(Reuters Business Insights) - The Future of Power Generation (2005)

ENERGY
The Future of Power Generation

Costs of Renewable and Traditional Technologies
By Paul Breeze
Paul Breeze
Dr Paul Breeze has specialized in the electricity sector for the past 16 years. He is
contributing editor for the monthly international magazine for the power industry,
Modern Power Systems, and as freelance writer he has contributed to The Financial
Times, The Guardian, The Daily Telegraph, The Observer and The Economist. In
addition to the power sector, Paul Breeze’s interests include science and the computer
industry.
Copyright © 2005 Business Insights Ltd

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ii
Table of Contents
The Future Of Power Generation
Executive summary 10
Introduction 10
The traditional approach to costing generation 11
Historical costs 11
Lifecycle costs 12
Structural costs 13
Factors which distort the price of electricity 13
Conclusions 14
Chapter 1 An introduction to the cost of

electricity 16
Introduction 16
Report structure 17
Chapter 2 The traditional approach to

costing electricity generation 20
Introduction 20
Capital costs of power generation technologies 21
Australia 23
US 24
UK 25
Analysis of capital cost figures 26
Capacity factor 28
Financing capital cost 31
The cost of power 32
Levelized cost of electricity 32
Global levelized costs 34
iii
Fuel cost and fuel risk 38
Chapter 3 Historical costs 42

Introduction 42
Technology costs 43
Financial costs 49
Operational and maintenance costs 51
The cost of fuel 53
Oil 54
Gas 55
Coal 58
Fossil fuel discount rates 59
Hedged gas prices 61
Risk and security 61
Chapter 4 Lifecycle costs 64

Introduction 64
Net Energy Analysis 65
Greenhouse gas lifecycle analysis 70
Other atmospheric emissions 74
Policy making 75
Chapter 5 Structural costs 78

Introduction 78
Renewable characteristics 78
Structural costs of renewable generation 79
Grid extension 80
Capacity credit and balancing 84
Market structural effects 89
Energy storage 91
iv
Chapter 6 Factors distorting the price of
electricity 96
Introduction 96
Types of subsidy 97
Tariff subsidies 98
Fuel subsidies 99
Externalities 102
Legislation, quotas and green certificates 104
Quotas 105
Feed-in tariffs 105
Other measures 106
Green certificates 106
Government policy 107
Chapter 7 Conclusions 109

Introduction 109
The cost of renewable vs traditional power 110
Industry executive survey 113
Relative competitiveness of power generation technologies 113
Factors affecting the market price of green energy 115
Factors affecting the uptake of renewable energy 116
Factors affecting the future of fossil-fuel fired generation 118
Share of global electricity production that will be supplied by renewable
energy by 2015 120
Timeline for renewable energy supplying 50% of global electricity production 121
The significance of the proposed hydrogen economy 122
v
List of Figures
Figure 2.1: Global capital costs of power plants 22
Figure 2.2: Country comparison of capital costs of selected power plants 26
Figure 2.3: Typical capacity factors for power generating plants 29
Figure 2.4: Present value of $1m as a function of discount rate 33
Figure 2.5: Typical global levelized power generation costs 35
Figure 3.6: US Wind turbine costs, 1996-2030 45
Figure 3.7: Photovoltaic production costs in the US, 1996-2003 47
Figure 3.8: Cost of natural gas for electricity generation (US$/107kcals) 56
Figure 5.9: Grid extension costs as a function of renewable penetration 82
Figure 5.10: Balancing costs for 20% wind penetration and energy storage 92
Figure 7.11: Relative competitiveness of power generation technologies now and in ten years 114
Figure 7.12: Factors affecting the market price of green energy 115
Figure 7.13: Factors affecting the uptake of renewable energy 117
Figure 7.14: Factors affecting the future of fossil-fuel fired generation 119
Figure 7.15: Significance of the proposed hydrogen economy for future electricity generation 123
List of Tables
Table 2.1: Global capital costs of power plants 21
Table 2.2: Capital cost of power plants in New South Wales 23
Table 2.3: New electricity generating technology costs in the US 24
Table 2.4: Capital cost of new technologies in the UK 25
Table 2.5: Typical capacity factors for power generating plants 29
Table 2.6: Present value of $1m as a function of discount rate 33
Table 2.7: Typical global levelized power generation costs 35
Table 2.8: Levelized cost of electricity estimates for typical US utility 36
Table 2.9: Levelized cost of electricity from new technologies in the UK* 37
Table 2.10: Cost of electricity estimates for a gas-fired plant based on different models 40
Table 3.11: Wind turbine costs, 1996-2030 46
Table 3.12: Photovoltaic production costs in the US, 1996-2003 47
Table 3.13: Renewable technology 'learning curve' costs (US$/kW) 48
Table 3.14: Annual cost of maintenance in the UK 51
Table 3.15: Annual cost of maintenance for renewable technologies (US$/kWh) 52
Table 3.16: Average world oil prices (US$/barrel) 54
Table 3.17: Cost of natural gas for electricity generation (US$/107kcals) 56
Table 3.18: Cost of steam coal for electricity generation (US$/tonne) 58
Table 4.19: Power plant total energy balance 66
Table 4.20: Lifecycle energy efficiencies of different technologies 67
Table 4.21: Energy payback ratios 69
Table 4.22: Relative greenhouse gas efficacies of different power plant gases 70
Table 4.23: Greenhouse gas emission rates for different technologies, US 71
vi
Table 4.24: Greenhouse gas emission rate for different technologies, Japan 72
Table 4.25: Greenhouse gas emission rate for different technologies, Sweden 73
Table 4.26: Emissions from typical fossil fuel power plants (t/GWh) 74
Table 5.27: Grid extension costs as a function of renewable penetration 81
Table 5.28: Transmission and distribution costs in 2020 associated with increasing UK renewable
contribution above 10% after 2010 as a function of renewable penetration 83
Table 5.29: Wind capacity credit as a function of penetration level* 86
Table 5.30: Capacity cost of wind generation (Euro/MWh) 88
Table 5.31: Capacity cost of wind generation (Euro/MWh) 88
Table 5.32: Balancing costs for 20% wind penetration and energy storage 92
Table 5.33: Balancing cost per MWh of annual demand for 20% wind generation with storage 93
Table 6.34: Coal PSE estimates for some OECD countries, 2000 100
Table 6.35: External costs for various power generation technologies within the EU 103
Table 7.36: The cost of power (Euro/MWh) 110
Table 7.37: Relative competitiveness of power generation technologies now and in ten years 113
Table 7.38: Factors affecting the market price of green energy 115
Table 7.39: Factors affecting the uptake of renewable energy 116
Table 7.40: Factors affecting the future of fossil-fuel fired generation 118
Table 7.41: Share of global electricity production to be supplied by renewable energy by 2015120
Table 7.42: Timeline for renewable energy supplying 50% of global electricity production 121
Table 7.43: Significance of the proposed hydrogen economy for future electricity generation 122
vii
viii
Executive summary
9
Executive summary
Introduction
How much does it cost to generate electricity? This is the question, finally, upon
which all arguments about future power generation rests.
The question is particularly important in relation to renewable energy. How much

does it cost to generate a unit of electricity from a renewable source, and how does
that compare with the cost of the same unit from a conventional source? Clearly, if
the renewable electricity were the cheapest then there would be little debate about
its adoption. Yet today it is virtually impossible to arrive at a definitive figure for
the cost of either conventional or renewable electricity.
The reasons for this difficulty are multiple. They include taking into account
subsidies and other market distortions, trying to cost the unreliability of many
renewable sources when compared to conventional sources and putting a figure on
the environmental cost of the various technologies.
Within this, one must decide what cost one is trying to determine; is it the cost to
the end user, or is it the overall cost to society that is important? The answer to this
question is likely to depend as much on politics and on economics.
Given the manifold difficulties, it might appear impossible to arrive at a definitive

cost. Yet all decision-making in the power sector must start with a cost of power
estimate. This report aims to analyse the accessible costs in order to provide an
objective basis from which decision makers can start.
10
The traditional approach to costing generation
To estimate the cost of generating a unit of electricity from a given power plant
involves a multiplicity of factors. These are traditionally approached by using an
economic model that calculates the levelized cost.
One important contributing factor is the capital cost of the actual power plant.
Studies show that gas turbine power stations are the cheapest to build today. Of the
new renewable technologies, a wind turbine is the most competitive.
The capacity factor must also be taken into account, as must financing costs
associated with loans needed to support a project and fuel costs. All these costs,
together with total output of the plant over its lifetime are fed into an economic
model to provide the levelized cost of electricity from the plant.
When such calculations are carried out they usually show large hydropower,
nuclear power and natural gas-fired power to be the most economical. However this
traditional approach normally ignores the risk associated with fluctuating fuel
prices. If this is taken into account, then the levelized cost of gas-fired generation,
in particular, rises significantly.
Historical costs
The cost of all the main elements involved in calculating the levelized cost of
electricity from a proposed power station vary with time. Technology costs tend to
fall with time as production techniques improve and the efficiency of the
technology increases.
This learning curve improvement applies to all technologies but older technologies
tend to be on a shallower part of the curve and show slower improvement than new
technologies. The cost of financing a power project is also important; this will
depend on the prevailing interest rate combined with the level of risk that the
11
lending agencies place on the loan. Operational and maintenance costs are also time
dependent.
However, one of the most time-sensitive elements is the cost of fuel. A study of
historical costs show that oil and gas show the greatest volatility while coal prices
are much less prone to large swings in price.
When calculating the levelized cost of electricity, a common discount rate is

applied to all the costs. However, there are strong arguments for using a much
lower discount rate for fuel costs than for other costs. When this is applied the
levelized cost associated with the fuel rises dramatically.
Lifecycle costs
Lifecycle analysis offers a different way of looking at the cost of a power station.
Two types of life cycle analysis are considered here:
Net Energy Analysis (NEA) which measures the cost of electricity from a power
station in terms of the total amount of energy required to produce each unit of
electricity.
Lifeccle greenhouse gas emissions which show how much greenhouse gas each unit
of electricity costs.
Both are measures of the environmental impact of a power station and as such are
difficult to cost economically. However they are likely to have an important bearing
on the evaluation of power plants in the future.
12
Structural costs
When large quantities of renewable energy are added to a system there are,
depending on the type of renewable generation, additional structural costs
associated with accommodating the energy while maintaining stable network
operation.
The location of the renewable plants may require extensions to transmission and
distribution systems. More significantly, the intermittent nature of many renewable
sources means that additional capacity must be kept available to cope with the
situation where the renewable energy is not available.
The costs associated with these requirements vary, depending upon how the
renewable capacity is assessed but they must be taken into account when costing
energy from renewable sources. Energy storage can reduces these costs
significantly but is itself expensive to establish. However it can have cost benefits
for all forms of generation.
Factors which distort the price of electricity

