Guest Post by Peter Lang. Peter is a retired geologist and engineer with 40 years experience on a wide range of energy projects throughout the world, including managing energy R&D and providing policy advice for government and opposition. His experience includes: coal, oil, gas, hydro, geothermal, nuclear power plants, nuclear waste disposal, and a wide range of energy end use management projects.
A 10-page printable PDF version of this post can be downloaded here.
An Excel worksheet showing the calculations (allowing you to change inputs/assumptions) is also available.
Introduction
What is the cost of carbon dioxide (CO2) emissions abatement with the various electricity generation technologies being considered for Australia?
The abatement cost of a technology depends on many factors such as the engineering characteristics of the electricity grid to which the new technology will be connected, the geographic location and many others. One important factor often not mentioned is the reference case against which the abatement cost is calculated. The abatement cost for a new technology is only meaningful when compared with another new technology or with an existing generator it would ‘displace’; e.g. nuclear compared with a new coal power station or nuclear compared with an existing power station.
The Electric Power Research Institute (EPRI, 2010) report http://www.ret.gov.au/energy/Documents/AEGTC%202010.pdf for the Australian Department of Resources, Energy and Tourism provides data that allows CO2 abatement costs to be estimated for a range of new technologies. Unfortunately, the report is complex and opaque in parts.
The purpose of this paper is twofold:
- to summarise in tabular form the relevant information from the EPRI report so others can access it easily and produce levelised cost of electricity (LCOE) figures under differing assumptions, particularly using the NREL LCOE calculator http://www.nrel.gov/analysis/tech_lcoe.html .
- to calculate and compare the CO2 abatement costs for a range of new technologies for each of three ‘displaced’ technologies.
This paper does not attempt to calculate the effects of carbon price on the LCOE or CO2 abatement costs, because:
1) the EPRI report does not include the effects of carbon price — nor feed in tariffs, renewable energy certificates and other subsidies — so incorporating the effect of CO2 pricing, and other incentives and disincentives in the analysis would require many additional assumptions, and
2) the purpose of this paper is to show the abatement costs for the various technologies so options can be compared and so the cost of incentives and disincentives (including carbon pricing), which would be needed to make each technology viable, can be made visible.
Methodology
The CO2 abatement cost is calculated for seven new electricity generation technologies, selected from the EPRI report. The seven new technologies are:
- Coal (black, without CCS).
- Coal (black, with CCS)
- Nuclear
- CCGT (Combined Cycle Gas Turbine)
- OCGT (Open Cycle Gas Turbine)
- Wind (wind class 5, 100 x 2 MW)
- Solar thermal (Central Receiver, 6h storage, DNI = 6)
The abatement cost for each is calculated by comparison with each of three ‘displaced’ technologies:
- Hazelwood, brown coal power station, Victoria (1,600 MW, commissioned 1964 to 1971)
- Liddell (see photo above), black coal power station, NSW (2,000 MW, commissioned 1971 to 1973)
- A new black coal plant, withoutCCS; (this is same as #1 in the list of new technologies).
Most input data are taken from EPRI (2010) http://www.ret.gov.au/energy/Documents/AEGTC%202010.pdf ; these are summarised in Appendix 1. To bring the figures up to date and to aid in international comparisons, costs presented in Table 1 have been converted from 2009 A$ to 2011 US$; these are in Appendix 2. Details of the costings, including the exchange rates and inflation rates used, are included. The calculation steps and results are presented.
CO2 Abatement Cost is the difference in LCOE divided by the difference in CO2 emission intensity (EI):
CO2 abatement Cost = (LCOEnew – LCOEdisplaced) / (EIdisplaced – EInew)
The data needed for calculating LCOE for each technology, using the NREL simplified LCOE calculator http://www.nrel.gov/analysis/tech_lcoe.html, are provided in the Appendices.
The capital cost is one of the inputs needed for the LCOE calculation. The capital cost figure needed is the Total Capital Required (TCR). But theTCRfigure is not given in the EPRI report. As such, the method of estimating it, including the inputs and intermediate calculation results, are presented in Appendix 1.
The CO2 emissions intensity (EI) presented in the EPRI report includes only the emissions from burning the fuel in the generator. Fugitive emissions are not included. Nor do the emissions intensities include the higher emissions intensities produced when load-following; e.g. when cycling power up and down to back-up for intermittent renewable energy generators.
The emissions intensities (EI) for Liddell and Hazelwood power stations are 1.08 t/MWh and 1.53 t/MWh (sent out) respectively (ACIL-Tasman (2009), Table 18 http://www.aemo.com.au/planning/419-0035.pdf ). These EIs include fugitive emissions (whereas the EPRI EIs do not). This causes an error in the calculated abatement costs. In the ACIL Tasman report, fugitive emissions comprise 10% to 27% of EI for gas, 2% to 9% for black coal and 0.3% for brown coal.
The LCOE for Liddell and Hazelwood are ‘Commercial in Confidence’, so I’ve used $30 and $28 respectively, which are figures I’ve seen stated for the ‘equivalent LCOE’ for the remaining plant life.
Results
The CO2 abatement costs are summarised in Figure 1.
Figure 1: CO2 abatement cost for seven selected new technologies (named on the horizontal axis) compared with each of three ‘displaced’ technologies (named in the legend). Abatement costs are in US$/tonne CO2 (constant, 2011US$).
The inputs and intermediate calculation results are in Appendix 1 (in 2009 A$) and Appendix 2 (in 2011 US$). The data in Figure 1 is from Table A2-5.
Table A1-2 and A2-2 show the proportion of “Capital” (i.e. TCR) that EPRI apparently assumed for ‘Owners Costs’, including ‘Allowance for Funds Used During Construction’ (AFUDC).
The ratio TCR/TPC is given in Tables A1-3 and A2-3. This ratio shows how much higher the TCR is than TPC for each technology. For example, for nuclear the TCR is 1.93, or 93% greater than TPC.
Discussion
This report uses the EPRI (2010) figures for LCOE and emissions intensity. These are the figures being used in Australian government reports such as ABARE (2010) and for the Treasury modelling of the carbon tax and ETS. Some discussion of the figures and assumptions is warranted.
The Total Plant Cost figure in the EPRI report is confusing because it is not the full capital cost used to calculate LCOE. The capital cost figure needed for calculating LCOE is the Total Capital Required, which includes Owner’s Costs. Back-calculating from the figures provided reveals the amount of Owner’s Costs EPRI used in their LCOE analyses. This cost is significant. It is 93% higher than the Total Plant Cost for nuclear, 88% higher for CCGT, 45% higher for coal, and 41% higher for solar thermal. The EPRI report does not make clear the basis of the Owner’s Costs or the assumptions. For example, the construction period is not stated?
EPRI uses 85% for the average lifetime capacity factor for mature technologies such as coal, gas and nuclear. However it also uses 85% for immature technologies such as carbon capture and storage, and assumes capacity factors for Wind (36.6%) and Solar Thermal (31.6% with 6 hours storage) that appear to be based on the best possible figures, rather than the average achievable over a plant’s life. It is difficult to understand how these capacity factors could be realized in practice over the plant life.
The emissions intensities do not include fugitive emissions and appear to be for the technology running at optimum efficiency, rather than average efficiency. The abatement costs for Wind and Solar are probably understated, because the capacity factors assumed seem to be unreasonably high.
The reason the OCGT abatement costs are high is because EPRI used a capacity factor of 10% for the calculation of LCOE. This is because OCGT is economic at capacity factors up to about 14% due to its high fuel costs (IPART, 2004, Exhibits 1-2 and 1-3 http://www.ipart.nsw.gov.au/documents/Pubvers_Rev_Reg_Ret_IES010304.pdf )
If we assume wind or solar are backed up with OCGT, it is clear, without needing to do detailed calculations, that wind and solar with back-up are a high-cost way to avoid emissions.
Of the options considered, CCGT is clearly the least cost way to abate CO2 emissions. For example, if we are making a decision about new baseload capacity we might compare between a new baseload coal plant withoutCCSand other options. From Figure 1, the CO2 abatement cost, compared with new black coal, is $44/t CO2 for CCGT and $107/t CO2 for nuclear.
Based on the EPRI figures, nuclear cannot be justified inAustraliaat this time because it is too expensive. For nuclear to be an economically viable option, the impediments that are causing the EPRI estimates for the cost of nuclear in Australia to be several times higher than in Korea need to be removed.
Conclusions
Of the options considered, CCGT is clearly the least cost way to abate CO2 emissions, given the EPRI assumptions.
The abatement cost with CCGT is about 40% of the abatement cost with nuclear.
Based on EPRI’s estimates, nuclear is not economically viable in Australia because it is too expensive. This situation will remain while the impediments to low-cost nuclear remain in place.
Glossary
OCGT – Open Cycle Gas Turbine
CCGT – Combined Cycle Gas Turbine
CCS – Carbon Capture and Sequestration
CST – Concentrating Solar Thermal
EPRI – Electric Power Research Institute
NREL – National Renewable Energy Laboratory
LCOE – Levelised Cost of Electricity
TCR – Total Capital Required
TPC – Total Plant Cost
AFUDC – Accumulated [or Allowance for] Funds Used During Construction (Capitalised Interest)
References
ABARE (2010), Australian Energy Projections to 2029-30: http://adl.brs.gov.au/data/warehouse/pe_abarebrs99014434/energy_proj.pdf
ACIL-Tasman (2009), Fuel resource, new entry and generation costs in the NEM: http://www.aemo.com.au/planning/419-0035.pdf
EPRI (2010), Australian Electricity Generation Technology Costs – Reference Case 2010: http://www.ret.gov.au/energy/Documents/AEGTC%202010.pdf
Independent Pricing and Regulatory Tribunal (2004) The long run marginal cost of electricity generation in NSW: http://www.ipart.nsw.gov.au/documents/Pubvers_Rev_Reg_Ret_IES010304.pdf
NREL (2011), Levelized Cost of Energy Calculator: http://www.nrel.gov/analysis/tech_lcoe.html
South CarolinaElectric & Gas Company (2011), VC Summers Nuclear Station Units 2 and 3 (June 30, 2011): http://www.scana.com/NR/rdonlyres/A830A131-9425-46F1-B948-C8424530EE49/0/2011Q2BLRAReport.pdf
Appendix 1 – Input data and intermediate calculation results with costs in ‘constant 2009 A$’
Appendix 1 summarises the significant data from the EPRI (2010) report for the seven technologies selected for this study. Costs are in ‘constant, mid-2009 A$’.
Table A1-1 lists the values needed for input to the NREL LCOE Calculator, http://www.nrel.gov/analysis/tech_lcoe.html .
The Capital Cost figure listed in Table A1-1, needed for calculating LCOE, is ‘Total Capital Required’ (TCR). But the TCR figure is not given in the EPRI report. So it must be back-calculated from the other data available in the report. The EPRI report provides the breakdown of LCOE by Capital, O&M and Fuel (Tables A1-2 and A2-2). This data was used to calculate the value EPRI used for TCR. The results are in Tables A1-3 and A2-3. These tables also give the ratio TCR/TPC. This shows how much higher the TCR is than TPC for each technology. For example, for nuclear the TCR is 1.93, or 93% greater than TPC, whereas for coal it is 48%.
Appendix 2 – Input data and intermediate calculation results with costs in ‘constant 2011 US$’
The cost figures in Appendix 1 are in ‘constant, mid-2009 A$’. In Appendix 2 they have been converted to ‘constant, mid-2011 U$’. The conversion factors are in Table A2-6.
Table A2-1 lists the values needed for input to the NREL LCOE Calculator.
Brave New Climate 
262 replies on “CO2 abatement cost with electricity generation options in Australia”
Gene Preston — I can believe an on-peak price of US$0.50/kWh in ERCOT, although that over ten times the current on-peak price around here:
http://www.ferc.gov/market-oversight/mkt-electric/northwest.asp
and check the Mid-Columbia Hub average prices. I doubt that the average wholesale price is as large, but I certainly wish to be better informed.
Jani Martikainen — SLowly piecing together the story of the EPR, I gather it was first a cooperative venture between Areva and Siemens. A joint company, Framatom, was formed. As it became apparent that Siemens couldn’t deliver the control systems in a timely manner, Framatom became just part of Areva alone and Areva has sued Siemens for several hundred million euros. So if I have this even approximately right, Framatom, i.e., now just Areva, took the contract in Finland far earlier than they should have.
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David, with such low clearing prices, how are new capital intensive projects financed and paid for? How are customers charged for the capital cost? If the capital costs are put in a rate, what is keeping that customer from choosing another provider that doesn’t have the capital costs in their rate base? Do customers in Australia have a choice as to who will provide their power or are they stuck with one company that supplies all their needs? Maybe the market in Australia is just used so the utilities can buy and sell power. If so, that would be nearly equivalent to an economic dispatch.
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@ Jani Martikainen, on 7 November 2011 at 11:34 PM:
Jani, one thing to remember is that the discount rate has much greater impact at the start of a project than 20 years after completion.
Consider purchasing a house – the capital cost is substantial. After 20 years, even though the repayments may be the same and the principal not fully paid, the payments as a proportion of the family income is much reduced due to inflationary spirals.
When it comes to, say, coal fired power, the design life may be 25 years. Think of that as an expected minimum life, during which the asset must be paid for. It is not unusual for ways to be found to keep 25 year old power stations in service for a further 15 or more years, which are essentially the icing on the cake, but bring with them need for capital injection for plant improvement projects, increased maintenance and reduced efficiency by comparison with alternative new, ultrasupercritical coal powed station. Same fuel, two different options.
Try the example of working out using standard economists’ tools the present value of an income stream of, say, $100 per year at 5% over 20 years, then 30 years, 40 and 50. Then repeat using a discount rate of 10%.
The discount rate is more significant than the term, because the value today of a dollar earned 50 years down the track at 10% is (1.00 – 0.10) raised to the power of 50 = 0.57 cents. At a discount rate of Japanese or current US magnitude could be assumed for the whole of the asset’s life, we might use 1%, in which case present value of $1 in 50 years is 61.11 cents. Since 1% discount rates are not expected in the real world, the real world value of income generated 30, 40 or 50 years down the track is negligible in comparison with other costs and risks.
Extending the life of a planned investment is thus not very attractive at the planning stage, especially because the plant may well fail to reach the extended life. If it has blown up or burned down, then the anticipated cash flow will cease. The bet will have been lost.
By comparison, when the investment reaches 25 years and is still operating satisfactorily and technological advances are possible to economically extend its life, then life extension can be very attractive. Just don’t assume in Year 1 that this will always be possible.
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JB, @ 7 November 2011 at 8:36
That’s an informative post with many interesting thoughts and relevant specific detail.
I agree with much of what you say about what has gone wrong with ad hoc approach to energy policy.
I like your Proposal #2. However, I think the Federal government should fund it, not AEMO. If AEMO funded it the cost would have to be passed on to the electricity consumers in higher rates. It is a social and policy obligation that the Federal Government should fund, IMO. Does AEMO have the project management expertise that would be needed?
I’d suggest my earlier proposal is very similar to yours. I refer you to my fairly ‘SMART’ proposal here: https://bravenewclimate.com/2010/01/31/alternative-to-cprs/ . I believe is covers most of the bases, specific actions, time-line, was realistic and achievable at the time (except for politics) but now delayed. I believe this proposal provides some more detail about the steps and the time-line that would be required.
Regarding Proposal #1:
I agree with the objective. However, I wonder if the suggestion I made last year and reposted up-thread @ 5 November 2011 at 8:52 AM , might be give us a quicker start, and have more authority because it would be seen as independent (if the Terms of Reference are not biased) than your Proposal 1. Perhaps elements of your Proposal 1 could follow.
I’d suggest the Productivity Analysis would need to be a precursor to Proposal #2.
I’d also refer readers to the lead article of the “Alternative to Carbon Pricing” thread. https://bravenewclimate.com/2010/01/31/alternative-to-cprs/ Much of what John Bennett’s has proposed was covered in the post, including a detailed time line and, especially, how to progress with educating the population. I remain convinced this post is basically the way we should proceed, although I now believe we’ve lost about 7 years, largely due to the CO2 tax and ETS legislation and the political delay it will cause while it is being unwound. I doubt nuclear can be pushed by either side for at least the next two and probably the next three elections.
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I’ve had a quick scan of the PwC report. I don’t think much of it. It seems to be about trying to find more ways to build renewable energy and hide the true costs. For example, they propose to rob from the pension funds of those who have no chance to save or earn to make up for the stolen funds:
We should not be making pension funds invest in things wiser investors will not touch. If an investment is sound, the pension funds will invest in it without “encouragement” from government. This proposal seems like another intervention designed by bureaucrats in Brussels. They have little understanding of investing and finances, just like our own Treasury Department displayed so convincingly with the Resource Super Profits Tax fiasco.
