The Cost of Power Generation: The current and future competitiveness of renewable and traditional technologies

The Cost of Power Generation: The current and future competitiveness of renewable and traditional technologies

The Cost of Power Generation
The current and future competitiveness of renewable and traditional technologies

Conditions within the power industry have changed significantly in recent years. The rising cost of natural gas has made this an expensive source of power, while concern about global warming and the introduction of limits on CO2 emissions will have a profound effect on the use of coal for power generation, at least in the developed world. In consequence nuclear power has its best chance of a revival for a generation and renewable energy is gaining ground as technology is refined and experience grows.
The Cost of Power Generation is a new report published by Business Insights that assesses the current and future case for investment in traditional versus renewable energy. This report analyzes all available data to directly compare the investment case and future prospects of different power generation technologies. It also examines the results of our proprietary executive survey to provide a unique benchmark of how decision makers within the energy industry forecast the future of power generation and the issues influencing those changes.

Identify the most competitive forms of power generation using this report’s detailed analysis of the true costs of power generation.

This new report will enable you to...
• Assess the relative cost benefits of renewable and traditional technologies throughout their lifecycles.
• Identify the key factors that impact on the costings of new energy projects, including structural costs, operational costs, grid extension costs, subsidies and externalities.
• Analyse the impact of increased renewable penetration on the structural costs and capacity of energy networks.
• Predict the effect of changes in fuel prices on the competitiveness of renewable technologies.
• Understand why cost of power estimates have changed over the past three years.
• Benchmark industry executive opinion on the future roles of traditional and renewable energy and the significance of a proposed hydrogen economy.

Key questions answered by this report...
• Which technologies will be the most competitive now and in the next ten years?
• How does market structure affect the pricing and penalisation of green energy?
• What is the cheapest renewable energy source?
• How does geographical location affect cost estimates for power generation technologies?
• What are the weaknesses of traditional fossil fuels in terms of the long-term cost implications?
• When do industry executives forecast renewable energy to take a majority share of electricity production?
• What impact does government policy have on the relative competitiveness of competing power generation technologies?

Evaluate the costs of traditional versus renewable power generation using this report’s analysis of historical, structural and lifecycle costs...

Key findings from this report...
• There have been major changes in estimates of capital costs of renewable technologies since 2003, for example, cost estimates for fuel cells were 244% higher in 2007 than in 2003.
• The advance of renewables is likely to be slower than their competitiveness would suggest. Wind generation is becoming more competitive relative to fossil fuels but the global wind turbine manufacturing capacity is far too small to fill the gap today.
• Levelized costs for power generation technologies differ by geography. In California, geothermal and wind power have the lowest costs while Vattenfall data suggests nuclear power is the cheapest source.
• 43% of Business Insights survey respondents consider the proposed hydrogen economy for future electricity generation significant compared to 52% in 2005.
• Solar cells cost could fall below $1/W by 2020 and $0.5/W by 2030, assuming 20% annual solar cell production growth.