The levelized cost of electricity can be calculated for any power station to be built
in any part of the world. However there are local factors that will distort the
apparent cost of electricity. These distorting factors are various sortes of subsidies.
In many developing countries tariffs are subsidised for certain sectors of the
population, leading to massive over consumption. Fossil fuel subsidies are common
all over the world and may be worth as much as $230bn each year.
Externalities which measure the social costs of power generation technologies can
be seen as negative subsidies since they are not paid by the producer. If they were
they could, for example, triple the cost of coal-fired generation.
13
Conclusions
When all the various factors affecting the cost of power generation are taken into
account, it is possible to arrive at a relatively objective measure of the cost of
power from different generating technologies.
This is carried out for four principle technologies, a coal-fired power station, a
natural gas-fired combined cycle power station, a wind farm (representing
renewable technologies) and a nuclear plant.
14
CHAPTER 1
An introduction to the cost of

electricity
15
Chapter 1 An introduction to the cost
of electricity
Introduction
Most power plants have a lifetime of around 30 years, so every thirty years the whole
stock must either be replaced or undergo major renovation. Every time a power plant
must be replaced or new capacity added to a system, the cost of power generation
comes into play. This may not be the basis on which a final decision is made: political
factors may intrude. However it should be the starting point for any discussion.
The cost of electricity is not the same as its price. In many developed countries the
supply of electricity is based on a deregulated market system where the price is set by
the balance between buyers and sellers. Other countries maintain a state controlled
electricity supply industry where prices are set either by the government or by a
national utility. The price of electricity in both types can vary markedly. Market factors
or government policies can push prices up or down. The underlying cost of electricity,
the cost of generating it and delivering it to the consumer will vary too, but often by
smaller amounts and in different ways.
This report addresses the baseline cost of generating and delivering electricity. Bid
prices, profit margins, poor tariffs and rates of return are outside its scope. Where
investment decisions are to be made, this baseline cost should be the determining
factor. Today the future direction of electricity supply has become a contentious issue.
Environmental factors such as global warming and atmospheric pollution have
provoked a debate about whether power generation should continue to rely on fossil
fuel combustion. Large hydropower projects have been criticised for their
environmental effects too, while nuclear power has been shunned in many countries.
16
However, critics point out that renewable sources of electricity such as wind, solar,
wave power have inherent limitations as a result of their intermittent nature. Adapting
existing networks to cope with this is costly and does not make economic sense.
This report does not attempt to put the environmental arguments for or against any
generating technology, except where these arguments can be expressed in economic
terms (cost). It attempts to take into account all the cost factors, both traditional and
environmental. Once these have all been assessed, the cost of electricity from different
technologies can be determined with at least some claim to objectivity.
Report structure
The starting point for analysis of the cost of electricity is the traditional economic
model used to calculate costs. This in usually based on the Long Run Marginal Cost
(LRMC) and is discussed in detail in Chapter 2. Chapter 2 also discusses the issue of
fuel price risk and how it affects the LRMC.
Chapter 3 also looks at fuel price risk in an analysis of the historical costs of both fuels
and power generation technologies. Trends that lead to a gradual lowering in the cost
of technologies are identified and the issue of risk and security is discussed further.
Chapter 4 moves away from the traditional costing of power generation technologies in
economic terms, examining a different way of establishing cost in terms of energy or
emissions. These costings are based on life cycle analyses (LCAs) of power stations.
Their results provide a different measure of the cost of electricity to society.
The issue of structural costs, associated primarily with the introduction of large
quantities of intermittent renewable generation, are examined in Chapter 5.
17
Chapter 6 looks at how subsidies can distort the perceived cost of electricity. Fuel
subsidies and renewable obligations are both considered and the issue of externalities,
which might be viewed as negative subsidies are also tackled.
Finally Chapter 7 concludes the report and compares the costs of generating
technologies that represent the four main sources of power for the future, coal, gas,
wind (representing renewables) and nuclear power. It also presents the findings of this
report’s proprietary industry executive survey.
18
CHAPTER 2
The traditional approach to

costing electricity generation
19
Chapter 2 The traditional approach to
costing electricity generation
Introduction
The starting point for analysis of the cost of electricity must examine the economics of
electrical energy as the product of a manufacturing process, requiring a manufacturing
plant, raw materials and labour. However, where electricity differs from the traditional
manufacturing model is that the product must be made, delivered and consumed within
a very short space of time. Furthermore, the grid system for delivering electric power
requires that supply and demand always match or both the quality and the reliability of
the product deteriorate. The need to keep supply and demand in balance has a profound
effect on the market for electricity, leading for example to the requirement for base
load and peaking capacity, each with a different production cost. This, in turn leads to
large swings in the Short Run Marginal Cost (SRMC), which measures at any point
what the next unit of electricity will cost to produce. This creates differences in detail
to the markets for most commodities and goods.
Another unique factor of the electricity market is the range of means of manufacturing
exactly the same product: coal-fired power stations, gas turbine combined cycle plants,
nuclear stations, solar cells, hydropower plants, wind turbines. Analysis of power
generation technologies reveals striking differences in the balance between capital
outlay and fuel costs. A gas turbine is relatively cheap to manufacture but the fuel it
burns, normally natural gas, is expensive. In contrast a wind turbine is expensive to
manufacture but burns no fuel. Balancing the value of one type of plant against another
in such a situation is complex and therefore open to dispute.
This chapter will examine the capital cost of building various types of power plant first
before examining the cost of a unit of power from each type of plant as a means to
identify the key differences between the various technologies.
20
Capital costs of power generation technologies
Table 2.1 shows the capital cost of power station technologies based on projects built
in the US, Canada, Mexico and the UK. These figures offer an average cost for the
technologies. However, some of the more sophisticated technologies such as gas
turbines can only be constructed by a limited number of specialist companies. A
developing country, which has to import such equipment and pay for it with foreign
exchange might find the actual cost much higher than suggested in Table 2.1. Two
costs are presented, a bare cost and a cost including the infrastructure necessary to
support the plant. The bare cost is the cost for the equipment needed to build the plant.
The second figure takes account of the cost of land for the plant, the acquisition of
permits for construction, systems to deliver fuel and remove effluents and grid
connection to export the power from the plant. This can increase the cost dramatically.
Table 2.1: Global capital costs of power plants
Bare cost US$/kW Cost including

infrastructure US$/kW
Open cycle gas turbine 909 1,100-1,400

Combined cycle gas turbine 912* 1200
Hydropower 2056 2500
Coal-fired steam plant 1953 2,800-3,000
Biomass-fired steam plant 1183 1,600-2,000
Wind turbine 2019 >2,500
*Gas turbine combined cycle plants with capacities of above 300MW have lower average costs, in the range
$400-$500
Source: Creative Energy Concepts1 Business Insights Ltd
1
Distributed Energy Systems. Central Power Generation Economics, published by Creative Energy
Concepts on their internet site, www.cre8tiveenergy.com
21
It is clear that gas turbine technologies are the cheapest of those commonly available
today for central power station construction. Both open cycle gas turbines and
combined cycle plants can be built for around $900/kW. In fact, large combined cycle
plants are being built for significantly less today, in the $400-$500 range. Infrastructure
costs add roughly $300-$500 to this bare cost.
Figure 2.1: Global capital costs of power plants
Cost inc infrastructure (lower estimate)

Cost inc infrastructure (upper estimate)
Bare cost
3000
2500
2000
US$/kW
1500
1000
500
0
Open cycle Combined Hydropower Coal-fired Biomass- Wind turbine
gas turbine cycle gas steam plant fired steam
turbine plant
Source: Creative Energy Concepts Business Insights Ltd
Biomass-fired steam plants are the next cheapest option, with a bare cost of around
$1,200/kW and a cost including infrastructure of $1,600-$2.000/kW. This includes the
cost of collection and transportation of the biomass fuel to the plant and assumes that
the biomass is grown locally. Hydropower and wind power follow close behind
biomass, with bare construction costs of around $2,000/kW and total costs of
$2,500/kW, while coal-fired combustion are the most expensive option with a bare cost
of just under $2,000/kW, rising to $2,800-$3,000 when infrastructure costs are
included. These latter include the fuel transportation infrastructure cost as well as ash
disposal and environmental compliance costs. Data in Table 2.1 represents averages,
22
but the cost variations from region to region are important when it comes to selecting a
project. Data from Australia, the US and the UK (here used to represent Europe) are
provided below.
Australia
Estimates for a limited range of power generation technologies in the Australian state
of New South Wales are presented in Table 2.2. These broadly confirm the figures in
Table 2.1, although in this case the open cycle gas turbine power plant is significantly
cheaper than the combined cycle plant. Coal-fired capacity is notably more expensive
than either.
Table 2.2: Capital cost of power plants in New South Wales
Capital cost (A$/kW) Capital cost (US$/kW)
Coal fired thermal plant 1380-1840 838-1117

Combined cycle gas turbine 884-1040 537-631
Open cycle gas turbine 663-765 402-464
A$ to US$ exchange rate based on averaged figures over the period 01/00-12/04
Source: Intelligent Energy Systems2 Business Insights Ltd
Another source3 suggests that the cost of renewable electricity in South Australia is
A$1,500/kW for wind power, A$1,500/kW for wave power. A$4,000/kW for solar
tower technology and A$10,000/kW for solar photovoltaic generation. Costs for wind
power are again broadly comparable with Table 2.1. While the cost of wave power at
2
The long run marginal cost of electricity generation in New South Wales, A Report to the Independent
Pricing and Regulatory Tribunal, April 2004.
3
These figures are taken from an internet page compiled by Craig Peacock at beyondlogic.org
23
$1,500/kW might be currently rather optimistic the solar technologies are considerably
more expensive than either wind or wave.
US
Table 2.3 shows the cost of new power generation technologies in the US. This data
was calculated by the US Department of Energy's Energy Information Administration
and are based on projects initiated in 2002 for completion in 2004-2007, with the date
depending on the complexity and lead time required for the technology.
Table 2.3: New electricity generating technology costs in the US
Capital cost US$/kW*
Coal-fired steam 1,079