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Jani Martikainen, @ 7 November 2011 at 11:34 PM:
I have no more expertise in this that anyone else here. Here is my take on this.
When defining the terms of reference for the LCOE study EPRI undertook, the contracting agency (DRET) and the consultant (EPRI) would have agreed what factors to hold constant in the analysis and which should be varied. Considering the audience and the purpose of the study, I expect they agreed to keep as many factors constant as they reasonably could. I expect they decided to hold Capacity Factor constant at 85% for the baseload technologies, and “book life” constant at 30 years.
Someone who is more interested in nuclear than the other technologies might approach the LCOE calculation like this:
Plant life for nuclear = 60 years
Plant life for Wind = 20 years
Nuclear has two or three major refurbishments which have to be included
Wind plants have to be constructed three times.
The future capital costs are on a discounted cash flow basis.
Changing the life of the NPP from 30 years to 60 years and leaving all the other EPRI inputs the same, the LCOE changed from $144/MWh to $135/MWh (in 2011 US$)
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John Bennetts,
I think you are confusing the issue when you mentioned inflation. In most cases LCOE analyses are reported as “real” or “Constant” dollars not “current” dollars. So the effects of inflation are excluded.
The reason that the value decreases with time is because a $ now is more valuable than a $ next year, even if there was no inflation, because of what you can use it for in the meantime, such as investing it and getting a return on the investment.
That is how I understand it. Someone correct me if I have it wrong.
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Gene Preston — Here in the Pacific Northwest no new highly capital intensive projects are in planning AFAIK. The only generators being built are wind turbines [with some form of tax incentive or subsidy attached] and CCGTs. When hydro turbine/generators wear out and have to be replaced (as is beginning to happen to the legacy hydro), the costs are added to the consumer rate base; I estimate the average cost of electricity to consumers around here will grow by about 4% per year.
There is no choice of retail utility company possible around here and they buy from whatever supplier they wish [subject to utility regulatory commission post-review for ‘best’ prices]. The only exception is for ‘bleeding greens’ who want to pay extra for wind power; presumably the retail utility passes that extra to the participating wind farm(s).
The various hubs are used to set future and current prices for the relatively small proporation of power not under long term contract; so-called spot prices.
I don’t know how all these matters are treated in Australia. All I know is that the academic power engineers down the hall have high regard for the Australian ISO.
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David Benson, thanks for the Pacific NW view. We have the same thing going on here in Texas except our wind program is more aggressive by building enough new socialized transmission to double the wind from 9000 to 18000 MW in a system peaking at about 65000 MW in the summer and we have nil hydro. What the large influx of wind has done is caused the builders of gas to take pause on their new gas plants because the wind eats into their revenue stream. So even though wind needs gas for backup, the wind is killing the economics of gas if you can believe that. There is no way to finance high capital cost solar and nuclear in this market. I’m also interested in how Australia works.
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LCOE: So-called constant dollars are ordinarily assumed although this is not necessary. For a generator which is expected to last longer than the life of the mortgage, LCOE needs to be appropriately averaged between the mortgage life period and the extention; doing that properly is less easy than one might think.
For example, suppose a Westinghouse AP-1000 at a particular site has all-up capital costs of US$5100/kW, including finance charges during construction. Using otherwise US standard figures the LCOE during the 30 years of the mortgage is US$0.099/kWh. The difficult part is determining that the LCOE for the following (presumed) 30 years of useful life is US$0.053/kWh giving an average LCOE of US$0.076/kWh [which is the justifying LOCE for VC Summer, now in pre-construction as this phase might be called].
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David, the problem I have with using only the time value of money in assessing generation options is that LCOE puts too much emphasis on the current and not enough emphasis on the future. LCOE is almost completely blind beyond about ten years if the discount rate is fairly high. So lets say that we want to have zero CO2 in 50 years. If we just use LCOE to make desisions today about solar, nuclear, wind, coal, etc. We will always decide that coal is cheapest, to heck with the future, etc. But that is not the long range objective. Just relying on LCOE alone is leading up down a path of destruction on this planet. I now prefer to give equal weight to all time periods, i.e. just use a discount of 0% and give the same weight to future dollars as current dollars so that the generation mix of the future can reveal itself. If you do this then your earlier comments about wind having to be built three times for each nuclear plant life reveals the real cost of wind which is much higher than nuclear.
Lets say your kids take a view of history 20 years from now. They look back at your decision based on the time value of money in which we today decided we could not afford nuclear because the LOCO was too high. Those kids 20 years from now will have a pathetic energy short world on their hands and wonder how could we ever have made such a self centered short range vieww of the world so as to deny them a future. We today are depleting oil gas coal, and are raising the CO2 level to dangerout levels. Lets face it, the real evil is relying almost entirely on the time value of money at the detriment of our future kid’s standard of living. LCOE causes us to not be able to see into the future beyond our noses. LCOE used by businesses today is an evil force in itself that is leading us into destroying the planet.
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PL:
Proposal #2. I’m not surprised that it is more attractive to you. Me, too. I agree that the Federal Gov’t could/should fund it – the reference to funding via AEMO was included for variety and from a purist’s point of view. Energy planning org should pay for energy options planning… to a point.
Quite likely, in practice AEMO would have an input and kick in some costs by way of staffing and studies, as well as their very well established competion and industry regulator role. AEMO are indispensible partners.
Agreed about the social objectives. In a way, it’s a bit like the early days of the Snowy Mountains Authority, during which the project first took shape. NSW, Victoria and Commonwealth shared in this, mainly due to land ownership and other jurisdictional matters. The states need not be co-opted into the NPP effort, at least not as lead partners.
“Does AEMO have the project management expertise that would be needed?” In a word, No. However they are not without very strong resources in areas including legal/regulatory, economics and engineering project assessment. Whoever runs this thing would need to build a project team. Governments of the 21st century no longer have the depth and number of staff with suitable experience. Assembling an adequate project management team must be done with great care, because any weakness in this area will lead to domination of the project by the strongest player – possibly leading to cultural ambush of the project by the potential head contractor(s).
I will re-read your references this evening.
I intentionally avoided considering timeline, because until there is a map for the journey and a vehicle, the velocity cannot be determined. My experience has been that projects with too tight a timeline are at most risk of failure. NBN, anyone?
I will cogitate more about the early role of AEMO. If the project’s Champion is a Federal Minister, AEMO probably have a central role to play during the investigation and options study stages. Handover to a broader project team at that stage may be appropriate, to ensure that a balance is struck between the need for boffins with open minds early and the need to replace the boffins with more experienced delivers of projects once things take shape. Think of defining the scope before handing over to a conventional engineering design and delivery operation, leading to the Alliance which I mentioned before. AEMO would then probably be part of the Principal’s/Owner’s team, rather than within the Alliance team, as also representatives from relevant government departments and ANSTO, etc (but not regulators).
In the final washup, the project is not huge. A couple of NPP’s is a large but not exceptional, undertaking. For example, Bayswater Power Station in NSW had a peak on-site workforce of 2400, plus another 200 or so Owner’s staff. Project delivery has to be separated from management of scope and change, otherwise the tensions between scope, quality, dollars and time will be lost and one will prevail to the detriment of the other three. The Project Manager (responsible to the Champion) must not become the Alliance Manager, but his organisational equal.
For the above reasons, I would not recommend using a single consultant to lead project definition and delivery. Too often, that path leads to tears, but perhaps I am showing personal bias. Besides which, if things start going wrong between an Owner and a super-consultant, the consultant holds too many cards and the Owner too few.
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The “Alternative to Carbon Pricing” thread is frustratingly slow to load so I realise most readers will not follow the link to that thread. I’ll extract the main part I was urging people to re-read and post it here (an hope the Moderator will allow this). Although it is nearly two years old I believe it is still mostly what we need to do. I suggest the general thrust of this is consistent with what John Bennetts suggested @ 8 November 2011 at 9:31 AM
Alternative to the Carbon Pricing
See preceding section here: https://bravenewclimate.com/2010/01/31/alternative-to-cprs/
Implementation Details
This policy:
1. will cut Australia’s GHG emissions from electricity generation by 8% of current levels by 2020 and by 80% by 2050;
2. is by far the least cost option to cut emissions; and
3. will give the least cost electricity of options to cut emissions.
How will this be achieved?
1. Coal power stations will be decommissioned at the rate of 1.4 GW per year.
a. They will be decommissioned as they reach their retirement age,
b. together with a small component of government buy back in a “Cash for Clunkers” scheme
2. They will be replaced with (mostly):
a. Natural gas generation until 2020, then with
b. Nuclear and efficient Combined Cycle Gas Turbines (CCGT) until 2025, then
c. Nuclear (mostly) to 2050.
3. Coal with Carbon Capture and Storage and geothermal may play a role if they become commercially viable.
4. Wind and solar power will have only a minor role unless major technological advances are achieved
5. Some Pumped-hydro will be built using existing dams – for example by connecting existing dams in the Snowy Mountains.
Implementation.
1. A project like a modern version of the Snowy Mountains Scheme initially (to about 2025) to get it through about the first 15 years;
2. A Sir William Hudson type person in charge;
3. “Early Wins” – Establish research facilities in at least one major university in every state; and
4. Research – A significant component of the research will focus on how to implement nuclear energy at least cost in Australia. [For example, how will we avoid the political, NIMBY, regulatory and bureaucratic problems that have raised the cost of nuclear in USA and EU.]
Level playing field for electricity generators
What would be a genuine level playing field for electricity generators”?
1. Remove all mandatory requirements (e.g. the Mandatory Renewable Energy Targets)
2. Remove all subsidies for electricity generation
3. Remove all tax incentives and other hidden incentives that favour one generator technology over another
4. Ensure that regulations apply equally for all types of generators. Set up a system to allow electricity generator companies to challenge anything that is impeding a level playing field
5. Emissions and pollution regulations must be the same for all industries and should be based on safety and health effects on an equal basis.
Policy implications of “Emission Cuts Realities – Electricity Generation”
Some policy implications of the paper: “Emission Cuts Realities – Electricity Generation” (Lang, 2010)
1. Mandating renewable energy is bad policy
2. If we are serious about cutting GHG emissions, we’d better get serious about implementing nuclear energy as soon as possible
3. If we want to implement nuclear power we’ll need to focus on how to do so at least cost, not with the sorts of high cost regimes imposed in USA and EU
4. We should not raise the cost of electricity. We must do all we can to bring clean electricity to our industries and residents at a cost no higher than the least cost option
5. Therefore, ETS/CPRS is exactly the wrong policy
Schedule
Following is a proposed schedule for Australia’s federal Government, noting that our next Federal budget is in May 2010.
May 2010 – Federal Budget contains funding for the following to be implemented during 2010-2011:
1. Establishment of a modern version of the Snowy Mountains Authority. Terms of Reference: to implement low emissions electricity generation in Australia such that electricity costs less than from fossil fuel generation.
2. Funding for nuclear engineering faculties in at least one university in every mainland State
3. Funding of research will be largely for the social engineering aspects of implementing nuclear energy in Australia at least cost.
2010 – Government announces policies:
1. to allow nuclear energy to be one of the options for electricity generation;
2. to remove all the impediments that favour or discriminate one generator system or technology over another;
3. that 20% of emissions will be from low emissions generator mix by 2020 and 80% by 2050. A ‘low emission generator mix’ is a mix of generators that can provide power on demand and meet the emissions limits that will be phased in and become more stringent over time. For example, the limit might be 200 kg CO2-e/MWh in 2020 and 10 kg CO2-e/MWh in 2050. The rate would decrease progressively over time – but not necessarily linearly. The rate does not apply to a single generator. It applies to a company’s mix of generators. The 2020 limit could be achieved by a mix of 50% high efficiency CCGT combined with 50% of one of the following: nuclear, hydro, biomass, geothermal, solar thermal with its own energy storage. Wind cannot meet the 200 kg CO2-e/MWh for the reasons explained here: https://bravenewclimate.com/2010/01/09/emission-cuts-realities/
4. to buy back some old coal generators at a fair price in a “cash for clunkers” scheme
5. to conduct first public awareness forums throughout Australia.
2012 – Government announces policies to:
1. allow nuclear power plants to be established in Australia and under what conditions;
2. allow States to bid to host the first nuclear power station and the conditions for selection of the state – this will include a time frame for site selection to be complete by 2013 (I know its fast, but if its urgent we need to get on with it!). In the absence of states bidding and agreeing to meet the schedule the first NPP will be build on Commonwealth owned and controlled land.
3. Establish arrangements with IAEA to act as our Nuclear Regulatory Authority until we are ready to take over.
2013 –Source selection starts for our first four or five NPPs
2014 – Contract awarded for first four or five NPPs
2015 – Construction begins
2019 – First NPP commissioned.
2020 – Second NPP commissioned, and so on,
I suspect the reality is we’ve slipped another seven years from these dates as a result of the government’s determination to legislate the CO2 tax and ETS and showing no signs of dumping their anti-nuclear policy
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JB @ 8 November 2011 at 12:53 PM
I am reading your comment after I posted my extract from the “Alternative to Carbon Pricing “thread. I am hoping we may able to combine our proposals – what’s good out of your two proposals and my two (Productivity Commission suggestion and the extract from “Alternative to Carbon Pricing”).
I think we have to do much better than that. Ministers come and ministers go. And governments come and go. If this is tied into politics, it will be a long slow road. I am thinking of a real engineer leader such as:
• Sir William Hydson – he built the Snowy Mountains Scheme and managed all the politicians for abut 25 years.
• The Adelaide guy (bless his soul :) who spent most of his life dedicated to getting the telegraph line built from Adelaide to England.
• The engineer who built the Panama Canal.
• Many other examples. It will need a leader from outside politics.
Actually, come to think of it, I reckon one guy who ticks nearly all the boxes is Ziggy Switkowski. He ran Telstra, and has the logistics and political skills.
You’ve gone into a lot of detail about responsibilities and roles. There is a lot to program management and probably that would take us into too much depth at this stage. If we can’t find a way to make nuclear economically viable its not going to happen. At the moment we are a long way from them being viable. I feel many people are going to have to be prepared to give up on some of their very strongly held beliefs before we will make much progress on this.
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Thank you for you responses. I think I understand the concept of “book life” better. So basically for LCOE it doesn’t mattter hugely whether it is set at 30 or 60 years. On the other hand, for long term construction and other requirements (in order to decarbonize the energy system) the expected life time matters more, since some choices would have to be rebuild before we have yet finished the task.
@Peter:”Is TVO one of many electricity companies that are competing. If not are there competitive pressures to keep electricity industry efficient and low cost, or is price controlled by a regulator?” There is competition and shareholders in TVO compete also among themselves since they usually own generating capacity also outside TVO. Also, finns, swedes, norwegians, and danes have a common electricity market so the players in other nordic countries influence the prices here. My own contract for electricity is with a norwegian company, heat probably comes from the local utility (I rent a place so I am not sure which one), and for the grid services I pay to whatever company owns the grid here. The cost for grid services is, I think, regulated, in order to ensure competition.
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Jani Martikainen,
Thank you for that information. That sounds like an excellent arrangement. Trust the Finns (and the Scandinavians).
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Peter, “Trust the Finns (and the Scandinavians).” Be careful with such statements. I can assure you that we have our share of silliness as well. I suspect that the amount of woolly thinking is roughly constant across nations as long as we take the average over few years:-)
Right now Nordics on average enjoy much lower electricity prices than germans, but when EU electricity markets integrate things will change. Right now there is very little transmission capacity to Germany, but at some point the price gradient becomes too steep to resist. Once the transmission capacity is there, the prices here will approach those in central Europe. So many things that affect us depend on decisions done in bigger markets. Even decisions regarding future NPP:s (2 new ones have been politically approved) might have to factor in whether or not they are in a position to sell their production to Germany.
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Jani Martikainen,
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The NREL calculator has an overall cost escalation parameter with the default rate set at 3%. That doesn’t handle a step jump to a flat carbon tax in the middle of the period. With gas prices in Australia even industry insiders expect 5% arithmetic cost increase
http://www.canberratimes.com.au/news/national/national/general/gas-prices-to-double-in-20-years-as-demand-explodes-santos-predicts/2342581.aspx
However on gas I’d ask how will we make urea fertiliser when the world has 9 bn people? How will we power farm machinery when there is no diesel and very little gas? Today’s children should still be alive when this happens. Economic theory assumes when a key resource hits price $x a satisfactory substitute steps in to fill its place. we’ll soon see.