Executive summary 10
Introduction 10
Levelized cost 10
Risk 11
Historical costs 12
The cost of carbon 12
Market distortions 13
The cost of power 14
The Business Insights 2008 Industry survey 14
Chapter 1 Introducing the cost of power 16
Introduction 16
The structure of the report 18
Chapter 2 Levelized cost: the traditional
approach to estimating the cost
of power 22
Introduction 22
Capital costs 23
Capacity factor 29
Financing capital cost 32
Levelized cost of electricity 33
Interest, discount rate and present value 35
Chapter 3 Introducing risk into cost of
electricity estimates 44
Introduction 44
Fuel prices and fuel price volatility 45
Fuel price risk 49
Portfolio planning theory 52
Chapter 4 Historical costs of electricity and
the technology learning effect 58
Introduction 58
Historical costs of electricity 58
Retail cost and levelized cost 61
Technology costs 62
Chapter 5 CO2 lifecycle emissions and the
cost of carbon 68
Introduction 68
Lifecycle greenhouse gas emissions 70
Placing a price on carbon 74
Actual carbon costs: the European Trading Scheme 77
Chapter 6 Factors distorting the price of
electricity 80
Introduction 80
Structural costs 81
Grid extension 82
Operational costs 86
Externalities 89
Subsidies 92
Fuel subsidies 94
Tariff subsidies 96
Quotas 97
Taxes 97
Chapter 7 The cost of power 100
Introduction 100
Levelized cost trends 102
Chapter 8 Business Insights Executive
Survey 112
Introduction 112
Competitiveness of power generation technologies 112
Impact on the competitiveness of renewable energy 115
Impact on the uptake of renewable energy 116
Changes in the use of fossil fuels 117
List of Figures
Figure 2.1: Comparison of capital cost estimates ($/kW), 2003 and 2007 28
Figure 2.2: Typical capacity factors for power generating plants 31
Figure 2.3: Levelized cost of generation by type ($/MWh), California 2007 38
Figure 2.4: Levelized costs as estimated by Vattenfall (€/MWh) 40
Figure 2.5: Mean levelized costs from published global figures (£/MWh) 41
Figure 3.6: Average world oil prices ($/barrel), 1989-2008 47
Figure 4.7: Annual US photovoltaic module production costs (Cost ($/W), 1970-2005 64
Figure 4.8: Global solar cell production (MWp), 1993-2010 65
Figure 5.9: Energy payback ratios 69
Figure 5.10: Lifetime greenhouse gas emissions for different power generation technologies
(kgCO2/kWh) 73
Figure 6.11: Balancing costs for 20% wind penetration and energy storage (€/MWh) 88
Figure 6.12: External costs for various power generation technologies within the EU (€/MWh) 90
Figure 6.13: Fuel subsidies as a percentage of GDP (% of GDP) 95
Figure 7.14: Levelized cost comparison, 2003 vs 2007 ($/MWH) 104
Figure 7.15: Comparative levelized costs of full range of generating technologies ($/MWh) 107
Figure 8.16: The relative competitiveness of power generation technologies in 2008 and 2018 113
Figure 8.17: How important are the following for the competitiveness of renewable energy? 115
Figure 8.18: How important are the following for the uptake of renewable energy? 117
Figure 8.19: How important are the following to changes in the future use of fossil fuel for power
generation? 118
Figure 8.20: In how many years would you expect renewable energy to contribute half of global
electricity generation? 120
Figure 8.21: How significant do you consider the proposed hydrogen economy for future electricity
generation? 121
List of Tables
Table 2.1: Capital costs of power generating technologies in the US ($/kW) 27
Table 2.2: Comparison of capital cost estimates ($/kW), 2003 and 2007 28
Table 2.3: Typical capacity factors for power generating plants (%) 30
Table 2.4: Present value of $1m as a function of discount rate 35
Table 2.5: Levelized cost of generation by type ($/MWh), California 2007 37
Table 2.6: Levelized costs as estimated by Vattenfall (€/MWh) 39
Table 2.7: Mean levelized costs from published global figures (£/MWh) 41
Table 3.8: Average world oil prices ($/barrel), 1989-2008 46
Table 3.9: The comparative cost of natural gas for electricity generation ($/107kcals) 48
Table 3.10: The comparative cost of steam coal for power generation ($/tonne) 49
Table 4.11: The comparative cost of electricity for industry ($/MWh), 1998-2006 59
Table 4.12: The comparative cost of electricity for domestic use ($/MWh), 1998-2006 61
Table 4.13: Annual US photovoltaic module production costs (Cost ($/W), 1970-2005 64
Table 4.14: Global solar cell production (MWp), 1993-2010 65
Table 5.15: Energy payback ratios 69
Table 5.16: Lifetime greenhouse gas emissions for different power generation technologies
(kgCO2/kWh) 72
Table 6.17: Grid extension costs as a function of wind penetration (€/MWh) 84
Table 6.18: Transmission and distribution costs in 2020 associated with increasing UK renewable
contribution above 10% after 2010 (£m/y) 85
Table 6.19: Balancing costs for 20% wind penetration and energy storage (€/MWh) 88
Table 6.20: External costs for various power generation technologies within the EU (€/MWh) 90
Table 6.21: Fuel subsidies as a percentage of GDP (% of GDP) 94
Table 7.22: Levelized cost comparison, 2003 vs 2007 ($/MWH) 103
Table 7.23: Comparative levelized costs of full range of generating technologies ($/MWh) 106
Table 8.24: The relative competitiveness of power generation technologies in 2005, 2008 and 2018
113
Table 8.25: The relative competitiveness of power generation technologies in 2018 and 2013 114
Table 8.26: How important are the following for the competitiveness of renewable energy? 115
Table 8.27: How important are the following for the uptake of renewable energy? 116
Table 8.28: How important are the following to changes in the future use of fossil fuel for power
generation? 118
Table 8.29: What is the best way to implement carbon emission controls? 119
Table 8.30: What percentage of global electricity production will be supplied by renewable energy
in ten years? 119
Table 8.31: In how many years would you expect renewable energy to contribute half of global
electricity generation? 120
Table 8.32: How significant do you consider the proposed hydrogen economy for future electricity
generation? 121