IGCC 1,277
Combined cycle gas turbine 510-563
Open cycle gas turbine 389
Fuel cell 1,850
Advanced nuclear plant 1,750
Biomass 1,569
Geothermal 1,681
Wind turbine 938
Solar thermal 2,204
Solar photovoltaic 3,389
*These costs are in overnight US$ for plants with initiated in 2002 with starting dates between 2004-2007
Source: US Department of Energy, Energy Information Administration4 Business Insights Ltd
Gas turbine technologies are the cheapest by a significant margin. The capital cost of
an open cycle gas turbine power plant is estimated to be US$389/kW, while the
combined cycle plant is US$510-US$563/kW. A conventional coal-fired power plant is
estimated to cost US$1,079/kW while an integrated gasification combined cycle plant
(IGCC plant) has an estimated capital cost of US$1,277/kW.
4
Assumptions for Annual Energy Outlook 2003.
24
Table 2.3 shows that wind turbines are the cheapest technology after gas turbines, with
an installed cost of US$938/kW. This differs from the estimate in Table 2.1, which
showed the bare cost of wind to be higher than both biomass and coal-fired generation.
However the difference may be a result of the continuing fall in the cost of wind
turbines. The cost of biomass-fired generation in Table 2.3 is higher than wind in Table
2.3 whereas in Table 2.1 it appeared significantly less expensive. Solar technologies
are the most expensive in Table 2.3, with solar photovoltaic, at US$3,389/kW the most
expensive of all. This is in line data for Australia.
UK
Table 2.4: Capital cost of new technologies in the UK
Type Capital cost (£/kW) Capital cost (US$/kW)
Biomass-fired fluidised bed combustion 1840 2919

Coal-fired fluidised bed combustion 730 1158
Combined cycle gas turbine 300 476
Conventional coal-fired steam 820 1301
IGCC 1000 1586
Nuclear 1150 1824
Offshore wind turbine 920 1459
Onshore wind turbine 740 1174
Open Cycle gas turbine 330 523
Wave and marine technologies 1400 2221
£ to US$ exchange rate based on averaged figures over the period 01/00-12/04
Source: Royal Academy of Engineering5 Business Insights Ltd
Examples of capital cost estimates for the construction of power generating plants in
Europe are provided in Table 2.4, which shows costs based on plants assumed to be
built in 2004 in the UK. Gas turbine based plants are the cheapest by a wide margin
with an open cycle gas turbine plant costing £330/kW and a combined cycle plant
5
The Cost of Generating Electricity, a study carried out by PB engineering for the Royal Academy of
Engineering, March 2004
25
£300/kW. It is worth noting that in this case the combined cycle plant is expected to be
cheaper than the open cycle plant.
Coal-fired combustion in a conventional pulverised coal steam plant is expected to cost

£820/kW, nearly three times the cost of the combined cycle plant. Fluidised bed
combustion is slightly cheaper at £730/kW while an integrated gasification combined
cycle power plant costs £1,000/kW. A new nuclear plant is expected to cost
£1,150/kW, slightly cheaper than the estimated cost of a new nuclear plant in Finland,
for which a contract was signed in 2003. Of the renewable technologies, wind is the
most competitive on a capital cost basis, with an expected cost of £740/kW for an
onshore wind farm and £920/kW for an offshore installation. Wave power is expected
to cost around £1,400/kW and biomass, in a UK setting, £1,840/kW.
Analysis of capital cost figures
Figure 2.2: Country comparison of capital costs of selected power plants
2000
Advanced nuclear
1800
1600 Offshore
Onshore
Capital cost US$/kW
1400 Australia (NSW)

1200 UK
US
1000
Upper estimate
800 of costs
600
400
200
0
Nuclear
Combined Coal-fired IGCC Wind turbine
cycle gas steam
turbine
A$ and UK£ to US$ exchange rates based on averaged figures over the period 01/00-12/04
Source: Various, Business Insights analysis Business Insights Ltd
26
Table 2.1 and Table 2.4 list estimates of capital costs of new power generation
technologies from a variety of sources and for a variety of regions. There are obvious
differences between data from the different sources. The UK data, for example,
suggests that a combined cycle plant is cheaper than a simple cycle gas turbine. In all
the other cases the simple cycle turbine is cheaper to install. The overall capital cost of
coal-fired generation varies from source to source as well.
Overall, however, there is some broad agreement, as can be seen in Figure 2.2. Gas
turbine-based power plants are the cheapest to install in every region considered. Coal-
fired plants are generally considerably more expensive and nuclear power more
expensive still.
Of the renewable technologies wind is clearly the most capital cost competitive with
the other technologies following in its wake. The only estimate included in the above
tables for hydropower puts it on a par with wind generation. However wind generation
is becoming increasingly cheaper while hydropower is an established technology with
no expectation of cost reductions as a result of technology advances. Solar power, at
least in the form of solar photovoltaic units, is the most expensive renewable
technology on offer today.
The data above is neither exhaustive nor comprehensive. Sets from different
geographical regions cannot easily be compared. Only within a single set of estimates
can useful comparisons be made. But, geographical location is important and there will
be significant differences in the cost of a power plant depending on the part of the
world in which it is to be built.
One important factor will be the type of technology. Some technologies such as gas
turbines are very sophisticated and can only be manufactured by a limited number of
companies, all based in technically developed countries. These are readily accessible to
power companies within the developed world but a company wishing to build a gas
27
turbine plant in a developing country has to consider the additional cost of paying for
an imported unit in foreign currency.
However, the labour to build a power station will probably be much cheaper in a
developing country than in a developed nation. Thus the construction of a labour-
intensive project such as a large hydropower scheme is likely to prove cheaper in a part
of the world where labour is cheap. All these considerations must be taken into account
when calculating the initial capital cost of building a power station.
Capacity factor
The basic capital cost of a power plant refers to the cost to install one kilowatt of
generating capacity. The generating capacity referred to is the rated capacity of the
power plant. However in most cases a power station will not be able to produce power
at its rated capacity continuously. The Capacity Factor is takes account of this
discrepancy between nameplate capability and actual output. The capacity factor of a
power station is the ratio of the actual power output of the plant over one year
compared to the amount of electricity it would produce if it ran continuously at its rated
capacity for a year. So, for example, a 100MW power plant that ran continuously for a
year but at 50MW would have a capacity factor of 50%. Similarly a gas turbine that
operated for only 6 hours each day, 365 days/ year would have a capacity factor of
25%.
No power plant is capable of operating with a capacity factor of 100%. All require
regular maintenance and over time parts will have to be replaced, requiring the plant to
stop. The operation of most fossil fuel and nuclear power stations is limited by just
these factors. Otherwise they can operate continuously. However many renewable
energy technologies rely on intermittent sources of energy. In this case there is an
intrinsic limit to the capacity factor. This must be taken into account if one wants to
compare capital costs of different types of technology.
28
Table 2.5: Typical capacity factors for power generating plants
Capacity factor (%)
Gas turbine combined cycle 80-90*

Nuclear 90
Average US Coal plant 68
Biomass 68
Geothermal 90**
Hydropower 44
Wind turbine 30
Solar 20
*In practice many combined cycle plants operate as intermediate load power producers and often only run for
50%-60% of the time but they should be capable of much higher levels of operation.
** This represents an upper limit for a geothermal plant
Source: Author’s research Business Insights Ltd
Figure 2.3: Typical capacity factors for power generating plants
Upper estimate
90
80
Capacity factor (%)
70
60
50
40
30
20
10
0
Wind turbine
Coal plant
Gas turbine
Average US
combined cycle
Nuclear
Solar
Biomass
Geothermal
Hydropower
Source: Author’s research Business Insights Ltd
Table 2.5 shows typical capacity factors for a variety of different power generation
technologies. Nuclear power has one of the highest capacity factors of all types of
power plant in regular service, though this is partly a reflection of economics, since
nuclear plants operate most economically when run continuously. By comparison the
29
average capacity factor of a US coal-fired plant is 68%, though some will exceed this
by a significant margin. Gas turbine-based plants should also be capable of achieving a
relatively high capacity factor even though they are often run intermittently rather than
as base load plants.
Among renewable sources, only geothermal can compete with the leading established
technologies. Biomass, meanwhile, has a capacity factor very similar to that of a coal-
fired power station. This might be expected since both use similar technology.
Hydropower can achieve around 44% capacity factor, though this will vary
significantly depending on the site and the conditions. The capacity factors of US
hydropower plants dropped to around 30% in 2001 as a result of drought. Wind, while
intermittent, does not suffer from long-term changes such as this. Current technology
can achieve a capacity factor of 30%. Some sources quote factors as high as 40%; this
seems optimistic over land but might be achievable with offshore wind farms where
conditions can be more favourable. Solar power, meanwhile, has a capacity factor of
only 22%-23%.
The capacity factors of renewable technologies have an important consequence when

their economics are evaluated. The capital cost of an onshore wind farm quoted in
Table 2.4, for example is £740/kW. However when the capacity factor is taken into
account this rises to £2,470/kW. By contrast the cost of a conventional coal-fired steam
plant is £820/kW, and would rise to £1,210/kW when capacity factor is taken into
account.
30
Financing capital cost
The financing of power plants will be considered in more detail later in this chapter.
However it must be noted that, regarding financing of the capital cost of different
power plant technologies, almost all power generation projects are financed with some
type of loan which must be repaid. The period of this loan is critical to the economics
of the plant. The actual period will depend on the size of the loan but for large projects
the average is likely to be between 15 years and 20 years. This is significantly less than
the lifetime of many types of power generation technology.
Most fossil fuel fired power stations have estimated lives of around 30 years. Modern
wind turbines may achieve a similar life. However a large hydropower plant can have a
lifetime of at least 50 years, and if the turbines are replaced, this can be extended to
100 years or longer.
Hydropower, in particular, is expensive and capital intensive. Most of the outlay must
be found at the start of the venture. If this is in the form of a loan taken out over, for
example, 20 years, then the project may well appear prohibitively expensive when loan
repayments are taken into account. However if the loan was over a more realistic 30-40
years, the economics would be more attractive.
Large hydropower projects suffer most notably, but many renewable generation
technologies are capital intensive in the same way. This can make them appear more
expensive than they really are, leading to unreasonable penalties.
31
The cost of power
In theory it is possible to calculate the cost of electricity (often referred to as the cost of
energy or COE) by taking to capital cost of the power plant, adding to that the cost of
the loan (interest repayments) over the lifetime of the loan, the cost of operations and
maintenance over the lifetime of the plant and the cost, if any, of fuel over the lifetime
of the plant. Dividing the resulting sum by the total amount of electricity the power
station produced over its lifetime will produce the average cost of electricity from the
plant over its lifetime. Unfortunately such a calculation can only be made when the
plant has reached the end of its life. Until then, only estimates can be provided.
Levelized cost of electricity
When planning a power project a system planner or an investor will want to know
before deciding what type of power plant to build. The decision to finance a power
project will be based on an understanding of which technology offers the least cost
electricity. The decision is traditionally made on the basis of an economic calculation
yielding what is known as the levelized cost of electricity for each technology. For
example, if a power station was going to be built today and had a lifetime of only one
year, then the calculation outlined above would yield the levelized cost of electricity
from the plant. Such a calculation could be carried out for each technology to identify
the cheapest source of electricity.
Most generating companies and investors will assume a lifetime of twenty or thirty
years. However, the value of money depreciates over time, which is reflected in interest
payments. This must be calculated into the overall cost of a using a concept known as
present value.
In effect, when, for example, $100m is borrowed, an additional sum, the interest or
discount, is levied. The additional sum reflects both the opportunity cost of not having
the $100m available now, as opposed to at the end of the loan period. In effect, it says
32
that the $100m today is worth $100m +$interest. In economic terms, the present value
of the $100m is the $100m + the $interest.
Calculations of loan repayments and of present value are extremely sensitive to the
discount rate chosen as the basis for such a calculation as the figures Table 2.6below
show. One million dollars in ten years time has a present value of $620,000 at a
discount rate of 5%; at a discount rate of 10% this falls to $390,000.
Table 2.6: Present value of $1m as a function of discount rate
Year Present Value, $ Present Value, $