Today a politician announced that the carbon tax bills had passed into law. He said as a result two new gas fired power stations would be built. He didn’t say
– they were additional to coal, not replacements
– it doesn’t jibe with 80% CO2 reductions promised long term
– other parts of Australia don ‘t have the luxury of new gas plant.
It’s all piecemeal and fails to see the bigger picture.
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John I saw your comment:
However on gas I’d ask how will we make urea fertiliser when the world has 9 bn people?
I went to a talk the other day about a new CCS plant in West Texas that will send the co2 to oil producers to inject to increase oil production. A by product of their process is urea fertilizer. And it produces a lot. I think about 1/4th of the US use of this fertilizer. One concern by the plant owners is that it will produce too much urea and depress prices.
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@Gene: That is a good point. LCOE does not include the (discounted?) costs caused by fossil fuels. Those costs are not shouldered by whoever invests in fossil fuels. In this sense it is incomplete measure just like GDP is not always a useful measure of nations well being. (Not a useless measure, but incomplete.) Unfortunately I guess the way things are financed today force this shortsighted behavior. Actually, if I were a consumer of electricity and a utility asks me to invest in a bond which is used to finance NPP for example I would be more than happy to get say 5% interest or even less. I see no relatively safe place for my savings that could offer that. Where this disconnect between typical discount rates and reasonable returns in the current market environment come from, I do not understand.
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Regarding the discussion about what capacity factors, discount rates, “book life” to use for LCOE calculations, I came across this recent report. http://www.iea.org/papers/2011/costperf_ccs_powergen.pdf It is about CCS costs and compares eight LCOE analyses. The key input parameters are summarised in Table 2. The range of values used in the eight studies are:
Discount rates = 9% to 10%
Owner’s costs = 5% to 25%
Capacity factor, coal = 75% to 85%
Capacity factor, natural gas = 75% to 95%
Economic life, coal = 20 to 30 years
Economic life, gas = 25 to 30 years
Construction time, coal = 3 to 4 years
Construction time, gas = 3 years
Contingencies with CCS = 5% to 30%
Table 10 gives capital cost, LCOE, relative LCOE increase for CCS = 39% to 63%
LCOE with CCS = $102 – $107/MWh
LCOE increase = $29 – $41/MWh
Cost of CO2 avoided = $43 – $80/t CO2 avoided.
The caption below the Table 10 includes this which will be of interest given earlier discussion on this thread:
A paper by Alstom delivered at the POWER-GEN Europe Conference, 7-9 June 2011, Milan, Italy, “Cost assessment of fossil power plants equipped with CCS under typical scenarios” does not appear to be accessible on the web. The abstract says:
Figure 18 summarises the LCOE for nine different low carbon technologies over the 2011 to 2016 period. Eyeballing from the chart I get the following for the average min and max LCOE for each, in € / MWh:
Hard coal with CCS = 86; 80; 110
CCGT with CCS = 65; 50;80
Nuclear = 47; 45; 65 (the lowest of the average for the low carbon technologies)
Hydro = 50; 15; 90
Geothermal = 60; 60; 70
The others are: Wind onshore, wind offshore, solar thermal, solar PV. All are higher cost. Solar thermal = 225; 150; 265.
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Gene, @ 8 November 2011 at 8:15 PM
Both sentences are wrong.
Firstly, LCOE is not leading us down a path of destruction. As explained in a comment up thread, the LCOE method is also used to calculate the LCOE with externalities included or CO2e price included.
Secondly, arguing that rational people would apply a discount rate of 0% is nonsense. If that was the case, you could walk into a car dealer, buy a car and the terms would be “pay whenever you like. You can pay for it now, of in a year or 10 years of 100 years time. If you choose to pay at a future date instead of now, the only added cost is the rate of inflation”. So he sod you a car and you don’t have to pay for it. How nuts is that?
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Peter the zero discount rate does not mean you would pay for the car at any time in the future. Even with a non zero discount rate would the car dealer sell you the car if there were a 10% annual interest and you agreed to pay 1.10^30 or 17.5 times more for that car 30 years into the future? Would he sell you the car? No. So your example does not make sense either.
LCOE is leading us down a path of destruction because we are blinding ourselves to whats in store for us 50 years in the future. For example at 10% per year, a dollar 50 years from now is only worth 1/117th its current value or about a penny. So we see those huge expenses in the future just dwindle to no concern at all today, because we know that we will be able to pull a magic want out of the hat and walla, the LCOE analysis will take care of us at some point in the future when all hell is breaking loose.
Here is an idea for you to mull over. The doubling time for an exponential function is 70 divided by the interest rate per year. So if we used a discount rate of 10% we are implying that we have just 7 years to solve a problem. If we used 7% discount rate we have just 10 years to solve a problem like CO2. Lets say that it will take 70 years to solve the CO2 problem. We should be using a discount rate of just 1% in our studies to make decisions on a 70 year time frame.
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GP I’m using urea as a generic term for nitrogen fertiliser including nitrates, ammonium salts like diammonium phosphate, anhydrous ammonia and urea. Wikipedia opines that world population is a third more than otherwise due to nitrogen fertiliser. That’s now so that dependence can only become stronger.
The key point is that we need to conserve some hard to replace resources like natural gas for the long run. On TV one of the mayors in Queensland’s coal seam gas growth areas said gas fired power stations were ‘sustainable’. Huh? Like the Brits in 2011 the world as a whole in 2050 will look back at how we squandered so much gas, notably baseload power when there is an alternative.
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Peter Lang and all the others,
thank you – this has been a very enlightening discussion. Unfortunately I don’t have the time right now to follow all the links, but I’ll save the discussion for future reference.
As far as the “Mankala principle” of tax-free electricity I mentioned goes, you should know that it’s far from being generally appreciated here in Finland. There is a view – strongly held by certain commentators of Greenish bent, but not exactly uncommon nor unconvincing – that the principle favors heavy, energy-intensive industries while shortchanging less energy intensive businesses.
I’m no expert, but I strongly suspect that its original formulation in 1968 was somewhat influenced by the demands of the paper industry at the time. A common critique leveled against NPPs here is that they are artificial life support for old, energy-intensive manufacturing industries we should get rid of anyway. We’re actually behind most other European nations in that curve, as we still have a significant manufacturing sector (paper and metals mostly).
That and some admittedly poor policy decisions over the years also mean that our carbon footprint is far from ideal. It’s over 12 tonnes per capita per annum, far higher than even Denmark’s, and one of the highest in Europe. I suspect it will drop once new NPPs come on-line, but as much of the emissions are from oil (45%) and from coal (39%), much of which is burned in municipal CHP plants, the reduction won’t be that impressive. We’ve basically locked ourselves into “efficient” CHP plants, and the alternative fuels are either peat (very bad) or wood-derived biomass (not as bad, but limited).
This lock-in to what seemed an “efficient” solution at the time is something I worry about. I think I agree with Jani-Petri in that optimal solutions at any one time may turn out to be suboptimal in the long run.
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Gene Preston — LCOE is a generally accepted method of comparing the cost of alternate methods of generaation. It is overly simple in that other factors such as reliability are not directly included and as you previously noted these may be dependent upon the existing grid.
I’ll have to ponder for some time the idea that typical interest rates discount the future overly rapidly. I suppose I’ll attempt to see what various academic economists have written about that.
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DBB using the LCOE formula given here
http://en.wikipedia.org/wiki/Cost_of_electricity_by_source
but for constant output and annual cost some sensitivity analysis suggests the results are not strikingly different.
For example rather than discounting for years n = 1,..50 by the weight [(1 + r) ^ -n] I consider the case of no discounting (r = 0) years 1,..20 then ignoring (r = ∞) years 21,…50. For r = 0.1 or 10% and constant annual cost 10c per kwh I get
truncated no discount case LCOE = 10c
full term 10% discount LCOE = 11.7c.
No biggie if my calcs are correct. But consider the case the world has effectively run out of gas (for example) by 2050. Do we want our descendants to starve and freeze? Discounting seems to assume we make hard headed decisions now and magic will happen in the future.
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Hi, Peter L.
I agree that ministers come and go, but your four examples are all flawed. Maybe we need to dig further to find ideal examples. It appears that we do agree, at least in general, that above the project team must be an enabler, the person who I have titled the project’s champion.
Sir William Hudson was a magnificent fellow. Long after his retirement, he used to speak annually to a group of engineering undergrads, of which I was one. However, the project had ministerial support from 2 States and at Federal level who provided the support, the enabling legislation and the funding. He outlasted them all, of course.
The engineer who first tried to build the Panama, Frenchman Ferdinand de Lesseps, went bust on the project. The project was constructed by the US government, using primarily directly employed staff from various countries and under the management of a series of three commanding engineers, the last of which, George Washington Goethals, lasted longest and completed the job was was not the designer. The project’s enabler was US President Roosevelt, who forced the creation of the nation called Panama which was carved out of Colombia after the Spanish-American War. Its constitution includes a much-argued provision for the USA to occupy, rule and control the Canal Zone which splits the small nation in two, for ever. If not for Roosevelt’s championing of the project, including by being the first President to leave the US whilst in office to visit the Canal Zone, the canal could never have been constructed. (Ref: Julie Green “The Canal Builders”, Penguin, 2009.)
I would add General Sir John Monash, a most remarkable linguist, civil engineer and general who was the first and perhaps most successful boss of the State Electricity Commission of Victoria, the SECV. A most remarkable man, but again, he was appointed to this nation-building role by politicians who supported him with legislation and funds. That project’s commencement can be traced to enquiries and legislation in 1917 and 1918. Sir John Monash’s involvement as Chairman and CEO dated from 1920.
Think also of Kennedy and the Appollo project.
Consider also the Sydney Harbour Bridge, which was the brain-child of JJC bradfield, but was designed and substantially constructed by British corporations. It took Bradfield 10 years, 1912 to 1922, before he obtained the legislative support and finance with which to proceed. Bradfield’s proposal was superb, as also his abilities constructing railways and the SHB. Until 1922, the project lacked a Champion.
The first NPP in Australia will need more than just good or even great project management, it will need a Champion to provide the public and political will, the necessary legislation and the finance.
That is why I view political will as being the highest hurdle preventing construction of an NPP in Australia.
I’m working slowly on a review of economic factors behind the high projected cost of nuclear power in Australia compared with USA, as discussed upthread. A trip away has intervened… perhaps late next week.
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Jani Martikainen, on 8 November 2011 at 9:20 PMLang, several hours later:
Peter’s comment was to the effect that externalities are/can be included in LCOE calculations.
The notion of externalities is an economist’s concept of those matters which represent costs or benefits but which are outside the analysis. Thus, unless externalities are specifically introduced, the default situation is to ignore them.
I suggest that those not familiar with the terms “externalities” and “economic commons” check Wiki or an economics text or site before proceeding.
It is exactly damage to economic commons which contributors, including Gene, are attempting to value and thus to prevent. Gene, at first reading, appears to say that all damage to the commons is anathema and must be avoided, especially the commons known as the atmosphere, or the climate.
Placing a value on damage to the economic commons and placing a value on human subjective value gained or lost are the classic externalities. There is no easy answer, no simple way to arrive at a universally agreed valuation.
I am sure that Barry Brook will have run across several red hot attempts to put a value on environmental degradation. These include (warning: amateur at work!) costs of adaptation (eg walls to keep rising tides out, or cost of moving infrastructure upslope), economic loss (eg crop loss, cyclone damage, fisheries destruction) and more.
However, once externalities have been identified, quantified and evaluated, their costs and benfits ARE able to be included in economic evaluations.
What I disagree with is blanket “I don’t like it” type argument which is then followed by “then I will ignore/outlaw that factor”, as exampled by current inability of the basic LCOE procedures to consider future climate change and the response, from Gene, that he will thus ignore the economic reality that, in a world where the value of money changes with time and ignore these changes, which are real and measurable.
Gene’s response is akin to hiding one’s eyes behind one’s hand. That which is no longer seen is still real.
Regarding cash flows expressed as constant dollars Vs discounted cash flows, these terms are defined in Wikipedia and elsewhere.
The simple explanation is that constant value dollars have been adjusted to base date to adjust for inflation.
Discount rates may be thought of as being the annual cost of money borrowed, expressed as a percentage. The rate must allow for borrower’s costs, lender’s margin and fees and charges attached to the loans. Most corporations add a further impost onto the discount rate which must be used for project evaluations, perhaps a bit like an internal rate of return for the capital used – I have worked with figures from 1% upwards for this additional margin, but never zero.
In Australia during the past decade or so, the annual rate of inflation was typically about 3%, whereas the discount rate for housing loans has been around 8 percent. They are not the same animal. That explains the missing 5%.
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John how would you perform the time value of money if inflation exceed what you can earn on an investment. I subscribe to Stansbury who says that we will soon see very high inflation in the US. I have talked with utility executives who are buying solar power with an inflation clause in the contract. I query them about that expected 2% per year inflation they are assuming and they assure me the Feds will be able to hold down inflation. I just shake my head and say to myself, you are a fool indeed. We are going to see very high inflation soon. Those nuclear plants built before the high inflation are going to look like really good investments. Your LCOE figures are not capturing this future which I have a lot more confidence will happen than the other possibility, which is we will be able to keep doing business as usual indefinitly into the future. We are all in for some really rough days ahead as oil peaks and environmental science keeps improving and telling us we are destroying the planet. These things are going to cause really high inflation at some point.
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DBB:
Because the discount rate is always larger than the inflation rate, evaluations based on the time value of money at discounted rates will always appear to place a higher value on early cash flows when compared to evaluations calculated using inflation-adjusted constant dollars.
The subjective experience will be the same.
The difference, as explained above, is the economic friction due to lender’s margins and fees and cost related to the actual loans. Normally, added to the discount rate is a fudge factor determined by the CEO, CFO and/or the Board, which will always push the project-specific discount rate up further.
Remember: An inflation rates is measurable – a statistic.
A discount rate is a tool used for financial comparisons and may be adjusted up or down to suit the owner’s preferences, his perception of risk and desire to proceed. It is just a number. That is why evaluations are usually carried out using several different discount rates – otherwise known as determining sensitivity to discount rate.
If a company is used to making 20% pa on its investments, it might be entirely rational to require a discount rate of (20% plus costs), say 22%, regardless of the current or expected inflation rates.
Consider also that there are many different inflation rates operating in any given community at any one time. The rates of inflation for labour, consumer expenditure, electricity, transport costs and many other things are different. Selecting an appropriate estimated future rate of inflation for your constant dollars is not as easy as it might appear at first pass.
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John you said an inflation rate is measurable – a statistic. But this is only true in hindsight. Everyone is assuming low inflation rates will continue. Herein lies a trap. If you knew that energy shortages would trigger high in flation in the not to distant future, you’re LCOE calculations would show completely different results.
The second mistake you are making is implicitly assuming corporations will save us through the market activities and investments. They won’t. If oil companies were concerned about tomorrow they would be setting up R&D efforts to manufacture fuels using nuclear power. If our government was concerned about tomorrow they would require these R&D efforts. They aren’t interested nor are they concerned about tomorrow. And this is because we have taught to rely heavily on the short range outlook present value of money. Even if we programmed in extinction in 100 years into our economic model the PV analysis would not be concerned today.
So now tell me that 100% reliance on an economic model that will eventually lead to my death at some point in the future wise idea. We are sailing in a fog using just the PV economic model alone. We need to turn on the radar and take a longer range view of where we are headed.
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Gene:
What matters is not today’s inflation rate or tomorrow’s, which as I explained above doesn’t really matter in respect of making decisions to commit funds. What matters is the discount rate which the corporation perceives as being appropriate to finance the job, after all costs and risks related to arranging finance for that cash flow.
A corporation risking funds has additional tools, such as hedging, which can be applied to the anticipated cash flows. These facilities cost quite a bit.
Under normal circumstances, a hedge will cost several percentage points on the amount needed, compounded throughout the period of the loans.
The simple explanation of the result is that the cost of capital becomes the cost of (hedged) capital, which may move from 8% to 10% in order to transfer this risk to the lender and away from the corporation doing the borrowing.
If a single project represents a threat to the corporation’s existence should funding fall through, then the corporation would be well advised to take the insurance (hedged loan), pay the money, and include the costs in the discount rate used for evaluation of the project in the bid phase.
If, at the other end of the scale, the amount involved is relatively small and the perceived volatility of the economy low, then these would tend towards the corporation deciding to carry the risk alone. Whether they still adjust the discount rate in response to perceived future increased in input prices or of inflation more generally is a management decision, typically taken outside the project team.
