed Port Augusta CST installation are as follows:

Cost per peak Watt              AUD 11.54/Wp
LCOE                                     AUD 218/MWh

The components of the LCOE are:
Capital           {0.094 × 577×106}/{301,000 MWhr} = AUD 180/MWhr
O&M              {0.020 × 577×106}/{301,000 MWhr} = AUD 38/MWhr


The LCOE for the proposed Port Augusta CST plant is AUD 218 per MWh.  As can be seen from my post summarising all projects I have examined, the Port Augusta LCOE is significantly more than my estimates for recent PV projects.  Perhaps the best comparisons are with other recent CST projects.  In USD at today’s exchange rate, the LCOE for Port Augusta would be USD 153 per MWh, whereas Cerro Dominador is USD 125/MWh, Ashalim is USD 284/MWh and Xina Solar One is USD 256/MWh.

I should also give the LCOE resulting from Alinta’s sophisticated financial model based on a 12% internal rate of return (IRR); that’s AUD 201/MWh.  The chosen value for the IRR explains why Alinta is walking away from this project – on their 12% IRR, the project has a negative net present value.  Simple really; at the present time and without a lot of government support, this project would not get board approval.

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