(5% discount rate) (10% discount rate)
0 1,000,000 1,000,000
5 780,000 610,000
10 620,000 390,000
15 500,000 250,000
Source: The shadow of the future: Discount rates, later generations, and the environment. D A Farber and P A
Hemmersbaugh, Vanderbilt Law Review Volume 46 (1993) pp267-304 Business Insights Ltd
Figure 2.4: Present value of $1m as a function of discount rate
1,000,000
800,000
600,000
400,000
200,000 Present Value, $(5% discount rate)
Present Value, $(10% discount rate)

0
0 5 10 15
Year
Source: The shadow of the future: Discount rates, later generations, and the environment. D A Farber and P A
Hemmersbaugh, Vanderbilt Law Review Volume 46 (1993) pp267-304 Business Insights Ltd
33
The concept of present value is widely used to estimate the total costs involved in a
power generating project. This is preformed by assuming a lifetime for the plant, then
for each year calculating the total costs to finance the loan, buy fuel and operate and
maintain the facility. A discount rate calculation similar to that used to calculate the
data in Table 2.6 is then used to convert the future cost into a present value. The
present values of costs for all the years of the lifetime of the plant are then added
together to give an overall figure for the present value of the plant. This equates to the
total cost today of the station and its operation.
The present value of the costs for a power generating project are an estimate but they
provide a means of comparison. If the present value of the plant is divided by the total
amount of electricity the plant is expected to produce over its lifetime, the resulting
number is the levelized cost of energy. This is the key figure a planner will use to
compare the competitiveness of various technologies.
A prospective investor also needs to know how much a power project will earn.
Accordingly, similar discount calculations can be carried out, based on the return
expected each year from the sale of electricity from the power station. The sum of these
returns should exceed the present value of the plant if the scheme is to turn in a profit.
Global levelized costs
Table 2.7 presents some typical levelized costs calculated using a standard approach.
These are broken down by fuel type rather than generation type but they provide a good
example of the results obtained using this approach. It is significant that large
hydropower offers the most economical means of generating electricity according to
these estimates, with a COE of US$0.010/kWh. Nuclear power follows at
US$0.020/kWh, then natural gas, coal and oil. Apart from large hydropower, onshore
wind generation is estimated to be the most economical renewable means of generation
with an estimated COE of US$0.040/kWh. Solar, with a COE of US$0.260/kWh, is the
most expensive.
34
Table 2.7: Typical global levelized power generation costs
Average cost (US$/kWh
Nuclear 0.02
Coal 0.035
Oil 0.04
Natural Gas 0.03
Onshore Wind 0.04
Offshore Wind 0.055
Solar 0.26
Tidal & Current 0.08
Wave 0.09
Geothermal 0.08
Biomass 0.06
Small Hydro 0.07
Large Hydro 0.01
Source: The World Offshore Renewable Energy Report 2002-2007, prepared by Douglas-Westwood Limited
for Renewables UK report number 197-02, October 2002 Business Insights Ltd
Figure 2.5: Typical global levelized power generation costs
0.30
Average cost (US$/kWh
0.25
0.20
0.15
0.10
0.05
0.00
eo ave
d
al l
nt
r
ro
ho ind
l
as
om l
r
rg dro
i
oa
al s s
a
la
O
a
in
re
yd
le
So
G
a
W
C
O re W
y
er
ur
uc
H
lH
re
th
C
N
ur
e
Bi
ho
l&
at
Sm
La
ffs
G
ns
N
da
O
Ti
Source: The World Offshore Renewable Energy Report 2002-2007, prepared by Douglas-Westwood Limited
for Renewables UK report number 197-02, October 2002 Business Insights Ltd
Excepting large hydropower and nuclear power, Table 2.7 reflects prevailing evidence
that modern natural gas fired power plants offer the most economical means of
producing electricity. (Large hydropower projects tend to be expensive, often attract
35
environmental criticism and within the developed countries, most of the suitable sites
have already been exploited. Thus in most cases this type of project will not be
considered. Nuclear power is likewise capital intensive and is not environmentally
popular.) New coal-fired plants are also competitive, even when environmental
constraints are taken into account. This will change, however, if it became necessary to
capture and sequester carbon dioxide as well as the other atmospheric pollutants such
as sulphur dioxide and nitrogen oxides that are controlled today.
Table 2.8 presents figures derived for a much more localised situation, in this case
examining the renewable options available to utilities in Colorado, US. Though the
selection of technologies considered here are small, the figures agree quite closely with
those in Table 2.7. Hydropower, in this case small rather than large scale, presents an
extremely viable option with a levelized cost of US$0.021-0.038/kWh. A new coal-
fired plant would generate electricity for US$0.032-0.036/kWh while onshore wind has
estimated generating costs of US$0.043-0.049/kWh. Biomass co-firing6 (not covered in
Table 2.7) is also extremely competitive with an estimated cost of generation of
US$0.023-0.026/kWh. However this is only applicable where there is an existing coal-
fired power station that can be modified.
Table 2.8: Levelized cost of electricity estimates for typical US utility
Cost (US$/kWh)
New coal plant 0.032-0.036

Wind 0.043-0.049
Low impact hydro 0.021-0.038
Biomass co-firing 0.023-0.026
Biomass 100% firing 0.067-0.074
Source: Renewable Energy Options for Colorado Springs Utilities, summary prepared by Navigant Consulting,
2004 Business Insights Ltd
6
Co-firing of biomass involves mixing up to 15% biomass with the coal in a coal-fired power plant. This
offers an extremely cheap means of achieving a level of renewable electricity generation.
36
Data for the UK, which is broadly representative of Europe, is shown in Table 2.9. A
gas-fired combined cycle plant is most economical, with a new plant capable of
generating electricity for £0.0220/kWh. This is followed closely by nuclear generation
with an estimated cost of electricity of £0.0226/kWh. Conventional coal-fired
generation was estimated in this study to be capable of generating electricity for
£0.0251/kWh and advanced coal combustion based on an integrated gasification
combined cycle plant provided an estimated levelized cost of £0.0319/kWh.
Table 2.9: Levelized cost of electricity from new technologies in the UK*
Cost(£/kWh) Standby Cost(£/kWh)
Conventional coal-fired steam 0.025 -

Coal-fired fluidised bed combustion 0.0263 -
Biomass-fired fluidised bed combustion 0.0676 -
IGCC 0.0319 -
Open Cycle gas turbine 0.0310 -
Combined cycle gas turbine 0.0220 -
Nuclear 0.0226 -
Onshore wind turbine 0.0535 0.0167
Offshore wind turbine 0.0719 0.0167
Wave and marine technologies 0.0663
* These figures are based on a discount rate of 7.5%. The calculations have also assumed that
intermittent renewable sources such as wind power will require additional standby capacity and this
is included in the calculation
Of the renewable options presented in Table 2.9, onshore wind is the most competitive
with an estimated cost of electricity of £0.0535/kWh. The cost for offshore wind was
£0.0719/kWh while wave and marine technologies, which are of particular interest in
7
The Cost of Generating Electricity, a study carried out by PB Engineering for the Royal Academy of
Engineering, March 2004. The figures used in the table exclude the costs associated with carbon
emissions which were included in the study. These are considered separately in Chapter 6.
37
the UK where the wave regime is good, were estimated to be capable of providing
electricity for £0.0663/kWh.
The Royal Academy of Engineering study assumed that wind power cannot be
considered without taking into account some form of standby capacity which will
replace the wind output when the wind fails to blow. If this allowance is subtracted
from the wind figures in Table 2.9, the cost of generation for onshore wind is
£0.0368/kWh and for offshore wind is £0.0552/kWh. This would put onshore wind
closely competitive with coal-fired generation but gas and nuclear based generating
technologies would still be considered more economical.
Fuel cost and fuel risk
Clearly, the capital cost of power plant technology does not provide a good guide to the
cost of the energy it will produce. The principle reason for this is that some
technologies such as wind and hydro require a large initial investment but have low
running costs whereas others, such as fossil-fuel fired plants can be cheap to build but
are much more expensive to run.
Fuel, and its cost, make the crucial difference. So does the discount rate and related
interest rate. If the cost of borrowing money is high then a plant that requires a large
initial investment will become relatively more expensive because of the large interest
payments which will have to be made once the facility enters service. However, a
natural gas-fired combined cycle plant will cost little to build but the economics of its
future operation will depend entirely on the cost of gas. If that rises abnormally then
the plant will become uneconomical to run.
38
It has been argued8 that the traditional way of accounting for fuel costs in levelized cost
of electricity estimates does not take full account of the volatility in the price of fuel
and that this makes fossil-fuel fired power technologies appear more economical in
relation to renewable technologies than they actually are. According to this argument,
one should replace the traditional 'present value' approach to calculating the actual cost
of fuel for a power plant with an economic estimate based on a Capital Asset Pricing
Model (CAPM).
The main advantage of this model is that it takes account of the level of risk associated
with the various future payments that must be made in relation to a power generation
project. Payments associated with a fixed loan taken out to finance a project are
relatively stable and low risk, as are operation and maintenance payments. These types
of payment apply to all types of power plant.
Fossil-fuel fired plants are exposed to risk associated with fuel prices and their regular
fluctuations. These are not of a similar low risk and the CAPM model takes this into
account in calculating the cost of electricity based on such a plant. Some of the
arguments for this approach will be considered in the next chapter when historical fuel
prices are examined. In the present context it will serve to highlight the different results
from the two different types of analysis. These are shown for a typical case of a
natural-gas fired power plant in Table 2.10.
8
This argument is based on the work of Shimon Awerbuch; The true cost of fossil-fuel fired electricity,
Power Economics, May 2003, p17 and Determining the real cost, Renewable Energy World, March-
April 2003.
39
Table 2.10: Cost of electricity estimates for a gas-fired plant based on
different models
Levelized cost of gas Levelized cost of electricity