I doubt very much if any corporation large enough to contract to construct power generation facilities operates on a simple model when it comes to project finance. Each project’s financial risk matrix is just as significant as many other variables, eg labour rates of inflation, or sensitivity to long lead time items, which are perhaps more easily comprehended. The corporation’s treasury department and that of the purchaser will very carefully examine these aspects of the project, from the perspectives of contractor and client. The list of risks and allowances on a large long-term project can easily amount to 30% of the budget estimate.
For example, not too long ago, I was asked to take over project management of a job estimated at $63M, where the budget was only $52M. By addressing and minimising risks, from both the supplier’s and the client’s perspective, the project was re-scheduled to complete a year later but it came in at $43.9M all final, all done.
Where was this money found? Risks were identified and managed.
Design was completed before tendering.
Just-in-time design needs large contingency factors for unknowns.
Large and long lead time items were pre-purchased, thus enabling construction contracts to be let later and based on final designs.
Because the design was completed, the previous 8 on-site contracts were rolled into one, hugely reducing on-site supervision and quality costs to the client, as well as cordination snafu’s.
And so on… 1/3rd knocked off the cost of an award-winning project, mostly achieved by managing commercial and design risks.
I guess that this answer may not fully convince Gene, but essentially the discount rate which a corporation adopts will include allowance for the types of perceived risk, eg of future inflationary pressures. Perhaps the discount rate can be thought of as the price of money to the project – the internal price at which the corporation is prepared to put money on the line next year and the ones after. It is thus divorced from the current rate of inflation, estimates of future rates of of inflation and the estimated costs of borrowings by the firm, which are only several of the inputs into the final determination of a discount rate.
I have read recently that AEMO, the Australian energy market regulator, is re-thinking billions of dollars of high voltage transmission projects because of concerns that the asset owners are profiteering from differentials between the real net cost of capital and the discount rate which was agreed to by the Regulator during the project approval phase, which is where those (indexed) costs which may be added to retail tariffs are approved. Lawyers and economists are getting richer and fatter as the dabates rage… there are literally billions of dollars at risk, just in southern and eastern Australia, a market population of roughly 20 million people.
Sorry, Moderator… this has been another marathon post from JB.
MODERATOR
It’s not the length that matters, it is the content. Great content but please remember to supply the refs/links where available e.g.
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Gene, @ 1:52pm:
1. LCOE is not an adequate tool for project approval, whether as client or constructor. It is used for comparisons only, as a way to compare competing projects, using a consistent set of assumptions regarding such matters as discount rates.
2. Discount rates can be varied and often are for comparison purpose. That way, projects which have high up front capital costs can be compared fairly with competing projects, some of which have low up-fronts but high O&M.
3. Capturing the future…
It is possible to input varying anticipated costs and expenditures into financial models for specific projects and to run “What if?” scenarios endlessly, however this quickly reaches beyond the purpose of LCOE tools.
Smarties can and will use LCOE models over various time ranges and discount rates to espimate outcomes from such things as a step change in discount rate at Year 10, or an increase in fuel costs at rates which are higher than the discount rate or general inflation rate, but this quickly becomes futile because project-specific costs and market factors will quickly swamp any apparent precision gained thereby. I think of the LCOE as a way to tell whether to buy a new car or an SUV, and how much to budget. What it cannot do is tell me what the actual price of the vehicle will be, or what brand and model. It can thus narrow the range, but not make the final decision.
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Gene,
It appears that you have decided to take a contrarian point of view.
Inflation is only measurable in hindsight. There is no alternative.
Future inflation is able to be guessed at, and that I have covered already. If you are not prepared to accept that, then so be it. However, you appear to place your own gloomy prognostications above the knowledge and language of finance and economics. We are, thus, talking in different languages.
1. I have already discussed concisely how expectations of different future inflation scenarios can be modelled and why this is beyond the realm of LCOE. Financial modelling is not a matter of bashing opinions against each other, it is mathematical. If you don’t wish to base your future expectations on modelling, then we are only discussing opinions, which leads to unsolveable problems. Who can shout loudest and longest? That is no way to make decisions.
2.
There was no first mistake. Similarly, I have not said or meant to imply that “corporations will save us”. That is simply silly. What I have tried to do is to explain how corporations handle financial risks, especially those relating to expectations of future inflation of input prices.
I have offered examples from my own experience and have discussed the limitations of LCOE calculations, which are primarily tools used for comparisons of energy options, versus the more detailed financial modelling which is essential before committing billions of dollars to any venture, whether energy related or otherwise.
It is nothing more than an insult to attempt to brush this aside with unresponsive and uncomprehending opinion.
The fog of which you speak is not the result of economic or financial modelling and cannot be lifted by chanting slogans. It may be partially lifted through analysis and technology and teamwork. Ignorance is not radar. So-called longer range views of the type “In the long run, we are all dead” are neither insightful nor helpful, even if coming from folk who are on our own team.
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This thread contains some excellent comments and some nonsense. It has been getting away from being constructive, IMO.
I decided to sit back and watch for a while. I suggest, if getting nuclear in Australia is as important as most BNC contributors think it is, then it would be most constructive to focus on what is imiportant.
The following is unhelpful IMO:
– Avoiding discussing and trying to identify the cost drivers that are making nuclear too expensive (based on LCOE analysis done specifically for Australia by an authoritative source)
– Arguing about the validity of the LCOE method for use at this stage
– Discussing ideological positions such as “discount rate is not valid” (and the evils of capitalism, money, debt, equity and interest).
– Comments about the invalididty of the analysis when the commenter had not read the paper carefully “These studies are meaningless because CCS fails a simple legal test.”
Can we at least accept that capitalism is here to stay; we are not going to change that. Discount rate is the way we value long term investments; we are not going to change that. LCOE is a valuable and useful tool for doing the sorts of comparions done by EPRI and for the sort of analysis presented in the lead article. If the LCOE method isn’t valid, why would IEA, EIA, OECD, RAE, MIT, NREL, NEEDS, Treasury and virtually all the authoritative organisations that do these sorts of comparisons use LCOE?
Can I urge us to get back to:
– pointing out any important and relevant flaws in the analysis and the EPRI study. Please indicate the size of the error and how it shold be corrected
– accept the analysis and the results are OK and move on to the next step: what would need to be done to allow nuclear to be economically viable in Australia (and I’d argue there should be the caveat “without damaging our economy”).
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Peter Lang — Fine with me!
It might be that the validity of the EPRI figures, generally, can be assessed by projects which tehy rated and also have been constructed in Australia. For example, if EPRI assessed wind farms it seems there are several which have been completed in various parts of Australia.
This might be relevant as (if I recall correctly) wind farms in Australia are much more expensive than here in the Pacific Northwest. To establish the goal, right now wind energy contracted wholesale price to Idaho Power has an LCOE of US$0.083/kWh.
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Peter Lang,
accept the analysis and the results are OK and move on to the next step: what would need to be done to allow nuclear to be economically viable in Australia
Compared to what?
It would be hard to make a purely economic case for nuclear anywhere in the world compared to coal at $1.50/GJ. Most of the world doesn’t have $1.50/GJ coal.
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harrywr2,
So?
Nuclear fuel is about half the price, $0.78/GJ :)
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harrywr2, @ 10 November 2011 at 3:59 PM
Thank you for your comment.
Not compared to anything. Just simply, are there any errors in the analysis? Are the abatement costs correct, given the inputs? Is there any significant error in the inputs? That is the first step.
I’ve concluded from the discussion so far that no serious errors have been identified, so far. But many readers do not like the figures so the discussion gets diverted to other arguments such as the validity of the concept of discount rates and the LCOE analysis method. IMO, those discussions are a distraction.
In that case, Australia should be one of the last countries to move off coal. Until there is an international agreement on how to cut GHG emissions, we would be shooting ourselves in the foot by implementing policies to force expensive electricity for no benefit to the world (no reduction in global emissions) and serious consequences for Australia’s economy (i.e., for people’s well being). It would make us less able to implement the appropriate policies, including adaption policies. This is obvious. For substantiation for these statements see: https://bravenewclimate.com/2011/07/06/carbon-tax-australia-2011/#comment-136435 and subsequent comments.
If we want low cost nuclear, we need to be prepared to let go of some of the impediments that are constraining us. If Korea can have nuclear for $2,500/kW and China for even less, then why can’t we have it for close to those figures? We need to be prepared to approach this with an open mind, IMO.
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What is lacking in the analysis is the cost of a 7 meter ocean rise in about 100 years. This possibility is now in the minds of some of our best thinkers because they can project what is currently happening into the future. The present value of the future 100 years discounted at 10% annually is (future$)*1.1^-100 = (Future$)(.00007). So even if we did plug in trillions of dollars as the future cost of dealing with a 7 m ocean rise, it still has no present value impact in today’s decisions. This is the shortcoming of present value analysis. Its equivalent to harvesting a forest and not replanting it for the next generation.
For sure a 7 m ocean rise 100 years in the future will have a lot of meaning to those people 100 years from now, our kids. From their persective the CO2 problem would have been much easier to solve at our present time than in their future time. So they will see us as choosing to enhance our economic wealth at the expense of theirs.
Choosing to ignore this future problem might mean the person doesn’t believe there will be a 7 m ocean rise even though there is good evidence, or possibly they just don’t care. I’m afraid this is turning into an evolutionary test for humans. Are we up to the challenge?
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Indications from this article suggest that an overall large monetary cost to completely replace any electricity generating technology is a given, regardless of whether it’s to mitigate CO2 emissions or not
France Can’t Afford to Give Up Nukes, Utility Chief Says
In particular, this struck me:
(emphasis mine)
The major difference here (i.e. going from nukes to coal instead of the other way around) is that there are no savings from greatly reduced external costs, which are paid for by the public (health, pollution, contribution to global warming, etc.).
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I recollected a couple of other EPRI documents I’d encountered (regarding the elasticity of demand) . They changed significantly within only two years.
So I looked back, and found in 2005 EPRI produced a document, Nuclear Energy in a Carbon-Constrained World, which seems to put nuclear costs at about $60/MWh. That document also puts a ‘value’ on nuclear energy in different carbon constraint scenarios.
The recent EPRI document notes that ” (LCOE) for each technology was estimated based on a simplified version of the Revenue Requirement Methodology. The simplified COE methodology utilised a spreadsheet approach to ensure transparency of the results. Financial parameters, including assumed capacity factors, were reviewed by the AdvisoryGroup…”
I noted shortcomings of the model previously, and P.L’s spreadsheet anticipated the criticism. Choosing wind would have to trigger also choosing a second supply, which would in turn mean the capacity factor of the second source chosen would drop. A proper model is difficult to put in a spreadsheet.
The model also assumes costs will drop rather significantly for CCS. I am not convinced that is known – or knowable. I see no reason the EPRI model is reliable in estimating the actual cost of “CO2 abatement” – and my earlier comments should have stated I think a more complex model would show nuclear and CCGT, alone in the mix, would be the lowest replacement cost method of CO2 abatement – a conclusion not dissimilar to KPMG’s fresh reporting on the UK . http://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Market%20Sector/Power_and_Utilities/new-nuclear-an-economic-perspective.pdf
I didn’t say that, and we ended up discussing the LCOE for generation, This is clearly tied to estimates on the cost of capital, and I think Peter Lang’s “Can we at least accept that capitalism is here to stay” statement probably defines discussing the details on that. A free market without a cost on externalities/emissions should do what it is doing.
Australia has the comparative advantage of abundant coal. If Australia spends on nuclear, chances are more coal is exported elsewhere – so all that occurs is more fuel is used in shipping. The economics dictate Australia generate it’s electricity with it’s coal.
I’ve opined before that the economics seem to indicate the elasticity of replacement for energy are greater than the elasticity of demand – theoretically just banning coal would bring alternatives to market quicker, and cheaper, than models, such as EPRI’s produce. Australia would then lose all the value of the coal in the ground. In a CO2 abatement world, the scenario where Australia retains that ‘wealth’ is CCS. The EPRI study justifies that course of action – perhaps by design.
But, if the financing was provided by a government, at cost, the figures would be drastically different. The EPRI study shows debt as 70% of all financing, at a cost of 9% with a 6.3% return. Eliminate the return and things change rather quickly. You might consider doing that for the same reason the Hoover and Grand Coulee dams were built. There are times when governments just want to get money circulating.
The valuation choice ends up between mitigating climate change, and the value of coal extraction. Again, economically, the outcome of that choice is known. The monetary benefit is immediate, while the costs of climate change are not.
Immediate wins.
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harrywr2, on 10 November 2011 at 10:21 AM said:
This comment reinforces these points:
1. Nuclear cannot be viable in Australia at the currently expected costs.
2. CCGT, not nuclear, is the least cost way to reduce emissions in Australia, at least until much of the coal fired power stations have been replaced.
3. A carbon price of $107/tonne CO2 would be required to make nuclear a viable option (in the absence of other market interventions, incentives or disincentives to favour nuclear).
4. This means Australia would have to pay a higher CO2 price than probably any other country.
5. Such a high price for CO2 has not been justified (by impartial, authoritative sources).
6. Australia should not lead the world with the highest CO2 price penalty. (Deleted personal political inference)
7. CO2 pricing is not going to remove the impediments to low cost nuclear. It won’t even force us to look at what needs to be done to remove them. Instead, the easy way will be to continually lift the CO2 price until nuclear is viable with the impediments remaining in place. CO2 pricing will cover up the issue, as has been so amply demonstrated by two years of BNC contributor’s avoidance of the issue of how to remove the impediments to low-cost nuclear (see the comments on this thread: https://bravenewclimate.com/2010/01/31/alternative-to-cprs/ )
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Scott Luft,
Excellent comments. Thank you. Some really clear, deep thinking in this. I’ll think for a while before responding.
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Some inputs for LCOE analysis used in the ALSTOM paper (June 2011): “Cost assessment of fossil power plants equipped with CCS under typical scenarios.”
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Peter Lang, it was I who directed the moderator to make those edits. As I’ve said to you before, if the moderation policy as applied on BNC grates too much, then you have options elsewhere on the internet. It is fair in the sense that I believe it is fair, and that is all that counts here. So as galling as it may be to you sometimes, please grit your teeth and accept them as being done for the good of the blog, and in the interests of getting and keeping the most people onside to your way of thinking as is possible. Perhaps it will help if you think of the moderation policy as akin to a purse-lipped teacher who strides about a class of intelligent but sometimes belligerent schoolboys, brandishing a ruler and occasionally whacking it over the knuckles of those who get too rowdy, stir others too much, or don’t follow the class rules.
In sum, I must ask you to no longer complain here in the comments about moderation (do this via private email if you feel the need to vent). Otherwise, I’ll be forced to leave you on comment-by-comment moderation to avoid having these slip through, and neither of us want that.
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Peter I will agree the EPRI study and LCOE makes good economic sense if the analysis is performed in a conventional sense. I have done a jazillion studies exactly as you would expect, looking a cash flows and minimizing the total present value expense or alternatively maximizing profit.
However there is a new problem lurking in the distance. Take a look at this NASA site showing a rise in the CO2 level.
http://www.noaanews.noaa.gov/stories2011/20111109_greenhousegasindex.html
The rise was 29% from 1990 to 2010. The so called 400 ppm tipping point is at hand in about 4 years (I think). How high do you think the CO2 level will go before Australians will begin to take the CO2 rise seriously – i.e. in the economics and decision making. I had not seen this mentioned in your analysis so I think you are probably purposefully avoiding the issue.
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Gene Preston,
Thank you for your comment.
You are quite right, I have not mentined it in this analsys. I specifically excluded it in the Introduction, which says.
There are hundreds or thousands of analyses that do address the effects of CO2, externalities, CO2 pricing, etc. This paper has taken a different tack using the LCOE figures that the government departments are using for their analyses and decision making. I believe this approach is valid. This is a foundation stone for what follows. If there are errors in this analysis we need to know. So could you please focus on this analysis and its purpose, rather than try to go of in different directions (yet).
The purpose of this analysis is to show what the CO2 price would have to be to make the various technology options viable. For nuclear, the CO2 price would have to be $107/tonne CO2 (in the absence of other incentives and disincentives and given the current investment climate in Australia). This is based on the EPRI figures. In fact, the nuclear case may be worse than stated, because investor risk premium is not included in the EPRI figures. IMO there is no way that CO2 price can be raised that high, and nor should it be. Therefore, we need to look at other ways that will be acceptable.