(US$/kWh) (US$/kWh)
Traditional model 0.020 0.029

CAPM model* 0.038 0.050
* This represents the best case CAPM cost. Estimates based on other assumptions produce much higher costs
of electricity and gas.
Source: Power Economics9 Business Insights Ltd
As the figures in Table 2.10 show, using a risk-based CAPM model to calculate the
levelized cost of gas and electricity results in rise in the levelized cost of gas from
US$0.020/kWh to US$0.038/kW - virtually double - while the cost of electricity rises
from US$0.029/kWh to US$0.050/kWh. These CAPM estimates are based on the most
favourable conditions for the future purchase of gas based on long-term contracts.
More realistic assumptions can push the cost of electricity as high as US$0.073/kWh.
Clearly, if this model were adopted then renewable technologies, which are not subject
to the risk of fuel purchase and fuel price volatility, would appear much more
competitive than they do when appraised using the conventional approach. It is also
clear that all attempts to try and calculate the cost of electricity based on economic
models which make assumptions about the future are bound to be wrong. The key
question is which comes closest to representing the real situation.
9
The true cost of electricity, Shimon Awerbuch, May 2003, p17
40
CHAPTER 3
Historical costs
41
Chapter 3 Historical costs
Introduction
The cost of electricity depends on the costs associated with the construction and
operation of a power station. This was examined in Chapter 2 with analysis of the key
cost factors and how they could be used to obtain a number for the cost of electricity.
There are four main factors to consider when estimating the cost of electricity:
The cost of power station technology;
Financial costs associated with a loan to finance construction;
Operational and maintenance costs;
The cost of fuel to supply the power station.
Each of these will vary with time. Depending on the technology such variations may
have a profound effect on the final cost of electricity from a proposed power plant. This
chapter will examine how these costs have varied historically in order to draw some
conclusions about how such variations may influence the optimum technology choice.
42
Technology costs
Current construction costs for most of the major power generation technologies have
been collected in Chapter 2. These costs are not static. They change with time, and
these changes depend on a number of factors. One of the most important is the gradual
improvement in a technology over time resulting in what is often called the 'learning
curve'.
As a technology becomes more mature, its performance and reliability increases and it
becomes more efficient and easier to maintain. Construction techniques will often
improve as well. As a result succeeding generations of any given technology tend to be
produced and installed at a lower unit cost per kilowatt. A similar effect results from
economies of scale that can be realised when large numbers of identical units are being
produced. In this case the larger the manufacturing plant capacity and the number of
the units being produced, the lower the cost for each unit. Such an effect is of particular
significance when considering photovoltaic (solar) cells and may well have an
influence on the future cost of solid state fuel cell elements.
Both the learning curve and the economy of scale effect can be estimated by analysing
at historical trends. Evidence from a variety of different industries confirm that the
effect takes place. The size of the effect can be quantified by examining the change in
cost each time the number of units produced doubles. Studies have shown that a
doubling in the number of units will lead to a cost reduction of between one fifth and
one third.
Such trends lower the cost of technologies but there are other factors that increase their
costs. New regulations, particularly relating to safety and environmental factors, can
require new or additional technologies to be introduced. This will lead to higher costs
for new capacity, as was found with the nuclear industry in the US in the 1980s and to
a lesser extent has affected coal-fired generation across the globe in the last twenty
43
years.
The rollercoaster effect that such changes can have are well illustrated by the case of
nuclear power in the US. In 1972 the Maine Yankee nuclear power station was
completed at a total cost of $180mn, or roughly $200/kW for the 920MW station.
Twenty-five years later the last US nuclear power plant was completed at a cost of
$2,000/kW, ten times more expensive. Over 25 years, inflation would have been
expected to increase the cost by two to three times. The remainder must be put down to
increased regulation in the US, coupled with a perceived increased risk, which has
increased the cost of borrowing money to build a nuclear power plant. Longer
construction times were also a significant influence. Ironically, as a consequence of
deregulation and the writing off of debt associated with nuclear plants in the US, some
US nuclear plants are now providing perhaps the cheapest US electricity available.
Coal-fired power generation has been affected by more stringent environmental

regulations too. Over the last twenty years it has become mandatory to employ
technology to remove both nitrogen oxides and sulphur dioxide from the flue gases of a
coal-burning plant in many parts of the world. When particulate removal is included,
emission control techniques can add between $220/kW and $430/kW to the cost of a
coal-fired power station. In spite of these additional costs, coal remains competitive.
Traditional coal-burning technology is a mature technology so while it will still benefit

from a 'learning curve' lowering in costs, the learning curve is now a very gentle slope
as any improvements will be slight. Gas turbine technology is relatively mature too but
it experienced an explosive growth in power generation applications during the 1990s.
This led to a significant reduction in installed capacity costs over the same period,
though anecdotal evidence suggests prices have stabilised today. Coal and gas-based
generation are both relatively cheap to install but both depend on a fuel to generate
electricity. This is the determining factor in their competitiveness. Renewable
technologies often exploit a free source of energy but they are generally much more
capital intensive so any reduction in the capital cost of these technologies will have a
major effect on their competitiveness. The effect of 'learning curve' lowering of costs is
44
therefore more significant.
Wind power is a prime example. The cost of wind turbines has fallen steadily since the
1980s as technology has improved.
Figure 3.6: US Wind turbine costs, 1996-2030
1,050
1,000
950
Cost (US$/kW)
900
850
800
750
700
650
600
1996 2000 2005 2010 2020 2030
Year
Source: EPRI, US Department of Energy10 Business Insights Ltd
In Denmark between 1992 and 1996, for example, the installed cost of wind turbines
fell by 30% from Euro 1,050/kW to Euro 724/kW. Table 3.11 shows predicted wind
turbine costs in the US on a 1996 baseline. Here the baseline cost of US$1,000/kW in
1996 is expected to fall to US$750/kW by 2000 and US$/655/kW by 2020. Other
estimates have been much more optimistic. A European Wind Energy Association-
Greenpeace study in 2002 suggested that an installed cost of US$765/kW in 2001 could
10
Renewable Energy Technology Characterizations, TR-109496, US Department of Energy, 1997
45
fall to US$447/kW by 202011. While the scenario invoked in the study was optimistic it
indicated the scale of reduction in cost that might be achievable, given sufficient levels
of production.
Table 3.11: Wind turbine costs, 1996-2030
Cost (US$/kW)
1996 1,000
2000 750
2005 720
2010 675
2020 655
2030 635
A similar trend is expected with offshore wind turbine technology where capacity is
growing rapidly in Europe. Offshore technology cost around Euro 2,000/kW in 1991,
falling to around Euro 1,500/kW by 2000. The UK government has set a target of
around £750/kW (Euro 1,100/kW) for offshore wind turbines by 2010, a figure which
seems achievable based on current trends. It is on the basis of these trends that wind
power is being promoted extensively as the most important renewable technology for
the immediate future. The increased cost-effectiveness of wind turbines will continue
to be based on improvements in the technology. Solar photovoltaic technology, by
comparison, will benefit greatly from the economy of scale effect where the increase in
the volume of production leads to a decrease in price. This is exactly the same effect
found in the microchip industry, which shares a similar production technology.
11
Wind Force 12, a Blueprint to Achieve 12% of the World's Electricity from Wind Power by 2020,
EWEA and Greenpeace, 2002.
12
46
Figure 3.7: Photovoltaic production costs in the US, 1996-2003
4.2
1997
4.1 1996
4 1998
3.9
3.8
Cost (US$/W)
2000
3.7
3.6
3.5 1999 2001
3.4
3.3
2002
3.2
3.1
2003
3
0 20 40 60 80 100 120 140
US production (MW)
Source: PV News, Renewable Energy World Business Insights Ltd
Table 3.12: Photovoltaic production costs in the US, 1996-2003
US production (MW) Cost (US$/W)
1995 34.8 -
1996 38.9 4.00
1997 51.0 4.15
1998 53.7 4.00
1999 60.8 3.50
2000 75.0 3.75
2001 100.3 3.50
2002 120.6 3.25
2003 103.0 3.00
Source: PV News, Renewable Energy World Business Insights Ltd
The cost of a solar cell in the mid 1970s was around US$60/W. By 1990 it was below
US$10/W, and in 1996 was around US$4/W and by 2003 that had fallen to US$3/W.
This reduction in cost was achieved by improvements in technology and by the
introduction of new technologies as well as by the economies of scale from increased
production. As Table 3.12 suggests, between 1995 and 2003 production in the US
roughly tripled. However, growth in global production, concentrated in Asia, was much
47
higher: in 1995 itwas 77.5MW; in 2003 it was 744.1MW, almost ten times higher.
Several estimates can be used to calculate the rate at which costs will fall with a
technology such as solar photovoltaics. Estimates for the fall in the cost of a
technology for each doubling in volume of production vary from 0.68 and 0.8213. The
latter figure is most commonly found across a range of different industries. On this
basis, assuming an annual growth of 20% in the market for solar cells, prices can be
assumed to fall by 5% each year before inflation. Accordingly, the cost of solar cells
could fall to around $1/W by 2020 and $0.5/W by 203014. Such a reduction is in line
with an optimistic recent scenario, which predicted that the cost of solar cell modules
could drop below US$1/W by 2020, when global production capacity would be around
200GW/year15.
Table 3.13: Renewable technology 'learning curve' costs (US$/kW)
2000 2010 2020
Biomass gasification combined cycle 1,900 1,500 1,300

Direct fired biomass 1,800 1,400 1,100
Geothermal (high temperature flash plant) 1,400 1,200 1,100
Geothermal (hot dry rock) 5,200 4,300 3,300
Solar photovoltaic (residential) 5,300 3,100 1,800
Solar photovoltaic (utility) 5,300 1,500 1,100
Solar tower 4,400 2,600 2,500
Solar parabolic trough 2,700 1,400 1,400
Onshore wind turbine 750 675 655
13
14
15
Solar Generation 2020, by Greenpeace and the European Photovoltaic Industry Association, 2001.
16
48
The effect on falling prices on the economics of renewable technologies are
particularly important. Some broad predictions for the fall in the cost of a range of
renewable technologies are included in Table 3.13. These figures are based on a 1997
study but they remain valuable since they assess the range of technologies on a similar
basis. And while in some cases the costs of these technologies have already fallen
below the study estimates, most are still reasonably accurate. The data suggests that
wind is the most competitive of the renewable technologies (Table 3.13 does not
include hydropower). They also suggest that technologies such as biomass, geothermal
and solar photovoltaic could become competitive by 2020.
Financial costs
The success of any power generation project largely depends on securing suitable
financial support. Most private sector and many public sector projects are underwritten
using project financing. Under this model, the company wishing to build the power
plant (the owners) will be required to put up around 30% of the total cost in equity after
which financial institutions will lend the remaining 70% if they consider the project
viable.
Under a project financing scheme, repayment of the loan will be made from the
revenue of the power station when it starts generating and selling power. If for any
reason the project should fail, the liability of the owners is limited to the actual power
station which becomes the property of the financial institutions underwriting the
project. Beyond that there is no further liability. Thus the whole scheme depends on
calculating accurately the cost of generating electricity from the plant as well as
assessing accurately the future market for electricity.
Any project of this type involves a level of risk. Financial institutions are aware of this
and they will tailor their support package to the level of risk involved. The higher the
risk the higher the interest rate charged and the higher the financial cost of the loan. We
are not concerned here with the assessment of risk and its affect on the cost of a
49
project. What is important, however is to be aware that the interest rate charged on the
loan will have a bearing on the overall cost of electricity. Depending on the size of the
loan involved, repayment may be over as little as five years or as much as twenty or
even thirty years. Typically a loan of less than US$5m will have to be repaid in five
years; Loans of US$6-US$9m have a pay back period of no longer than seven years
while loans over US$10m will be repaid in 10-12 years17. Much larger loans can have
much longer payment periods.
For any given project and interest rate, the shorter the length of the loan the higher the
cost of electricity will be during the payback period. But once the loan is repaid, the
cost of electricity may fall dramatically. This can be seen in hydropower schemes,
which produce some of the cheapest electricity available once their loans are repaid. As
noted above, a similar effect has allowed some nuclear power plants in the US to
produce extremely cheap electricity.
While the cost of a loan will be related to risk, the baseline interest rate will generally
be related to the current discount rate18. Thus loans are likely to be cheaper during
periods when interest rates are low. When the cost of money is high, low capital cost
projects such as gas turbines become relatively cheaper whereas when the cost of
money is low, high capital cost projects will look more attractive. Thus the prevalent
financial situation can have an important effect on the choice of power generation
technology.
17
The ABCs of project financing, Jeffrey A Deutsch, Power Economics, June 1997, pp21-3.
18
Banks will charge more than the baseline interest rate but how much more will depend on the risk
associated with the project.
50
Operational and maintenance costs
The cost of operating and maintaining a power plant involves the cost of labour, the
cost of various consumables and the cost of materials and components for regular
maintenance and repair of the plant. Component costs will vary slightly over time but
normally in a predictable way. The cost of labour and the cost of consumables will vary
too, but less predictably.
UK data shows that a coal-fired steam plant, a combined cycle gas turbine plant and an
onshore wind farm all have a very similar maintenance cost of £24-25/kW/year.
Offshore wind turbines, together with wave power plants have the highest maintenance
charges, £56-57/kW/year. This reflects the cost and difficulty of maintaining
equipment offshore. For this reason, offshore wind turbine manufacturers are aiming to
make their machines as rugged as possible in order to keep maintenance costs low.
Table 3.14: Annual cost of maintenance in the UK
Cost (£/kW/year) Cost ($/kW/year)
Coal-fired steam 24 38
Onshore wind turbine 24 38
Combined cycle gas turbine 25 40
Open cycle gas turbine 34 54
Biomass-fired fluidized bed 38 60
Nuclear power plant 41 65
Coal-fired IGCC plant 48 76
Wave power plant 56 89
Offshore wind turbine 57 90
A$ to US$ exchange rate based on averaged figures over the period 01/00-12/04
19
The Cost of Generating Electricity, Royal Academy of Engineering, 2004
51
Maintenance costs for other technologies fall between these two figures. Open cycle
gas turbines cost around £34/kW/year, while a nuclear power plant costs £41/kW/year.
A biomass-fired fluidized bed plant costs £38/kW/year and a coal-fired integrated
gasification combined cycle (IGCC) plant is expected to cost £48/kW/year to maintain.
Table 3.15: Annual cost of maintenance for renewable technologies

(US$/kWh)
2000 2010 2020
Biomass gasification 0.0362 0.0355 0.0329

Direct fired biomass 0.0474 0.0474 0.0387
Geothermal steam 78.5* 59.5* 52.4*
Geothermal hot dry rock 207* 179* 163*
Solar tower 67* 30* 25*
Solar parabolic trough 63* 43* 34*
Solar dish 0.037 0.011 0.0105
Wind turbine 13.9* 11.3* 11.1*
* These figures are expressed in US$/kW/year
Source: US Department of Energy and EPRI20 Business Insights Ltd
The data in Table 3.14 represents costs today in the UK. Table 3.15 shows projected
costs until 2020m, based on a study of renewable energy technologies in the US. They
are in 1997 US$ and so direct comparison with the 2004 data in Table 3.14 is not
possible. A comparison of the cost of maintenance of a wind turbine from the two
tables gives an idea of the scaling from one point in time to another - $38 in the UK in
2004, $14 in the US 1997-200. However the figures in Table 3.15 remain valuable
because they provide an indication of how costs for operations and maintenance can be
expected to change over time.
Table 3.15 shows that the cost of maintaining plants based on traditional technologies
20
Renewable Energy Technology Characterizations, TR-109496, US Department of Energy and EPRI,
1997
52
such as direct fired biomass, and even biomass gasification are expected to be
relatively stable with little change over the twenty year time scale shown in the table
(these figures do not take into account inflation). Wind turbines are the cheapest of the
technologies listed in the table from an operations and maintenance perspective,
reinforcing the conclusion from the figures in Table 3.14.
All the other renewable technologies are still in an early development stage and all are
expected to cost more than wind to operate and maintain, at least until 2020. However
the solar technologies, in particular, can be expected to become relatively competitive
on this basis by 2020. Notably, geothermal steam plants produce competitive electricity
today, in spite of the relatively high operating and maintenance costs.
The cost of fuel
While technology costs are the key factor influencing the cost of electricity from many
renewable technologies, the cost of electricity from traditional fossil fuel fired power
plants depends critically on the cost of fuel. The price of fuel has changed dramatically
during the last fifty years, both upwards and downwards. The market can show
considerable volatility. Coal, oil and gas are commodities, traded on an open market
and their prices will vary depending on the level of supply. In times of oversupply
prices fall whereas in times of shortage prices will rise. Supply, then, is the key to fuel
prices.
53
Oil
The history of the price of oil shows how dramatic price fluctuations can be. Between
1947 and 2003, the average world price of oil (adjusted for inflation in 2000 US
dollars) has been US$21.12/barrel and the average US oil price has been
$19.61/barrel21. In fact, the price of oil fell in real terms during the first decades after
the Second World War so that by 1972 the actual price of crude oil was around
$3/barrel.
By the end of 1974, following the war in the Middle East and an OPEC oil embargo,
the price quadrupled to $12/barrel. Prices stabilised at the higher level until the
beginning of the 1980s, when events in Iran and Iraq prompted a further doubling in
the price of oil. The recent war in Iraq has seen oil prices rise dramatically again.
Table 3.16: Average world oil prices (US$/barrel)
Cost
1989 13.58
1990 18.91
1991 24.72
1992 16.22
1993 16.77
1994 12.37
1995 16.13
1996 18.41
1997 23.18
1998 15.21
1999 9.76
2000 23.17
2001 22.1
2002 18.68
2003 29.03
2004 28.98
Source: US Department of Energy, Energy Information Administration Business Insights Ltd
21
Oil Price History and Analysis, Energy Economics Newsletter, 2003
54
Table 3.16 shows average world oil prices over the past 15 years. In addition to the
prices rises already mentioned, there was a further prices rise in 1991 as a result of the
first Iraq War, a notable rise in 1997 and then a sustained increase in price from 2003.
Under normal circumstances few power stations burn oil today but the cost of gas and
the cost of oil are linked because many gas-fired power plants are capable of burning
oil, so if the price of natural gas were to rise above that of oil, these plants would
switch fuel. Thus the cost of oil represents an upper limit to the cost of gas.
Gas
It has been traditional to fix the wholesale price of gas with reference to that of various
oil products. As a result gas and oil prices tend to track one another. This link was
broken in the UK in the mid-1990s when oversupply led to a rapid fall in UK gas prices
and the emergence of a spot market for gas. The situation restabilised with the opening
of a gas interconnector between the UK and Europe but it is possible that gas prices
will become less closely linked to those of oil over the remainder of this decade22.
As with oil, actual gas prices are determined by supply and demand. The situation in
the gas market is complicated by its regional nature. Gas prices in the USA are
determined by the supply of gas available through networks in the USA and Canada.
European gas prices are determined by availability within the European gas supply
network. Countries such as Taiwan and Japan where there is no source of gas must rely
on the shipment of liquefied natural gas (LNG), which is relatively more expensive.
22
The return of oil price escalation and the continental interconnector influence, Niall Trimble, Power
Economics, November 2000, pp21-22.
55
Figure 3.8: Cost of natural gas for electricity generation (US$/107kcals)
300
Cost of natural gas for electricity generation (US$/10 7kcals)
Taiwan
250
200
Finland
150
UK
100
US
50
0
1994 1995 1996 1997 1998 1999 2000 2001 2002
Table 3.17: Cost of natural gas for electricity generation (US$/107kcals)
Taiwan Finland UK US
1994 268.2 107.5 118.8 86.4