If you want to see what I’ve been writing on CO2 tax and ETS, then I’d refer you to the CO2 Tax thread from here https://bravenewclimate.com/2011/07/06/carbon-tax-australia-2011/#comment-136435 to the end of the thread. That will give you a pretty good understanding of where I stand.
The “lead article of the “Alternative to Carbon Pricing” thread also gives a good idea of how I suggest we implement nuclear in Australia.
Now I hope we can get back to discussing the lead article on this thread.
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My estimate is that 107 $/metric tonne for CCS translates into 14.6 cents per kWh using a 1000 MW coal plant producing 3 million lbs CO2 each hour. This seems a bit high, maybe by a factor of two. In the US coal is a little cheaper than nuclear, but if you add CCS, it doubles the cost of energy from coal, making nuclear by far a cheaper alternative.
You had said “Based on EPRI’s estimates, nuclear is not economically viable in Australia because it is too expensive. This situation will remain while the impediments to low-cost nuclear remain in place.”
What are the impediments in Australia stopping nuclear power? In the US its a deregulated market that is stopping nuclear, not because of the energy cost, but because under our deregulated no one can afford to build anything because the risk to a capital investment is too high in a deregulated market. So in our deregulated environment, not even gas plants can be built at a low investment risk. And that is why rolling blackouts are going to be the norm soon here in Texas.
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Build Time Differences
Since interest costs during construction can be in the area of 30% of the cost to build a nuclear plant, it is important to estimate the construction time correctly. Construction time is defined here as from first concrete to fuel load.
I have been comparing the Australian and the English levelised cost studies.
England study link – http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/nuclear/2153-electricity-generation-cost-model-2011.pdf
It is strange that the two studies come to opposite conclusions. The English study shows nuclear to be the cheapest option.
From appendix D of the English study – Areva says construction is likely to take 42 months, i.e. 6 months longer than Westinghouse. The figures show this 6 months difference.
From section 6 of the Australian study – The first US contract agreement since Three Mile Island was signed in April 2008 by Georgia Power Company for two AP1000 reactors. It is estimated that the construction period will last approximately 36 months.
It appears that both studies seriously under estimate the construction time by taking the company estimate. Also, it appears that the time of construction is same for the first of a kind in a country and the Nth of a kind in a country.
The AP1000 builds in China appear to be on schedule but the schedule is 50 months from first concrete to fuel load. At the Sanmin site first concrete was 3/09 and fuel load is scheduled for 5/13. The AP1000 build in the US plant Vogtle may start 1/12 with a finish in 2016. About 50 months also.
Both the Areva EPR in Finland and France are years behind schedule. However, the Chinese EPR seem to be on schedule and plan to take 44 months. The Taishan start was 10/9 and the projected finish is 12/13. (If I can remember, I will look to see how the AP1000 and the EPR are doing in December of 2013.)
It would seem reasonable to use 50 months for the first-of-a-kind-in-a-country and decrease to 36 months for Nth of a kind.
I assume that adding 14 months to the construction time increases the cost quit a bit.
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@Martin Burkle,
It appears that both studies seriously under estimate the construction time by taking the company estimate. Also, it appears that the time of construction is same for the first of a kind in a country and the Nth of a kind in a country.
There are build time estimates with/without contingencies.
The VC Summer Schedule(pdf page 26)
Click to access 2011Q2BLRAReport.pdf
shows an 18 month contingency. If you scan down to item # 60 – there has been a slippage of 12 months in the coolant loop pipe fabrication. But item #130 – Hot functional test has only slipped one month and item#133 – Unit 2 substantial completion hasn’t slipped at all. It’s also interesting that ‘first nuclear concrete’ is item #69 on the project plan. It would appear that in the AP1000 build plan substantial verification of ‘long lead time’ items is made prior to pouring concrete.
One would ‘think’ that at nth build supply chain issues would be resolved. Of course if one is ‘maximizing local content’ then the supply chain problems could repeat.
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Gene Preston, @ 12 November 2011 at 9:31 PM:
From this and most of your comments on this thread it seems you have not read the lead article carefully. Could I urge you to, please, read it carefully and understand the whole article as a package. Then hopefully, if you find something wrong in the article – as opposed to hand waving – you can point to specific errors.
Excellent question Gene. I’ve been urging BNCers to focus on getting to the bottom of what thye are for the past two years. It is not a subject anyone on BNC has shown any inclination to go near. It would involve questioning some deeply held ideological beliefs. I have posted many comments on just the question you ask about on the “Alternative to Carbon Pricing” thread (which is accessible by clicking on the “Renewable Limits” tab [click on the tab don’t hover over the contents list that comes up when you hover over the tab]).
Furthermore, Also please refer to this comment on this thread:
@ 5 November 2011 at 8:52 AM
I can provide you with a list of links to some previous comments that paretly address your question. However, my main point for the past two years is that we need to identify the impediments to low cost nuclear in Australia before we can work out which we could remove and how we could best go about it.
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Martin Burkle, 13 November 2011 at 4:27 AM
These are excellent points. They get to the heart of one of the most important uncertainties in LCOE estimates.
EPRI provides a short description of five of the main Gen III technologies available at the moment, including the vendor’s claimed construction duration. For AP1000 they quote 36 months construction duration. Furthermore, EPRI has used a 1,117 MW plan for its baseline nuclear plant, so we can conclude their LCOE analyses are based on the AP1000.
However, EPRI does not specifically state what construction period they have used for their LCOE analysis. I suspect they may have used a long duration as the basis of their LCOE figures. The reason I say this is because the capital cost figure ($/kW) we need to enter in the NREL LCOE calculator to give the capital component of LCOE, $114/MWh (see EPRI, Table 10-13 and convert to 2011 US$), is $9,207/kW. This is much higher than other figures quoted elsewhere. This is comprised of $4,763/kW for Total Plant Cost (EPRI Table 9-2 converted to 2011 US$) plus (by subtraction) $4,444 Owner’s Costs and AFUDC.
The EPRI report does not state what is included in the $4,444 of what I am assuming comprises Owner’s costs plus AFUDC. The EPRI report states they have assumed Owner’s Costs amount to 15% of Total Plant Cost. But Owner’s Costs plus AFUDC amount to 93% of Total Plant Cost. This suggests a large AFUDC component and therefore, a long construction duration.
How EPRI has calculated the capital cost component of LCOE is a mystery (to me).
I should point out that the ACIL-Tasman report gives a more detailed description of their LCOE calculation. The Owner’s Costs are not included (from memory) and the AFUDC is calculated in the program from inputs about assumed cash flow during the construction period (through to the start of commercial operation). The EPRI and ACIL-Tasman calculations also differ in that EPRI is done on a ‘before tax’ basis and ACIL-Tasman on an ‘after tax’ basis. The ACIL Tasman report exposes that there is a considerable tax penalty for nuclear compared with coal. That is just one of many of the impediments to nuclear we need to address.
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Harrywr2,
Excellent points. However, as you would know (but I’ll spell it out for those who do not), delays of individual milestones do not say how much the project completion date will slip unless we also state that the milestones is on the critical path. The milestone list does not say which milestones are on the critical path, nor how much float (slack to Americans) is on each milestone.
For readers not familiar with these terms (critical path, float and slack) see definitions here:
http://en.wikipedia.org/wiki/Float_(project_management)
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@Peter Lang,
Yes, without knowing how much float/slack is in each milestone we don’t know what the impact will be or the build time on NOAK units.
Just as background history…Vogtle #3 and #4 in Georgia, the US FOAK for the AP1000 is just a couple of months ahead of VC Summer #2 and #3 in South Carolina. Georgia and South Carolina are neighbors.
The history on Vogtle #1 and #2 was they were originally budgeted at $660 million and ended up costing $8.8 billion(1980’s dollars). So there is some ‘sensitivity’ in the region about the words ‘delay’ and ‘cost overrun’.
Given the ‘sensitivity’ I would be very surprised if there isn’t a lot of float in the project plan.
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Harrwyr2,
Thank you for that. All this information helps us to work out what we will need to do if we want to remove the impediments to low-cost nuclear in Australia. The first step is to identify what all the impediments are, quantify the effects on LCOE, prioritise them in terms of: the effect on LCOE, consequences of removing them (effect on other systems), ease of removal, and time line for removing them.
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harrywr2, on 13 November 2011 at 5:35 AM said
This raises an important, and often contentious, point. Should we or should we not impose constraints on the contractor that forces the contractor to meet a specified proportion of Australian Industry Involvement?
If we do, the cost of the plant will be higher. If we don’t we may not develop expertise in Australia in nuclear technologies as quickly.
We have a parallel in defence procurements. Australia is considering whether we should build our next fleet of submarines ourselves or buy them overseas. The cost difference is likely to be more than a factor of two and there will be a lot of problems if we build them ourselves. But there are considerations about the flow on effects of keeping industry in Australia as well as Australian independence in submarine warfare. Similar debates will no doubt apply to implementing nuclear power in Australia. From my perspective, we need nuclear to be least cost so it will be rolled out faster and so Australia can assist developing countries to choose nuclear over fossil fuels. I believe we will learn fastest by just getting on with it. To do this means adopting the least cost approach whatever that might be.
Adopting the least cost approach may mean, for example, allowing the vendors people, e.g. Koreans to enter Australia to build and operate the plant for an extended time, without requiring that they be employed under Australian industrial regulations. (Personal political inference deleted)If we want least cost nuclear, for all the benefits it would bring, then I’d suggest we need to open our minds to all options.
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Martin Burkle or anyone,
Further to my 13 November 2011 at 9:23 AM response to you, and your comment:
I am still struggling to understand why EPRI has what I am interpreting (perhaps incorrectly) to be an Owner’s Cost plus AFUDC of 93%.
AFUDC for VC Summers 2 and 3 [1] is $249 million out of a total plant cost of $5,371 million, or about 5%. EPRI states that it allows 15% for Owner’s costs (as do OECD 2010 and IEA 2011). Those total about 20%. How does EPRI get 93%? What am I missing?
[1] http://www.scana.com/NR/rdonlyres/A830A131-9425-46F1-B948-C8424530EE49/0/2011Q2BLRAReport.pdf , Appendix 3.
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EPRI Construction Cost Mystery
“How EPRI has calculated the capital cost component of LCOE is a mystery (to me).”
Peter, I am confused. Please tell me what I am missing.
Your article basically says, “Assume that the EPRI report is correct. Since nuclear is too expensive for Australia, what needs to be done to make nuclear competitive in Australia?”.
Now after 170 comments you admit that even you, an expert, can not figure out the capital cost component of LCOE in this report. We all agree that the capital cost component of nuclear is VERY important (and we all don’t agree on much).
So, Peter, why would you ask me to assume that the EPRI report is correct when you can’t figure out where the large cost of nuclear comes from?
The EPRI cost for nuclear appears to be too high but appendix 1 says a build time of 36 months is expected for an AP1000. This build time is too short especially for the first Australian build. So the EPRI construction cost should be higher still.
Conclusion: Australian nuclear build costs may be too expensive or not. The EPRI report can not be trusted because it is not detailed enough to know nuclear construction costs.
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It is my understanding that finance for nuclear plants in the US often comes at a premium because of the risk of political interference during and following construction (Shoreham is the classic example of how badly things can go wrong with this). Did the EPRI estimates take this into account? If so, there’s a pretty obvious way to attack the problem.
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Martin Burkle,
I pointed out in the paper that the EPRI report is “obscure in parts”, doesn’t explain all the input s needed for calculating the capital component of LCOE and that Total Capital Required is 1.93 times Total Plant Cost.
I do not understand how the capital component of LCOE is calculated in the EPRI report. I cannot get the capital component of LCOE for the ACIL- Tasman report to match their stated values. Both reports do not specify all the cash flow and other inputs you’d need to calculate the LCOE they way they have done.
When I say I don’t understand their method, I am not saying that I dispute their figures. I put the discrepancy down to me not having the knowledge or tools to be able to replicate their outputs.
I strongly suspect their figures are correct, and probably realistic for Australia. There is a remote possibility they are wrong. I am urging that we accept their figures and move forward because I see no other realistic option that will allow us to move forward. The reason I say that is because we cannot expect to be able to get Treasury and the many other organisations to re-do their carbon tax and ETS modelling. Furthermore, AEMO contracted Worley Parsons to check the EPRI figures and conduct sensitivity analyses on the effect of varying the input parameters. So I believe the EPRI report will have been given very close scrutiny by Worley Parsons, AEMO, Treasury, ABARE, ACIL-Tasman, all the big financial firms, ESAA, the electricity generators, BZE, and many others who have the competence to do so. Thirdly, LCOE analysis is standard practice for EPRI. It is unlikely they would get this wrong, and if they had an error it would probably have been found and corrected by now.
Therefore, the “highly likely” situation is that EPRI figures are correct. If there was an error, it is “highly likely” it would have been picked up by now.
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Peter is the EPRI LCOE of nuclear capital cost higher or lower than you would expect? I thought LCOE could only be calculated one way.
David, we need storage when wind and solar become so large that their power swings are not manageable by ramping convention generation. ERCOT is there right now and with wind expected to double in next few years the ERCOT engineerf are doubting they can make the system operate reliably. The near instant power swings are getting close to exceeding the loss of a large nuclear plant and our spinning resereve is set to cover that loss. Larger than that causes the frequency to drop and automatic load shedding.
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Possibly the EPRI financing interest is higher than the LCOE discount rate. Like I had said it depends a whole lot which utility is building the nuclear plant as to what the financing interest is. It was 11% for ERCOT because of our screwed up market design but could be 5% for Southern Company if they showed the sales of the nuclear plant energy was for certain and the collection of revenue from sales was secure. The reason nuclear looks so bad in the US is nearly entirely due to regulatory or deregulation reasons, not technical.
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Hi Finrod,
Investor risk premum is not included in the EPRI analyses. The analyses use the same discount rate for all technologies: 8.4% real before tax.
Investor risk premium would need to be added to this discount rate. I agree investor risk premium is one of the major impediments to nuclear in Australia and it is one of the most critical issues we will need to address (and remove) if we want nuclear.
MIT (2009) [1] estimated the investor risk premium for nuclear in USA is 26% (from memory). I expect it would be much higher in Australia.
You have hit on one of the most significant hurdles we need to deal with (IMO).
[1] MIT (2009) “The future of nuclear power”, 2009 update.
http://web.mit.edu/nuclearpower/
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Several commenters have suggested or implied that we should return to an earlier time and reintroduce state ownership or increased regulation to make nuclear viable. This is Keith Orchison’s take on this (released this afternoon) http://www.businessspectator.com.au/bs.nsf/Article/NSW-power-privatisation-OFarrell-unions-profit-deb-pd20111114-NKV87?OpenDocument&src=pmm .
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The point of my previous post (extracts from Keith Orchison’s article), is to say that we should not waste our time arguing about whether Australia should reintroduce state ownership or stronger regulation as a way to implement our preferred solutions. That is simply not going to happen. Australia is heading towards transferring the electricity generation assets to private sector so it can free up the value to invest in what only the public sector can do. We’ve been heading in this direction for over twenty years (as have most other western democracies) so to suggest we will turn back is unrealistic.
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Peter the movement to privitization and/or the deregulation of AU’s electric system is a big mistake. Its been a disaster for us here in Texas. The publically owned utilities offer much lower rates and are doing a much better job of planning their future systems. I am just waiting for this deregulated system to have rolling blackouts and the citizens are going to get so mad then the whole system will be redesigned from the ground up. Keep an eye on this development.
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Martin Burkle, 14 November 2011 at 11:20 AM
I can’t see where the EPRI report states it has used a 36 month construction period as the basis of its LCOE estimates. I said this in an earlier comment. I cannot see any mention of 36 months in the EPRI appendix nor in the appendices to the lead article for this thread. So I am confused as to what you are referring to. I am now wondering if you read all of my comment @ 13 November 2011 at 9:23 AM, which included this:
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Peter, you gota get the detail.
Thank you for explaining your position as “EPRI is the best information we have. Let’s use it as a starting point to see what policies and practices could reduce the cost of nuclear”.
This is a reasonable business position. It is normal to take a troubling business report and drill down to the detail level where business practices can be changed for the better. It is also normal that the required detail is not in the original report. Managers will have follow up meetings that often become both very detailed and very nerve wracking for the report writer (OMG did I get this report right?).
Now, we have a troubling EPRI report. We would like to drill down to more detail so we can think about Australian policies and practices that would reduce the cost of nuclear. But it seems to be impossible to get more information from EPRI. In the US there is a freedom of information act that is sometimes used to extract more information from the government. I picture Australia as a smaller community where such formality is not required. Can’t you just ask one of the authors for more detail?