1995 260.1 146.0 117.9 76.8
1996 234.0 144.8 113.9 102.3
1997 255.2 128.4 123.2 109.5
1998 218.9 119.9 126.3 94.3
1999 201.7 107.8 114.7 102.1
2000 246.2 113.2 104.0 172.9
2001 244.7 109.0 111.1 185.1
2002 252.1 109.0 110.1 149.0
Table 3.17 illustrates both the regional variations in gas prices and the temporal
variations. Taiwan, which imports all its natural gas as LNG, has consistently higher
prices for gas than any of the other countries listed. The UK market became uncoupled
from the European market during the middle of the 1990s so that while prices rose in
56
Finland between 1995 and 1996, prices in the UK fell. By 2002, however, prices were
similar again within the two countries.
During the early 1990s the US has the lowest prices of all those shown. However the
danger of price volatility in regional gas markets is illustrated dramatically by the US.
From US$86.4/107kcals in 1994, the price more than doubled to US$185.1/107kcals in
2001. This was a result of supply shortage triggered by a number of factors that were
unique to the US market. However similar situations could arise in other regional
markets. In this case the price of gas rose much more swiftly than the price of oil in the
US market, though the two broadly track one another.
Gas is becoming an important fuel for electricity generation in those parts of the world
where it is available and is the benchmark for the cost of electricity in these regions.
Provided the cost of gas remains low then gas-fired generation will undercut coal-fired
generation and will be the target against which renewable technologies must compete
when new generating capacity is considered. Gas consumption for power generation in
the US is expected to roughly double between 2000 and 2015 although this will only
represent a total increase in consumption of around one third23. In the US the resource
is expected to be able to cope with this increase in demand but it will involve a capital
outlay of around US$67 billion between 2001 and 2015 by the gas industry.
The European market faces similar challenges as traditional sources of natural gas
begin to wane and new regions such as the USSR and North Africa become important
suppliers. In addition to new investment required to bring this gas to Western Europe,
security of supply will become an important issue when gas supply routes cross many
national boundaries. Gas supplies are likely to be adequate to meet demand over the
short to medium term but any dramatic change in either the supply or security situation
23
Natural Gas and Electricity Generation: Market and Operational Convergence, Bruce B Henning,
NASEO Annual Energy Conference, 2002
57
could easily upset the economic balance.
Coal
If the market for gas is marked by significant regional variations in price, the regional
nature of the coal market is even more marked. Coal is the cheapest of the fossil fuels
and where it is available in abundance it is frequently the cheapest source of electricity.
As a consequence countries like the USA, China, India, South Africa and Australia use
it extensively for electricity generation.
While coal is cheap, the cost of its transportation is not. The latter escalates rapidly
with distance. A power station can generate electricity most cheaply from coal when it
is sited close to the mine from which the coal is produced. In some regions, particularly
where coal is of poor quality, pithead power plants are common. Conversely, countries
that must import coal will pay much more than countries with their own reserves.
Table 3.18: Cost of steam coal for electricity generation (US$/tonne)
OECD Germany Taiwan Turkey* US
1994 38.4 141.6 114.9 13.2 31

1995 39.2 161.8 116.9 17.9 30.1
1996 34.4 55.9 113.8 17.7 29.5
1997 32.9 49 118.9 15.7 29.1
1998 30.4 46.6 93 15.9 28.6
1999 28.8 42 96.4 15.4 27.8
2000 26 42.4 100 14.4 24.5
2001 29.8 51.9 - 10.3 28.2
2002 28.3 47.1 - 15.1 27.9
*The Turkish price is for brown coal
Table 3.18 presents coal prices for the OECD and four individual countries between
1994 and 2002. The OECD average price in the first column smoothes out regional
variations and so provides a good idea of the volatility in the coal market. As the
figures suggest, this is much less marked than in the oil and gas markets. In fact over
58
the nine years listed, the cost of coal has slowly fallen.
A similar trend can be seen in the individual country markets. Excluding the Turkish
figures which are for brown coal, the US market shows the lowest prices over the
whole period. Prices in Taiwan, where coal must be imported (much from Australia)
are three times higher than those in the US. The cost of coal in Germany, meanwhile
was very high during the middle of the 1990s when the coal industry was undergoing a
period of rationalisation but has fallen since. Brown coal prices in Turkey are roughly
half the cost of US black coal but brown coal has a lower energy content and cannot be
transported economically over any great distance.
Fossil fuel discount rates24
In Chapter 2 showed how the cost of electricity from a proposed power generation
project is calculated by using the discount rate in order to calculate the present value of
both payments and income from the project over its expected lifetime (or the project
finance lifetime). This calculation normally consolidates all payments for such
outgoings as loan repayments, operational and maintenance costs and the cost of fuel
into a single figure for each year of the project and then applies a single discount rate to
this figure over the lifetime of the project. However, there are arguments for using
different discount rates for different types of payment or income depending on their
nature.
In order to understand this argument one needs to introduce the concept of risk. Any
financial arrangement involving future income involves and element of risk. Compare
for example a low risk government bond paying 4% interest and a high risk company
24
This argument is based on the work of Shimon Awerbuch; The true cost of fossil-fuel fired electricity,
Power Economics, may 2003, p17 and Determining the real cost, Renewable Energy World, March-
April 2003.
59
bond paying 10% interest. From an investment perspective two such bonds will often
be considered to be of equal value, even though the second pays £100 each year while
the first only pays £40 on a £1,000 bond. This is because in making the present value
calculation for each, a different discount rate has been applied. The more risky
company bond is evaluated using a discount rate of 10% while the less risky
government bond is evaluated using the lower discount rate of 4%.
The same principle can be applied to power plant economics. When considering the
payments associated with a power plant over its lifetime some, such as loan repayments
and fixed costs for operations and maintenance carry a low risk. These costs can be
predicted with good accuracy over the lifetime of the project. In financial terms they
carry a relatively low risk. The cost of fossil fuels, on the other hand, can change
significantly over the lifetime of a project. They therefore carry a higher risk and this
ought to be factored into any 'cost of electricity' calculation.
When examining costs, the highest discount rate should be applied to the lowest risk
element while a lower discount rate is applied to higher risk costs25. The effect of this
is to make the present value of the higher risk costs higher. According to one
estimate26, fossil fuel discount rate should be in the range 0-2%, and certainly no more
than 3%. In most 'cost of electricity' calculations, however the discount rate applied to
fossil fuel is in the range 5%-10%. As discussed in Chapter 2, the effect of using the
lower discount rate would be to increase the 'cost of electricity' from fossil fuel projects
in relation to that from renewable energy projects. Fossil fuel electricity costs would
rise by between two and three times. This would have a profound effect on the relative
economics of renewable and fossil fuel projects.
25
This is the reverse of the situation where one is investing on the expectation of an income where the
higher the risk, the higher the interest rate.
26
The true cost of fossil-fuel fired electricity, Shimon Awerbuch, Power Economics, May 2003, p17.
60
Hedged gas prices
Renewable energy provides a stable electricity supply over the long term and is often
sold on the basis of fixed-price contracts. This provides both wholesale purchasers and
consumers with long-term stability. However gas-fired generation cannot be sold on
this basis because its cost depends on the cost of the fuel. But when generators and
utilities calculate the cost of gas-fired generation they usually base their estimates on
long-range gas price forecasts, which are, by their nature, uncertain.
The same level of stability associated with the fixed-price renewable contract could be
achieved by basing the gas prices on the hedged cost of natural gas27, a far more stable
basis. A recent comparison of gas price forecasts and hedged future gas prices found
that over the limited range of usable data available, the hedged price for gas would add
on average US$0.006/kWh to the cost of electricity compared to commonly used gas
forecasts28. Once again, taking a realistic measure of the volatility of the cost of natural
gas significantly affects cost predictions.
Risk and security
The higher risk associated with fossil fuel supplies also represents an economic
security issue. When prices of fossil fuels rise, economies reliant on them suffer a
decline in economic activity. If the price rises are dramatic enough the result can be a
27
The hedged price of gas uses financial techniques to guarantee future supply of gas at a given cost.
Thus hedging the price means guaranteeing it, so providing a much more stable basis for costing future
generation.
28
Accounting for Fuel Price Risk: Using Forward Natural Gas Prices Instead of Gas Price Forecasts to
Compare Renewable to Natural Gas-Fired Generation, Mark Bolinger, Ryan Wiser, and William
Golove, Lawrence Berkeley National Laboratory August 2003, http://eetd.lbl.gov/EA/EMP/ The work
described in this study was funded by the Assistant Secretary of Energy Efficiency and Renewable
Energy of the U.S. Department of Energy under Contract No. DE-ACO3-76SF00098.
61
recession. Thus the economic cost associated with the volatility in gas and oil prices,
for example, is much more far reaching than simple 'cost of electricity' calculations
imply.
That this is so can easily be understood. If the cost of gas rises and forces up the cost of
electricity, companies cut back on the use of electricity, eventually stopping production
if costs outstrip the value of the product. This negative relationship between fuel price
and economic activity can be taken into account by using a measure of the volatility of
supply to establish the associated risk. This is the basis for the assessment discussed
above that much lower discount rates should be applied to fossil fuel payments when
costing power generation projects.
Renewable technologies have lower risk and should, on this basis, be valued more
highly. This does not mean that over the short term a wind farm will produce cheaper
electricity than a combined cycle power station, but that over the longer term the wind
farm will promote greater economic stability. In this sense, the renewable technologies
can be considered an insurance policy, a hedge against rising fuel prices29. In order for
risk to be accounted in this way, the calculation generally used to estimate the 'cost of
electricity' from a prospective power station project must be modified to take account
of the variable risks associated with different aspects of the project. If fossil fuel risk is
higher than other fixed cost payments, then the cost of electricity from fossil fuel power
plants is actually higher than the most commonly used methods of calculation suggest.
29
This suggestion by Robert C Lind and Kenneth Arrow is quoted in Determining the real cost, Shimon
Awerbuch, Renewable Energy World, March-April 2003.
62
CHAPTER 4
Lifecycle costs
63
Chapter 4 Lifecycle costs
Introduction
Chapters 2 and 3 concentrated on traditional methods of evaluating the cost of