I assume the answer is “No, we can not get more EPRI detail. The detail is a closely held secret guarded by privilege and lawyers”. If this is the case then I really wonder about the motive of the “protectors of the detail”.
It is not logical to guess at reasons why the EPRI nuclear cost is so high and then act on those reasons. The detail not only contains the reasons but the extent of each factor. Let’s use my example, I think that the construction duration used by EPRI is 36 months because 36 months is used in the appendix for the construction duration for an AP1000. Peter, you infer a longer construction duration was used because you don’t see how the cost could be so high using 36 months as the construction duration. We need to know whether they used 36, 48, or even more months. If the construction duration could be reduced from X (EPRI report months) to 36 months, then we would know how important construction duration is to nuclear cost.
We disagree after reading the same report. Back when I worked for a living, it was not at all unusual for me to read a design and disagree with someone else who read the same design. The managers would grimace and call a meeting including the disagreers and the writers of the design. Sometimes it was a misunderstanding on my part. Sometimes the the design needed to be improved.
The EPRI report was to inform public policy decisions. The EPRI detail could be used to inform public policy. In order for the EPRI report to be the “best information we have”, you have to get the detail level information.,
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Scott Luft, @ 11 November 2011 at 12:59 AM:
I said I’d return to this thought provoking comment.
I’ve read it again, carefully. I agree with all you say until the last paragraph. I have some issues with some of the statments in the last paragraph, but they are minor; I think the comment is interesting and important. I would urge interested readers to re-read it.
I am not sure what you mean by “at cost”. I’ll assume you mean at the rate the government can borrow. But doing this has costs for society. The money the government borrows for electricity generation cannot be used on other capital investment projects that only the government can build, such as hospitals, public transport and investments for environmental remediation. If the government borrows too much money it squeezes out the private sector. If we go too far, we end up in the mess Europe is in. So, I am far from convinced that public ownership of electricity generation is the right approach.
The assumed interest rate on debt is 9% (Current) or 6.3% (Constant). Debt comprises 70% of the funding, so the debt component is 9% * 70% = 6.3% (Current) or 4.4% (Constant). EPRI’s report works in Constant dollars throughout. At first I didn’t understand what you meant so I’ve laid it out so others can follow.
We cannot do that. That would put private sector generators out of business. They’d go broke. When we have a mix of private and public sector generators, as we have in Australia, the public sector has to pay a dividend to the government at the same rate as the private sector to allow the private sector to compete. See the full Keith Orchison article (link in previous comment) for some up to date figures on the dividend the NSW generators have to pay to the NSW government.
That might be the correct approach in a depression, but not now, especially since the EU and USA are up to their eyes in debt. Instead, we should remove the mass of regulation that is strangling innovation and business and forcing manufacturing to move to Asia.
I have some concerns about bits of this, but can’t address that here. I believe we can cut global emissions without damaging the economy.
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Peter you said:
“We cannot do that. That would put private sector generators out of business. They’d go broke. When we have a mix of private and public sector generators, as we have in Australia, the public sector has to pay a dividend to the government at the same rate as the private sector to allow the private sector to compete. See the full Keith Orchison article (link in previous comment) for some up to date figures on the dividend the NSW generators have to pay to the NSW government.”
This is insane. This means that the public pays a subsidy to the profiteers? I build a power plant and because the private companies do not like me generating my own power, they bill me? This isn’t competition, its highway robbery. Its the poor subsidizing the rich. This is no way to keep the lights on. The only reason you might have low rates is because you have cheap coal. What does Australia do to keep rates reasonable? Otherwise the profiteers would just keep rasiing rates and raising rates.
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Gene Preston, @ 14 November 2011 at 9:32 PM
Thank you for your question and comment.
As I’ve explained several times on this thread, the EPRI LCOE figures are the best we have to work with at the moment. They are authoritative because they have been prepared by a groups who is expert in the field and because have been checked by numerous groups and widely adopted by the key government departments including Treasury, ABARE, Deparrtment of Resources, Energy and Tourism, and AEMO to name a few. So to try to develop our own figures and get anyone to take any notice would be futile.
Furthermore, I suspect the figures are realistic for Australia given the masses of impediments to nuclear power we have in Australia.
No. There are many ways to calculate LCOE. Here are a few:
Constant or Current $
Before or after tax
Many other financial and economic assumptions included or excluded
What is included in ‘Capital’ or handled elsewhere in the computation algorithims
Simplified NREL calculator or more sophisticated expressions
Refer to Section 2 here http://www.aemo.com.au/planning/419-0035.pdf for a lot more about LCOE calculations.
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Gene Preston, @ 14 November 2011 at 9:39 PM
I’ve answered all tha t previously on this thread. Could you please go through the article and read the responses to comments.
Like I said, the EPRI study is not a site specific or market specific analysis. It is not a financial analysis (I’ve already said all this in earlier comments on this thread; are you reading them?). It is a comparison of technologies using the same discount rate for all technologies. If we add in investor risk premium and remove incentives and disincentives, renewables could not be built at virtually any discount rate and the nuclear would have a high investor risk premium. So the true LCOE of nuclear in Australia would be far higher than the EPRI figures without major government incentives.
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Gene Preston, @ 14 November 2011 at 9:50 PM:
I know you believe that, and so do some other engineers who have spent most of the early parts of their careers in the government owned electricity industry. There certainly are advantages and disadvantages of public ownership / strong regulation.
However, most people believe that the private sector can run it better.
Importantly, there is no turning back. It’s reality is it is not going to happen. The whole momentum is to sell off the remainder of the government owned assets. To try to argue against this is a waste of time.
Governments can no longer afford to provide the capital the electricity industry needs. Government’s have urgent needs for whatwver capital thay can raise. Thise needs include: health system, education, public transport, roads, dams and defence. We’ve been steadily increasing the total tax take and spending it on social welfare programs. We can no longer pay for electricity, telephone, banks, groceries etc to be provided by the public sector.
Get over it, Gene. It ain’t going to happen :)
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Gene, @ 14 November 2011 at 10:20 PM
That is left wing ideological silliness, IMHO. It is the same sort of nonsense that gave us mandated renewable energy and CO2 tax and ETS.
If you want electricity to be run by the state, do you also argue that telephone, internet, television, media, banks, groceries, petrol, gas should be run by the state? If not, why not? (By the way you are in good company because many in the Labor and Greens in Australia would agree with you).
Did you see this when I posted it a year or so ago?
Malcolm Grimston (June 2010), Chatham House Electricity – social service or market commodity? The importance of clarity for decision making on nuclear build.
http://www.chathamhouse.org/publications/papers/view/109378
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I differ from the greens in several ways. I do not believe in government subsidies. I do not believe the wind and solar are good investments because they return too little energy for the invested dollar. The open market competition model does not work either because it cannot see more than a few years into the futue. We need a new economic model unlike what we have ever had in the past and completely different from what we have now. You know what I believe. I believe that the long range energy supply can only be financed efficiently through the energy annuity concept: see http://thesciencecouncil.com/eugene-preston/196-a-new-way-to-finance-high-capital-cost-projects-using-and-energy-annuity.html
There is no other model that solves the financing problem for nuclear and even for solar, for those individuals who want to throw their money away. But that should be their choice, and we should not be subsidizing these energy sources. What governments should be doing is funding R&D on new processes and thats it.
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Martin Burkle, @ 15 November 2011 at 2:26 AM:
Martin, this is an excellent comment, all the way through. Thank you. I hope many people will read it and read it a second time.
You’re right, of course.
I’ve been thinking for a while I should try to contact someone in the Department to see if I can get some of the detail as you suggest. If I can’t I’ll write to the Minister.
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I wasn’t sure how, or if, to respond to your comments on my previous post – without going off on some tangents.
My point on coal was for Australia to meaningfully, and affordably, move off coal is for the world to have a better option. Wealth is what has value – and that includes, currently, the coal in the ground. I mention it as a hurdle that needs to be overcome.
We want to devalue coal, don’t we?
Secondly, I didn’t discuss public power at all, but I see the concern. Offering a financing advantage to one source would be like offering priority purchases at guaranteed high rates for long periods of time. Like the feed-in tariff, and renewable energy standard programs do…
Or allowing externalities, like emissions, to be unaccounted for…
Well, I also see my point. Picking where to distort a market also picks technologies. If you have a market for providers of electricity on 30-year power purchase agreements where the state lends at their cost of borrowing, you still have a market.
You just have a market for nuclear.
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Scott Luft, @ 15 November 2011 at 12:30 PM
Thank you for another thought provoking comment.
Yes, coal is an asset as long as it is valuable (e.g. for generating electricity, making other fuels and making steel).
OK. But why pick on just one externality? Why pick on CO2? Why not pick on any number of other far more important externalities?
And what about the external benefits of low cost electricity generation. How do you account for those?
A better way to make the transition to low emissions electricity generation, IMO, is to allow nuclear to compete with coal for electricity generation. Fifty years of misguided policies and regulation have made nuclear higher cost than it should be. These have made it uncompetitive in the developed world and less competitive than it should be everywhere. This is slowing the progression from fossil fuels to low emissions electricity generation. Instead of further distorting the market with more regulations and misguided bureaucratic interference, I’d urge we take direct action to remove the impediments to nuclear.
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Scott,
could you please expand on the point in your last paragraph
Is this a truly level playing field for all generators, for all energy sources, for all other industries that would want to borrow money at government rates? Why should electricity get special treatment over other critically important public infrastructure such as dams, public transport, health system, etc?
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The capital cost for nuclear (central estimate, Real 2009-10 A$/kW) = A$5,283 in 2015 translates to US$4515/kW which is in good agreement with VC Summer capital cost.
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DBB,
Yes,, but remember that is the Total Plant Cost not the Total Capital Required. To calculate the LCOE using the NREL sLCOE calculator we need to input the Total Capital Required. According to EPRI 2010, we need to increase TPC by 93% to get TCR.
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Martin Burkle, et al,
Department of Resources Energy and Tourism (DRET) has posted an update of the EPRI figures on their web site at:
http://www.ret.gov.au/energy/facts/Pages/EnergyFacts.aspx
Points of interest:
1. The cover page here http://www.ret.gov.au/energy/Documents/facts-stats-pubs/2011/AEGTC-2011-Fact-Sheet.pdf explains how AEMO contracted ACIL-Tasman to conduct a review of the EPRI (2010) report for both AEMO and DRET. A “Stakeholder Reference Group” reviewed the EPRI data and “updated” it.
2. ACIL-Tasman did the work (they are highly competent, respected and trusted by industry. I’d trust them on this more than just about anyone else in Australia).
3. 25 technologies are listed. Nuclear is not!
4. That is, nuclear was specifically excluded from the information available to the public, despite nuclear being included in the EPRI (2010) report!
5. The data is available in Excel spreadsheets. This is the link for fossil fuels: http://www.ret.gov.au/energy/Documents/facts-stats-pubs/2011/Fossil-Fuel-Plant-Performance-and-Cost-Summary-2011.xls
6. Discount rate used is 10.1% (pre-tax real).
7. The Total Plant Cost for Black Coal without CCS ($2,408 – $2,944) is a little lower than in the EPRI (2010) report ($2,967)
8. Conversely, Total Plant Cost for Black Coal with CCS ($4,043 – $4,941) is much lower than in the EPRI report ($5,855). [I smell the hand of politics interfering here! For background, Australia is trying to lead the world to invest in an Australian led RD&D effort to solve make CCS viable. We want the world to send us lots of money for CCS RD&D.]
9. Nuclear is included in the ACIL-Tasman (2010) report
Source: Preparation of Energy Market Modelling Data for the Energy White Paper, Supply Assumptions Report. ACIL Tasman, September 2010 http://www.aemo.com.au/planning/0400-0019.pdf
10. The capital cost for nuclear (central estimate, Real 2009-10 A$/kW) = A$5,283 in 2015 and A$4,486 in 2030. (for comparison it was A$5,742/kW in EPRI (2010)). As these are 2009 A$ they would need to be reduced by about 17% to make the 2011 US$.
11. I’ll do some work on these figures and see what I come up with. I can’t see the assumptions listed for cash flow during construction, so I expect I’ll still have a problem. Interest during construction is not included in the capital cost, so it has to be calculated. The NREL simple LCOE calculator does not handle that.
12. John Newlands may want to review and comment on the projected future coal and gas prices (Section 7).
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Martin Burkle, et al
I have reproduced the LCOE figures in the DRET (ACIL-Tasman) update of the EPRI (2010) report from the inputs in the Excel spreadsheet provided here. I have checked black coal without CCS and black coal with CCS (but excluding the CO2 transport and Storage line item – because I didn’t bother).
These LCOE figures do not include Owner’s Costs or AFUDC. Therefore, they are close to other commonly quoted capital cost and LCOE figures but not close to the EPRI (2010) capital cost or LCOE figures.
I have calculated an LCOE figure for nuclear based on the following assumptions which are drawn from two different reports.
Assumptions from ACIL-Tasman (2010) Excel spreadsheet:
http://www.ret.gov.au/energy/Documents/facts-stats-pubs/2011/Fossil-Fuel-Plant-Performance-and-Cost-Summary-2011.xls
Plant life (years) = 40
Discount rate (WACC) = 10.1%
Capacity Factor (%) = 85%
Assumptions from EPRI (2010) report
Click to access AEGTC%202010.pdf
Thermal efficiency = 33%
Fixed O&M Cost ($/kW-y) = $146.90
Variable O&M Cost ($/MWh) = $6.10
Heat rate (kJ/kWh) = 10,900
Heat rate (Btu/kWh) = 10,331
Fuel Cost ($/GJ) = $0.94
Fuel Cost ($/MMBtu) = $0.99
My guess>
Auxiliary load = 10%
Levelized Cost of Electricity
Below I summarise the LCOE components (in $/MWh) for four analyses (columns separated by spaces):
• Coal without CCS (low value) from DRET
• Coal without CCS (high value) from DRET
• Nuclear based on the assumptions listed above
• Nuclear from the EPRI (2010) report.
Capital Charges = 33 41 81 137
Fixed O&M Cost = 4 4 20 20
Variable O&M Cost = 5 5 6 6
Fuel Cost = 7 13 10 10
LCOE = 49 63 117 173
(LCOE is real 2009-10 A$/MWh)
What I need now is:
1. the figures ACIL-Tasman would use for the O&M and fuel cost inputs
2. to understand why the EPRI report has such a high cost for what I am assuming is Owner’s Costs and AFUDC
3. to understand why ACIL Tasman is not including Owner’s costs and AFUDC in their LCOE. It should be noted that IEA, OECD, EPRI all include Owner’s Costs and AFUDC in LCOE and seem to use a figure of around 15% of TPC for Owner’s Costs. As Martin Burkle pointed out in an earlier comment, AFUDC is around 30% of TPC, but very dependent on the construction duration, the cash flow distribution over the construction period and the interest rate during construction.
That’s enough for tonight. Lot’s more to do.
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Correction to previous comment,
In the comment @ 15 November 2011 at 7:30 PM, I guessed the auxilliary load as 10%. I’ve worked out that ACIL-Tasman used 8%.
That reduces the Capital component of LCOE to $79/MWh (down from $81/MWh) and reduces LCOE to $115/MWh (down for $117/MWh). This assumes that ACIL-Tasman have not changed the O&M and fuel costs for nuclear.
Since ACIL-Tasman have accepted the EPRI figure for Total Plant Cost, and since ACIL-Tasman would have no better figures to use from Australian experience than EPRI has provided, I supect ACIL-Tasman would not have changed the O&M and fuel cost inputs.
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@ Peter Lang at 4.15 on 15/11 which of the reports has the price projections?
Here’s a somewhat objective basis for predictions. The Mortlake gas project in Victoria expects to pay $7/GJ. The CEO of Santos has said the price of gas will double in 20 years which is 3.5% compound. Thus if Vic piped gas is $7 in 2012 it will be ~$10 in 2022 all going smoothly.
Black thermal coal is as low as $31/t ex Cobbora NSW with the spot price ex Newcastle around $125. I’d use the same 3.5% price escalator.
What could go wrong is unexpected supply dramas. In the case of gas the Federal govt could force coal seam gas to hook up with natural gas. There could be a big shift to CNG diesel substitute if for example they dropped the diesel rebate. In the case of thermal coal maybe Mongolia won’t have as much coal as the Chinese claim and they will pay anything for Australian coal. Local generators will have to match the price when contracts are renewed.
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John Newlands,
The projected fuel prices are here: http://www.aemo.com.au/planning/0400-0019.pdf
Section 7, Section 8 and Appendix A are the main sections to review.
You’ll find they not trivial. I’d be surprised if you don’t find this to be a sophisticated, analysis and projection of fuel prices.
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Thank you to Scott Luft, Martin Burkle and others hwo have prompted me to look more deeply into why the large difference in the value of capital used in LCOE analysis and the difference in LCOE. I have a lot more to do on this, but just to keep you informed, here is where I am at.
I’ve sent an email off to a contact with three questions about the EPRI and ACIL Tasman reports for AEMO and DRET. The questions ask for explanation of why EPRI includes Owner'[s costs and AFUDC in LCOE analysis (as do IEA, OECD and most other’s I beleive) whereas ACIL-Tasman does not. I expect ACIL Tasman is conforming wiht a long established practice in the Australian electricity industry. However, this makes comparisons with LCOE quoted in internatioal reports difficult.
At the moment I beleive the EPRI figures are the one set of consistent figures we have. ACIL-Tasman’s (1010) are internally consistent but do not include nuclear. They exclude Owner’s Costs and AFUDC so are not ‘the full monte’.
LCOE for nuclear in 2009 A$
EPRI (2010) = $173/MWh
ACIL-Tasman (2010) = $115/MWh [Note 1]
Note 1: My calculation of LCOE for nuclear using ACIL-Tasman inputs and excluding Owner’s Costs and AFUDC as laid out @ 15 November 2011 at 9:15 PM and in the previous comment.
This highlights the very large difference in LCOE due to including or excluding Owner’s Costs and AFUDC.
By the way, on a more careful reading of the EPRI report, I now think the assumptions for calculating Owner’s costs are included; and they look reasonable to me. I’ll try to reproduce the EPRI LCOE values today.
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Peter Lang I’ve looked at the AEMO planning document on coal and gas prices and so far I can’t see any statement that jars. On the general question of export parity pricing
– this is likely to apply soon to south eastern gas
– it may apply to black thermal coal as contracts expire
– it’s irrelevant to Vic brown coal.
It is possible that customers for gas and black coal ask the Federal govt to ensure that x% of production is set aside. Example if an old contract price for northern NSW black coal was $50/t but the spot price was $120. The Feds could insist that a certain tonnage of coal could not be exported so that generators had more ability to set prices.
It’s slightly weird reading these reports when they fail to mention nuclear but talk about mythological beasts like carbon capture and large scale geothermal. If there was intervention to quarantine domestic gas and coal prices from export parity critics could argue this constitutes a virtual subsidy. We see a forerunner of this in NSW
http://www.miningaustralia.com.au/news/cobbora-mine-deal-could-cost-taxpayers-6-billion
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More correctly the report fails to separately discuss nuclear as it does appear in several comparison tables, never under its own heading.
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JN,
Nuclear was not included in the Terms of Reference for the study. The Terms of Reference were issued by Australian Government Department of Resources, Energy and Tourism (DRET) and the Australian Energy Market Regulator (AER).
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JN, I saw your comment at 7:37 am after I posted my two comments. Just to let you know, I am trying to get answers to my questions (I mentioned in a comment yesterday), but have been told “we are not in a position to answer your questions”. You can interpret what that means. I was told yesterday “Nuclear was not included in the Scope of Work”.
At the moment I am assuming, from what I’ve been told so far, the EPRI figures for nuclear have not been changed. So, whereas the cost of coal has been reduced (assumed fuel costs reduced and efficiency increased substantially), the figures for nuclear remain the same as in the EPRI report. But remember that the DRET/AEMO report does not include Owner’s Costs or AFUDC in LCOE, whereas EPRI does. Also, the Capital cost figures ($/kW) in EPRI are “net, or sent out” whereas in ACIL Tasman they are “gross”. To convert $/kW (gross) in ACIL-Tasman to $/kW (‘net’ / ‘sent out’), divide the capital cost by (1 – Auxiliary Load). ACIL Tasman gives Auxiiary Load for Super Critical Black Coal as 9.8%, and with CCS is 23.3%. I’ve calculated that ACIL Tasman used Auxiliary Load = 8% to convert the EPRI capital cost of nuclear to the capital cost in the ACIL-Tasman report.
I haven’t a clue if anyone is interested in these comments, but I am posting them to keep them all in one place and keep people up to date as to what is happening, just in case someone is interested.
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Peter,
I am following everything you post. Although I am not able to contribute due to an abundance of ignorance, this thread is becoming something like a good mystery book. There’s plenty of misdirection and a slowly evolving core of probable facts. There’s a hint of political tampering. There’s a strong possibility of hidden goals. There’s even a chance to learn something new.
Keep of the good work. I hope the last chapter has a revelation that no one expected.
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Peter I endorse Martin’s comments, I am continually in awe of your persistence to ferret out real data and evidence then use this information to post a comment we can all understand (usually).
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Martin and Tom, Thank you. I’ll get back when I have some more information. It may take a long time to get the information I am seeking.
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(The comment to which you refer has been deleted as off topic)
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Peter Lang, I did notice your last post left some questions for me.
I don’t believe expanding on my previous comments would contribute to the discussion. In terms of competing interests for funds provided at cost to the government, all of the examples you give are funded directly, and often entirely, by the government where I live (health, dams, public transportation). I think that’s an unhelpful tangent.
In terms of whether the structure would be “truly a level playing field for all generators, for all energy sources,” I’m a little stumped.
My point is that the rules/playing field largely determine the successful party. I played some football/soccer decades ago, but a little game on my yard with Messi wouldn’t work out well for me.
In the winter my yard’s a skating rink. That might work for me.
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I have been busy elsewhere for several days, so this evening has been catch-up time for this thread.
Gene (Comment 154, 9th November), is still having problems regarding discount rates.
Peter Lang (Comment 156) is convinced that discount rates and the LCOE are paramount.
The subsequent 60 comments have not seen any convergence of opinion, so I am returning with an example.
See: http://www.ivanhoemines.com/i/pdf/ppt/IDP_2010_PPT_May_11_2010.pdf. Ivanhoe Resources have assembled a set of 50+ Powerpoint slides to explain their commitment to a project in Mongolia costing several tens of billions of dollars. The quotation below comes from one close to the last in the set.
I provide it to introduce a concept of varying discount rates and metal prices for a copper/gold/silver mine via an analysis technique called Real Option Method. This allows analysis far more sophisticated than LCOE calculations based on starting assumptions which are then not variable.
This project indicates the strong effect that metal prices can have on the outcome. In the case of power plant, similar analysis, more detailed than we can attempt here, can and will be done by experts in respect of investments of this magnitude.
The results will quite possibly indicate similar departure from the initial assumptions, which have gold at $850/oz with a sensitivity comparison at $1200/oz. This study is only a year or two old, yet gold has since risen beyond the range, to $1900 and back to $1800/oz.
Similar price variation for fossil fuels can be expected. Gene has based his arguments on his belief that oil and gas supplies will peak and scarcity will drive higher than trended prices. There is some validity in this expectation, the problem we face is anticipating the magnitude of these swings in commodity prices. Ditto, for discount rates.
I seek to draw attention to the severe limitations of the NPV method of calculating the costs and returns of any transformative project, which in our present case includes wide application of non-traditional power generation technologies.
It is asking too much of an LCOE calculation based on a 30-line spreadsheet to expect its assumptions and outcomes to hold true beyond a few years. LCOE, in my opinion, is a tool suited to broad comparison of competing projects.
What LCOE is not suited for is:
1… It is not reliable for specific projects, for which site-specific and market-specific data must be generated.
2… It is not reliable in the presence of social upheavals such as depressions or extraordinary inflationary periods. The assumptions relating to costs of money are unreliable under such conditions.
3… LCOE cannot and does not model market behaviour in real day-to-day markets, including responses to stochiometric generation sources, to daily and seasonal peaks and lows in consumption and to variation in costs of physical inputs such as materials and labour.
4… LCOE cannot model legislative or cultural changes, as we have seen in Germany and Japan following the Fukushima earthquake and tsunami.
5…. In defence of LCOE, it is not reasonable to just ignore the value of LCOE calculations on the basis that individual observers may opine that the future circumstances are going to be different from the present. These differences must be identified and quantified. OK, they may not be able to be fed into basic LCOE models, but the example I have cited indicates that more powerful models exist.
I could go on, but readers will understand where this leads.
LCOE calculations are very much suited to comparison studies, as distinct from feasibility studies. When it comes to analysing options, especially of long-term, capital intensive projects, LCOE type studies must be supplanted by year by year financial and economic modelling to guide the decision makers. It appears that ACIL-Tasman have done so using the detail assembled in the report cited by P.L. at http://www.aemo.com.au/planning/0400-0019.pdf.
Further, the feasibility studies must be revisited every time commitment of substantial increments of capital are envisaged, eg each new power station, each new transmission line.
I caution against placing too much reliance on economic analysis, when there are other, often subjective, factors operating which are just as powerful. Examples: Perceptions of safety. Legislative and regulatory restraints. Bureaucratic inertia. NIMBY-ism. Land use planning regulations and processes. Political compromises. In some countries, corruption of officials, social and cultural considerations.
Achieving change is difficult. It is many-facetted. The speed and nature of change are not easily determined by numerical analysis, although such analysis may appear to be both compelling and persuasive. If those who are the agents of change are not listening, it matters not at all what the message may be.
Wind and solar have won the hearts and minds of the change agents and this has not been the result of LCOE or any other rational analysis: it has been entirely due to expectations of future delivery of desired results. These results may not have been delivered, but public sentiment still lies with the expensive non-performers.
Thus, it is not only or even primarily a question of cost, or of least cost. It is a question of subjective value judgement.
Nuclear power’s chance, lost sometime in the 1970’s, will not come again until the tide of public opinion demands it as strongly as the current demand for unreliables.
Gene, #170, 12 November, asks what the impediments in Oz are to NPP.
Most appear to me to be socially determined. Only after public opinion drives change will the federal and state laws which currently prevent consideration of NPP’s in Australia be repealed. Only then will safety regulation for nuclear power become based on other than “ALAP – As Low As Possible (harm)” principles, while turning a blind eye to comparatively much higher unsafety figures for competing technologies. Only after comparative measures are adopted will objectively measured environental costs of damage to the economic commons and to public health and public amenity be allocated against those industries which are cause the damage. If the governments of the world, nation by nation, cannot or will not impose appropriate pollution charges then how and when will this be addressed?
Despite perceiving these limitations to the persuasiveness of LCOE calculations, I echo Martin’s and Tom’s sentiments re the need to continue to refine our knowledge because by so doing, Peter L has unearthed a wealth of information which would otherwise have gone unnoticed.
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Regarding the LCOE, there is much uncertainty in the future concerning discount rates. The current discount rates assume that the current business climate will continue and that a dollar invested will earn a certain percentage return. I do not think this is a given certainty. For example, Stansbury and Associates believes we are at the beginning of a world wide financial collapse. They have good evidence to support that belief. The US debt just passed 15 trillion dollars and is rising rapidly. Greece and Italy are at the verge of collapse which could trigger a domino effect world wide and trigger the US failing also. I am sitting here doing wind power studies and clients are slow to pay sometimes. I’m thinking that if there is a financial meltdown I may personally be in for a big loss just on outstanding invoices I currently have. This happened to me with Enron and I lost about $5000. But if we do have a world wide collapse, I’m going to have a lot more problems than just collecting. The US is so dependent on imported oil, if the dollar collapses, we are going to be out of fuel overnight for our highly dependent transportation needs. So we are sitting here argueing over whether the interest rate is 6% 8% or higher and I’m thinking that all this is irrelevant if we plunge back into the dark ages by a lack of energy in the US. Thats what worries me. Can’t you see what’s happening. Open your eyes guys and gals. We in the US are headed down a path of financial ruin and to a large degree its because we have been far too dependent on fossil fuels.
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JB,
Thank you for your example of the financial analysis for a mine in Mongolia.
I’d just like to remind readers when we should use LCOE and when we should use more advanced financial analyses. LCOE is for comparison of technologies in the early screening phase, for example when a country is deciding on policy as Australia is doing now. The LCOE method is the correct method to use at this stage. It should also be noted that the sensitivity analyses can also be done, just as EPRI, ACIL-Tasman and Worley Parsons have done with the EPRI data and the updates of it.
JB, in part you are arguing that we should move the financial analysis to the next stage, sophisticated analysis for a particular site, when the screening process (including sensitivity analyses on fuel prices and a whole lot more) has shown that nuclear is not close to being viable in Australia under the current conditions (even if bans on nuclear were removed).
This is is an example of what has been called “Monkey business with numbers”.
You are also arguing that we need to change public perception. We’ve been trying to do that for 50 years. However, if it is a more expensive option (even with all positive and negative externalities included), it will not be supported. Many do not agree with your opinion about the value of the positive and negative externalities.
Instead of trying to ignore the reality – nuclear is not close to viable in Australia – we should be prepared to accept the reality and consider, with open minds, what is the cause of the problem and how could it be addressed.
I find it startling that there has been this ongoing avoidance of the real issue for two years on BNC. It seems to me the majority of contributors have preferred to try to ignore the reality rather than tackle it.
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Scott Luft, @ 19 November 2011 at 10:54 PM,
I don’t understand why you say that’s an unhelpful tangent. I think it is the crux of the issue. The point is that now days, in western democracies, governments cannot raise all the money they need to pay for all the welfare state, the public services and the infrastructure that people want. Therefore, anything that can be provided by the private sector, especially if it will be managed better than by the public sector as is the case with electricity generation with appropriate (light) regulation, should be provided by the private sector. That allows the government more capacity to provide what society believes are the priorities for government to provide such as: health, education, public transport, dams, etc.
I agree the rules/playing field determine the successful party. So I don’t understand why “you are stumped”. Surely you would agree that the lower the cost of energy (with all positive and negative externalities included) the better? I presume you’d also agree that a level playing field, with all distortions removed, is the best way to achieve least cost. If you don’t accept that you must believe in the opposite; i.e. that governments, bureaucrats, environmental NGOs, the noisiest groups in society – through their demands on parliamentarians and their ability to persuade the public to accept their beliefs – can make better choices than a free market (with appropriate (light) regulation.
To help me to understand your position could you comment on what you think of this Chatham House article:
Malcolm Grimston (June 2010), Chatham House Electricity – social service or market commodity? The importance of clarity for decision making on nuclear build.
http://www.chathamhouse.org/publications/papers/view/109378
Do you think electricity should be a public service or a market commodity?
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John Bennetts, @ 9 November 2011 at 12:33 PM
Are you still working on this?
I am hoping you might include a slant like: how some adaption of the Finnish TVO funding arrangements might be able to work for NSW?
My original suggestion was @ 4 November 2011 at 5:06 PM here:
Five references you might find as useful starting points are included in the comment.
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Radiation and Reason
Peter, you have been asking about what could be done to lower the cost of nuclear in Australia. I have started reading Wade Allison’s book Radiation and Reason where he suggests that “radiation is about 1000 times less hazardous than is suggested by current safety standards”. His proposal for safety levels for radiation exposure are: 100 millisievert in a single dose, 100 millisievert in total in any one month, and 5,000 millisievert total whole-of-life exposure.
It is reasonable to think that these standards would reduce the cost of plant operations, the cost on decommissioning, and the cost of disposal. These standards might affect how close plants would be built to cities or factories using the heat from a nuclear plant. However, I don’t see how these standards would affect the cost of construction. If anyone could give me a concrete (pun intended) example of cost reduction, I would be appreciative.
It would be interesting if Dr Allison’s radiation standards were adopted in Australia and combined with the idea of taking back the uranium mined in Australia to be disposed of in Australia. The moral and economic arguments could complement each other. Australia could become a supplier of all uranium life cycle processes except the reactor its self. You mine it. You enrich it. You make the fuel. You accept the used fuel. You recycle the used fuel. You dispose of the waste that is not valuable. All could be good business with great jobs. Since political policies require lots of compromise, the uranium life cycle business is just as likely as the business of building reactors in Australia.
Dr. Allison would be a good guest blogger at this site. He is a professor at the University of Oxford and teaches a course on medical physics.
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@John Bennets
Thank you for bringing up the Ivanhoe project in Mongolia. I have been following that quite closely, since my main interest is energy from the Gobi desert.
Actually, the Mongolian government and Ivanhoe are discussing this right now, since their first plan to pull electricity from China over a power line has hit some problems. The Chinese seem to want to use their electricity themselves.
The plans have always been to build a coal plant and this is still very likely to happen, maybe a couple of years earlier than in the original schedule.
As to cost and your point that LCOE is not everything, Ivanhoe might be interested in taking note that the World Bank just decided to give $297 million in cheap financing to Morocco for a 500 MW solar project. Anyone familiar with these questions will know that the cost of financing is not without influence on LCOE, especially with projects like nuclear and renewable where almost all of the cost is in building your plant in the first place.
The World Bank lends at LIBOR (London Interbank Offered Rate) plus 0.49%, which works out to around 1%. Good luck finding those conditions on the free market for a mining project in Mongolia. They would probably be rather less interested in financing a coal plant.
I have just written about that on my own blog as well:
http://k.lenz.de/7
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Sorry, messed up the link: http://k-lenz.de/7
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PL:
“Are you still working on this?”
Sorry, Peter. My presence on BNC will be curtailed for a few months due to a short term engineering engagement overseas.
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JB,
Leave approved. :)
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Peter Lang,
OK, I’ll do the reading – I’m already reading some dreary data reports related to Ontario’s ‘market’ so I’ll be some time. Your reference is a topic I find compelling.
I used to be an advocate of public power. The issues with that I’d now say are precisely the issues with everything else you noted. Collectively, I believe that Parkinson’s laws hold pretty true (‘work expands to fill the time available’). Cynically, the role of private enterprise is to make money, and the role of public enterprise is to expand the time, people, and money, required to fill the role of public enterprise. In the upcoming talks in South Africa, I’m sure they will succeed in expanding committees and planning future talks.
But, the private sector also seems more likely to compete for public contracts than to deliver a service such as electricity, and I see little value in that either. I’ve spent some time over the past few months trying to feed data, and ideas, to some economists interested in market structures required for the public interests, expressed politically, to be fulfilled by market structures. Presumably a market is to encourage competition which will serve to allocate resources efficiently. I think a regulated market likely necessitates multiple markets. Any mingling with the market is almost sure to require another supplemental market.
I’ll attempt to work-through the issues here.
Here’s a simple market roughly analogous to Ontario’s bungled attempt at a market. Providers are expected to emerge to service a market with a low:average:peak demand scenario of 1:1.5:2. In my province, we historically (with public power) decided the low (1) would be provided with low/no emission sources. That’s nuclear and hydro here, but everywhere the cleanest plants probably have high capital costs and therefore an expectation of operating at high capacity factors. I’ll assume carbon concerns are reflected in market design, so coal would be with CCS here.
Intermittent requirements are predictable, based on daily demand trends – and that’s probably some of the reason France can get the nuclear contribution so high as they manipulate output from their reactors.
So the second market is intermediate supply, and some suppliers may wish to have baseload units (running at 70% capacity -for instance), also operate in the intermediate market.
And then you’d need a market for peaking power – primarily during hot, and cold, weather. These plants only get built if they are cheap to build, or if there is another market, which would be a market bidding for capacity (availability).
Then …
we introduce either feed-in tariffs or renewable energy certificates/standards, saying 20% must come from intermittent sources. OK. Assume a 25% capacity factor on those intermittents and to get to 20% output,of the average, you’d need a total capacity 80% of the average, which is 20% more than the low demand. I think that is the real reason for nuclear being turned off in Germany! They had increasingly depressed pricing and especially worrisome, increasing periods of negative pricing due to excess supply. 1st victim = high capacity factor plants, and …
now we’d need a market for bids on removing contracted supply (baseload plus renewables), and we’d have knocked down the frequency of purchases from intermittent and peaking sources in the market.
This necessitates capacity markets – to pay suppliers to be ready. But these are the suppliers that set the price in the market, because they provide the marginal supply. The marginal supply is then offered to the market at any price over the cost of fuel (the plant is paid for through the capacity payments) – and this clean market ends up priced at the cost of gas/coal without the cost of the plant.
That is the reality in Ontario now. No new supplier will enter such a market – and the only competition is for government contracts.
Similarly, any plant that has aged to where is paid off (and this is true of many coal plants) can also offer low bids as the marginal supplier.
That says something, I think, about carbon taxes (I see your concern), but it provides me a new thought on Gene Preston’s post.
Annuities, as I understand them, are structures usually suited to an existing asset with a diminishing revenue stream. They milk an asset until it dies.
If the discount rate is based on eliminating the debt after 25-30 years, and new nuclear builds are to last 60, it seems to me in 25-30 years the nuclear plant will become, effectively, an annuity. It would not be an annuity if the company was pumping the funds back into their R&D and capital spending – but then the cost of capital wouldn’t be that high for new plant either!
I don’t recall seeing a valuation of the plant (as an annuity) after the book life period either. Over half of all generating assets, including over half of the nuclear units, in the US are over 30 years old already – http://www.eia.gov/tools/faqs/faq.cfm?id=110&t=3
I believe in functioning markets operating within the parameters of public regulation. If there is no functioning market, ownership should be public.
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Scott amen to your comments! A nice writeup.
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Scott Luft, on 21 November 2011 at 3:54 AM
You make some excellent points. Very clearly written. Thank you. Some I agree with and some I don’t. Although you haven’t stated it a such, I think you have, probebly unintentionally, written a comment which is an excellent explanation of why we should go the direction I’ve been advocating: remove the impediments to a freer market, reduce the regulation to only what is appropriate, remove the impediments, incentives and disencintives for any particular types of generation.
So did I.
But we are not going back to that; we are moving away from public ownership of electricity. It would take decades to move back even if the tide did change. So it is unhelpful, IMO, to advocate this because it is not a realistic option.
I suspect you are approaching this from a background and familiarity with how electricity worked under public ownership. Coming at it from that perspective you are more able to identify the problems with the (half-baked) market solution than to see the problems with trying to make the public ownership solution work since financing has changed so dramatically since the times when public ownership was the only realistic option in many western democracies.
Could I urge you to try to approach the market solution with a clean sheet of paper. Consider removing all the impediments to a true market (with appropriate, light regulation). As a first step, I hope you can read the Chatham House paper.
Below are responses to some of your comments.
That’s not a real market. It’s a pseudo-market established by bureaucrats directed by politicians who are responding to polls and media which report what the population believes is the way to go based on the noisiest and most effective scaremongering groups in society (often the Greens and the environmental NGO’s).
True for public ownership. But in a true market, competition delivers greatest efficiency and least cost (see the Chatham House paper). But we are trying to implement the middle ground which, as the Chatham House paper points out, is the worst of both options.
That is because we have a half baked solution – a pseudo-market established by bureaucrats, etc, etc.
No. The problem was caused by the intervention in the market with feed in tariffs, renewable energy targets, renewable energy certificates, direct subsidies for renewables, fast tracking of planning processes and removal of constraits for renewables but leaving them in place for other technologies, and even directly impeding nuclear as is done in many countries (even before it was banned in Germany, the German NPP’s were taxced mor heavily because they were too profitable and the extra was used to subsidiese renewables. How nuts is that. That is political interference that is almost as bad as Australia’s ban on nuclear and incentives for renewables. The answer is not more of this sort of nonsense. The answer is direct action to remove the impediments to an efficent market for energy. Light, effective regulation is needed.
Yes. We are nearly at that point in Australia too. We’ve been building a mountain of regulations on top of regulations. The whole thinng has been built by bureauctrats directed by politicians from the very start. It’s a monstrousity. Therefore, I propose we need to define the mess, then unwind much of it – as I said in previous lead articles and comments, including this comment on this thread: 5 November 2011 at 8:52 AM
See pages 54 to 56 here:
Click to access 0610pp_grimston.pdf
It begins with:
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Gene Preston, thank you for that.
Peter Lang, I agree with your comments. I thank you for continuing to challenge me.
I was referencing the public sector in noting the concern with ‘Parkinson’s Law”
On the problem of the introduction of feed-in tariffs, etc., I agree.
If I have any solution fighting the battle at home, I’ll be sure to communicate the successful strategy.
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Scott and Peter, I think the difference between Peter and I is that Peter thinks the market can solve the utility needs and I see the market here in Texas as being an experiment that has been a flop, resulting is higher rates and very poor planning for our future needs. I have no faith the market is even capable of getting us through this rough time we are having now in Texas. And it was just a few years ago that Texas had a reliable power supply. But now now. I hope my ERCOT friends don’t see this ha ha. Oh well, doesn’t matter. By the way the local paper printed this letter today concerning the shutting down of one of our coal plants and replacing it with wind. Here is the link http://www.statesman.com/opinion/coal-power-water-conservation-1983863.html
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Martin Burkle, @ 22 November 2011 at 4:21 AM
I think you have brought up what is probably one of the most important issues we need to address to reduce the cost of nuclear, especially over the longer term. A lot flows from your comment:
1. Any lifting of the overly restrictive radiation safety standards would be good. It will have more effect on the cost of future generation of reactors than on the current generation. But it should be done, and the sooner the better.
2. Any lifting of the standards reduce siting restrictions and reduce the costs of even the current generation of NPPs.
3. Any such change in the regulations could be an invaluable aid in educate the public more broadly about nuclear and its safety compared with other electricity generation technologies. For example, it would help in explaining that evacuation is not necessary, and not a rational solution, in most of the cases where leaks of radioactive materials occur.
4. However … I am a little concerned about what is the basis for the proposed new standards. My concern is: if the limits are raised to the proposed level, and they are still low compared with the other hazardous leaks we accept from other industries, then we are still locking in at too low a level. So I would like to see the new standards to be shown as comparable with the standards for the other hazardous materials that apply to other industries. I want a level playing field in terms of the health effects of radioactive contamination compared with chemical, particulate and types of contamination. However, I agree any step forward is good, so I would support what you say while arguing for a level playing field.
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Scott Luft,
Thank you (and many others) for challenging me too. For me, this thread has been fascinating (as are many others on BNC). A lot of new information has come out on this thread, hopefully, we will be able to follow through further with this. I’m hoping we can continue to the next step, which in my opinion, is to work out what are the most viable ways to allow nuclear to be cost competitive in Australia (allowing for externalities where practicable and to the extent practicable given all the constraints).
I have more to do on tracking down the basis of the EPRI estimate of Owner’s Cost and AFUDC (and whatever else is burried in the figure that 93% to the Total Plant Cost to get makes Total Capital Required.
I also want to understand why ACIL-Tasman, AEMO and other Australian organisatiosn do not include Owner’s Costs and AFUDC in Total Capital Required, when it seems to be common practive to do so with IEA, OECD, EIA, EPRI to name a few.
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Gene Preston, on 22 November 2011 at 7:36 AM said:
I accept what you tell us that the Texas electricity market experiment has been “a flop”. But I can only take your word for it. I expect a more correct statement may be it is not working as well as hoped. I understand similar has occurred in many other electricity markets, including in Australia.
However, I put the cause of the problem down to the fact they are not real markets. They have been established by governments and bureaucrats. Industry has had input but has not always been able to get its concerns recognised by the bureaucrats. The noisiest groups in society have been able to influence the implementation and the rules to suit what they think should be the social/green objectives. The result has been a mess in most cases. It is a case of prescription by people and noisy groups who think they know best, but don’t.
I’d also say that I doubt the Texas electricity system would be better off now had it remained in public ownership. Generally, publically owned businesses do not operate well over the long term. There are many reasons for this. But let’s not get into this discussion again. We’ve done it to death on other threads before.
Importantly, IMO, this is an irrelevant discussion, because as I’ve said repeatedly, none of the western democracies are moving back towards reintroducing public ownership. It’s simply not going to happen in our life time – unless China invades us to take the coal John Newlands wants to deny them :)
Did you read or re-read the Chatham House paper? What did you think of it?
Click to access 0610pp_grimston.pdf
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I don’t know if we discussed this or not, but the inclusion of a large amount of subsidized wind into a system causes the energy cost of other sources to increase. For example suppose we had a nearly base loaded gas plant with a capital cost component of energy cost at 1 cent per kWh. Now suppose we introduce enough wind into the system so that this gas plant generates half as much energy. Its capital cost is now 2 c/kWh. If the wind causes a 90% decrease in energy of the gas plant the capital cost of the gas plant is 10 c/kWh. The investors in the gas plant are going to become alarmed if the wind truly eats into most of the gas plant’s energy sales. The gas plant may never get built in a system with a lot of wind. Oddly the wind requires the gas plant for backup as stated in earlier postings on this blog. Yet I know of only a few instances where gas plants are combined with wind or solar. The wind developers would rather just sell the wind power and not worry about the gas plant backup. This not financing backup for wind leads to a shortage of power in the region, which is the current problem with ERCOT. I just wanted to point out that the LCOE cannot be evaluated when the energy being sold is not known in advance for a particular plant because the interaction of wind is not known in advance. Introducing wind in Australia is likely to drive up the cents per kWh energy cost of coal both through lower utilization of the coal facilities and the wear and tear on the plant itself starting and stopping to accomodate those wind generators. If Australia ever does add a lot of wind, it is likely to make the coal plants less economic and a shortage of coal capacity will result, just as in Texas. The moral of the story is that wind is not compatible with conventional generation although its needed for backup capacity.
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PL not deny coal to China just ensure the CO2 it creates is counted towards a predetermined world allowance. That is if they burn our coal to make important stuff we have to burn less.
No need for an invasion China already owns more mines than the public realises. One metal mine hereabouts I visited as a going concern is now in care and maintenance until that metal price rebounds. That’s what non-market economics can do if there is no obligatory return on capital.
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JN
That is what I’ve been teilling you for yonks is what happens to mines. That is why there will be no NPP at Olympic Dam Mine nor, probably at Ceduna. The first nuclear power station in South Australia will need to be a complex of several units and located near the main demand centre, Adelaide.
By the way, what do you mean by “non-market economics”. The response to low metal prices by mothballing or shutting down a mine is pure market economics (not “non-market economics”. Mining is one of the purest markets. The price of their produces determines management decisions.
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@Peter Lang … I finished working through the Chatham House paper, and while I enjoyed it very much, I don’t think it altered my thinking.
@Gene Preston, I agree with your perspective on almost everything, but Texas is an isolated grid which, being located in the middle of a continent, really isn’t an example of open market behaviour at all (it likely does, as I suggested elsewhere, make it a good study for Australia, but it needn’t be so). I think the Texas market has acted exactly as a market would be expected to act – building marginal capacity will always be problematic, and that is exacerbated by intermittents on the grid, spurred on with, essentially, a wealth transfer scheme to get some money to the poor west Texas area.
My childhood home, in the western suburbs of Toronto, is about the same distance from Dallas as it is to the Churchill Falls reservoir in Labrador. There’s 3000MW of undeveloped hydro potential left on the Churchill/lower Churchill system, which is cited as a possibility for markets including Ontario and New England. When Texas was suffering rolling blackouts in February, and again when threatened with them in August, Ontario and Quebec had far greater than 10000MW of idle potential – if you look at the second graph on this link, of Quebec’s annual demand profile, you’ll see north North America could complement south North America quite well: http://morecoldair.blogspot.com/2011/11/reviewing-ontarios-feed-in-tariff-part.html
Peter, lets review Nordpool, the Chatham House paper’s exemplary market. Norway is blessed with abundant hydroelectric potential/capacity, and natural gas. Large hydroelectric facilities tend to be publicly owned, probably because of land-use issues. Norway is no different and Statkraft is an important player in that area. Sweden has less hydro, but still a large portion, and again publicly owned for the most part (as I understand it). Along comes Denmark (and later Germany), with big subsidies for wind and massive residential energy taxation to pay for it, and voila… you have the mix for a market.
But it is a market where the value being added is primarily to publicly owned hydroelectric generation. I think I’ve already cited, earlier on this thread, Statkraft’s terrific defense of open markets and their opposition to market-distorting capacity markets (ignoring the strategic reserve mechanism of Nordpool) In Canada I urge Hydro-Quebec to copy Norway’s policies to maximize the potential of their hydroelectric assets.
So I am not moved from my position that markets and trade are more relevant, by far, than public/private ownership. It is markets that allow for efficiency, not ownership.
Returning to the question about how to build nuclear … Ontario will soon have 2 reactors, totaling 1500MW of capacity, returning to service after over a decade mothballed, at a cost, to the private owner, of ~$4.8 million. I think the contracted cost to residents will be about 7.5 cents/kWh (Bruce reactors 1 and 2). They’ll be good for 25-30 years and then that will be the end of it. If the APRI estimates have no way of recognizing the difference in this asset, with a 30 year life, and a new asset, with a 60-year life, I suggest that is a modeling issue that isn’t accounting for future value properly.
Perhaps the way to do that is to account for the value of the asset at the end of the ‘book life’ period used in calculating the discount rate.
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