electricity. This evaluation is purely economic; the bottom line is the financial cost of a
kilowatt of electricity and the cheapest source wins. The economic analysis uses
levelized cost to assess the performance of a power station over its lifetime and convert
this into a cost of electricity. There is another way of analysing the performance of a
power plant over its lifetime called life cycle analysis (LCA). Like the economic
analysis, the LCA rates the performance of different plants but in this case the rating is
in terms not of financial cost but of some other factor.
There are many types of LCA. Two considered in depth here are Net Energy Analysis
(NEA) and the life cycle analysis of greenhouse gas emissions. NEA establishes the
amount of energy used by a power station for each unit of energy it generates while the
greenhouse gas LCA calculates the amount of greenhouse gas emitted for each unit of
energy generated. Similar LCAs can be used to calculate the amounts of other
pollutants such as sulphur dioxide or nitrogen oxides generated per unit of electricity.
As with the levelized cost calculation, life cycle analyses provide a cost for each unit of
power generated. In this case the cost is measured in energy or in greenhouse gas
emissions or sulphur dioxide, or some other parameter. Today analysts consider these
to be environmental costs, which cannot be easily translated into dollars or euros. Over
the next generation this is likely to change and these environmental ratings will become
a much more important way of evaluating power plant performance because they
provide a way of measuring the environmental impact of each type of plant.
64
Net Energy Analysis
When energy resources are limited, the amount of energy used to produce any
commodity becomes an important factor. Today much of the world relies on fossil fuel
for primary energy supply and although there remains sufficient fossil fuel to maintain
existing levels of consumption and growth for at least another generation, the supplies
of both natural gas and petroleum are likely to tested over that period.
Net Energy Analysis measures how expensive the production of any commodity is in
terms of these primary sources of energy. As such, it can be applied to any commodity.
There are two main approaches to carrying out a NEA. The first, called Input/Output
(I/O) measures the number of units of energy used to produce each dollars' worth of the
commodity. The result of this calculation is usually called the Energy Intensity of the
commodity. The Green Design Initiative at Carnegie Mellon University in the US
provides a free tool for calculating energy intensities using a database of around 500
commodities.
The second approach to NEA is called Process Chain Analysis (PCA). When applied to
electricity production, PCA assesses the total amount of energy consumed by the power
plant over its lifetime and compares this to the total amount of energy it produces. Such
an analysis may limit itself to plant operations alone but the most meaningful NEAs
look at the complete life cycle starting from the raw materials needed to build the plant
and ending with the plant site being returned to its original condition. The result of the
analysis provides the number of units of energy required for each unit of energy
generated and forms perhaps the most useful way of assessing and rating power plants.
In calculating the energy input, it is necessary to estimate - in addition to fuel input for
a fuel-burning power plant - the energy used to mine fuel and raw materials, the energy
used in transportation and construction, the energy required to manufacture various
plant components and a wealth of other factors. To perform this from scratch for every
aspect of the plant can prove almost impossible but meaningful figures can be derived
65
by using energy intensities such as those available from the Green Design Initiative
noted above.
Energy output is simpler to assess and can be derived from the average electrical output
of the plant, the average capacity factor and the lifetime of the power station. Thus, in
practice both I/O and PCA evaluations may be used to arrive at the net energy
efficiency of a particular plant or type of plant.
Once the energy inputs and outputs have been evaluated they can be analysed in a
number of different ways. One type of analysis is shown in Table 4.19, which
compares biomass power generation with fossil fuel power generation. The table
contains two columns. In the first the total number of kJ of energy used to produce each
kWh of electricity is tabulated. These figures are biased towards biomass because the
calculation assumed that when biomass is burned the fuel is ultimately replaced with
growth of a new crop so the actual fuel energy content need not be included in the
equation. However the fuel content of both gas and coal are included. Using this
method of calculation, the biomass technologies consume between 125kJ and 231kJ for
each kWh produced whereas a coal plant consumes 12,575kJ and a natural gas
combined cycle plant 8,377kJ.
Table 4.19: Power plant total energy balance
Total energy consumed Non-feedstock energy consumed

(kJ/kWh) (kJ/kWh)
Biomass gasification (energy crop) 231 231

Direct fired biomass (urban biomass waste) 125 125
Coal 12,575 702
Coal,15% biomass co-firing 10,118 614
Natural gas combined cycle 8,377 1,718
Source: Biopower Technical Assessment, State of the Industry and the Technology, Richard L Bain, Wade P
Amos, Mark Downing and Robert L Perlack January 2003 (NREL/TP-510-33132)
Business Insights Ltd
66
In the second column of Table 4.19, the energy content of all the fuels including coal
and gas are omitted from the calculation. Even so, the biomass based generation
technologies perform better than either coal or gas. In this case the figures for the two
biomass technologies are unchanged but the coal figure has fallen to 702kJ/kWh and
that for gas-fired combined cycle to 1,718kJ/kW. Burning a small amount of biomass
in a coal-fired power station reduces the energy balance of the coal plant to
614kJ/kWh. Surprisingly, gas is the worst performer by this yardstick. The reason for
this is found in the relatively large transmission losses of methane (1-4%) that
accompany its delivery to the power station. Coal's relatively poor performance
compared to the biomass technologies is also due to the energy use in mining and
transportation.
Table 4.19 covers a limited number of combustion technologies. Table 4.20 provides
data for a wider range of technologies, presented in the form of Lifecycle Energy
Efficiency, the energy output for each unit of energy input, expressed as a percentage.
Table 4.20: Lifecycle energy efficiencies of different technologies
Lifecycle efficiency (%)
Wind 12
Photovoltaic 4
Nuclear fission 31
Coal 40
Natural gas combined cycle 43
Source: Life Cycle Assessment of Electricity Generation Systems and Applications for Climate Change Policy
Analysis, Paul J. Meier, University of Wisconsin, 2002 Business Insights Ltd
As with the first column of Table 4.19, data in Table 4.20 is calculated by including the
fuel energy input for each type of plant. This means that the data includes the energy
contained in the coal and gas burned, the uranium consumed in a nuclear plant and both
the solar energy and wind energy exploited by the solar and wind technologies.
Presented in this way, gas-fired technology shows the highest performance with a
lifecycle efficiency of 43%. Coal-fired generation has an efficiency of 40%, nuclear
generation 31%, wind power 12% and photovoltaic 4%.
67
The renewable technologies show poorly on this scale because they are relatively
inefficient at extracting energy from the energy source they exploit. However, the
energy sources they use, wind and solar energy, are free and renewable so there is no
penalty for wasteful exploitation. Gas, coal and nuclear generation use up a limited
resource so the losses here are much more significant. For this reason, lifecycle
efficiency figures calculated in this way are best used to compare like generation
technologies such as fossil fuel burning plants.
It is worth noting while considering fossil fuel generation that a complete lifecycle
efficiency assessment reduces the overall generation efficiency of a fossil fuel plant
compared to the normally quoted efficiency based simply on plant operational energy
calculations. For example a gas turbine combined cycle plant with a rated efficiency of
around 48% shows a real life cycle efficiency of 43%30. Coal-fired generation is less
significantly affected, with a typical plant efficiency falling from 31% to 30% when
lifecycle energy consumption is taken into account. The reason for the larger reduction
in performance of the gas-fired plant is exactly the same reason for its poor rating in
the figures in Table 4.19; gas losses during transmission.
Another way of presenting this data is by way of an Energy payback ratio. This
represents the ratio of the total energy produced by the plant over its lifetime divided
by the amount of energy (but excluding in this case the fuel input energy) that the plant
uses over its lifetime. As Table 4.20, on this basis a wind turbine is the most efficient
system, providing 23 times more energy than it consumes. Nuclear generation comes
next followed by coal, with photovoltaic and natural gas generation performing the
least well.
30
Life Cycle Assessment of Electricity Generation Systems and Applications for Climate Change Policy
Analysis, Paul J. Meier, University of Wisconsin, 2002
68
Table 4.21: Energy payback ratios
Energy payback ratio
Wind 23
Photovoltaic 6
Nuclear fission 16
Coal 11
Finally, the figures can be presented in the form of the payback time, the time it takes a
power plant to generate as much electricity as was consumed during its construction.
Thus, for example, the photovoltaic system in Table 4.20 and Table 4.21 has a payback
time of 5.3 years.
Since there are various ways of presenting what is essentially the same data, it is
important to be clear when evaluating such figures what is being shown. The lifecycle
efficiency provides a valuable means of comparing fossil fuel technologies. The energy
balance data shown in Table 4.19 is a good way of comparing combustion technologies
including both fossil fuel and biomass while energy payback ratio offers a simple way
of comparing renewable technologies. Care must be taken when trying to compare
unlike technologies, as Table 4.20 shows. However it is clear that when it comes to the
most efficient use of fossil fuels - and this it true even when the actual fossil fuel
consumed directly to generate electricity is excluded from the equation - renewable
technologies such as wind and biomass are more energy efficient than coal and gas-
fired power plants.
69
Greenhouse gas lifecycle analysis
Table 4.19 and Table 4.21 show that fossil fuel power plants, and gas-fired plants in
particular, are relatively poor exploiters of fossil fuel energy when compared to other
options. By comparison greenhouse gas life cycle analysis holds few surprises. Fossil
fuel plants are bound to be the worst performers. Nevertheless the greenhouse gas LCA
is an important tool because it offers the fairest means of comparing greenhouse gas
emission performance.
A greenhouse gas life cycle analysis follows exactly the same route as the Net Energy
Analysis for a power station outlined above. Indeed, the NEA itself can be used to
calculate the greenhouse gas emissions over the life cycle of a plant since it provides
the total amounts of each different type of fuel burned over the lifetime of the plant.
Well established equations can be used to convert the type and quantity of fuel
consumed into a green house gas emission figure.
Table 4.22: Relative greenhouse gas efficacies of different power plant gases
Carbon dioxide 1
Methane 21
Nitrous oxide 310
Source: US Environmental Protection Agency31 Business Insights Ltd
It is necessary to take into account the differing effects of differing gases released into
the atmosphere. As we have already seen, the use of natural gas in a power plant results
in significant releases of methane into the atmosphere. Table 4.22 shows that methane
31
Inventory of US greenhouse gas emissions and sinks 1990-2000, USEPA report No 236-R-02-003, US
Environmental Protection Agency, 2002.
70
is 21 times more effective than carbon dioxide as a greenhouse gas. Nitrous oxide,
which may be produced during combustion of fossil or biomass fuel, is even more
effective. In calculating overall greenhouse gas emissions, any emissions of these gases
will be multiplied by the figure in Table 4.22 to convert them into carbon dioxide
equivalent emissions and the quantities added together to give a single carbon dioxide
equivalent emission figure. This is then divided by the total electrical output from the
power plant over its lifetime. The result represents the amount of carbon dioxide
released for each unit of electricity produced (expressed as grams of carbon dioxide per
kWh or tonnes of carbon dioxide per GWh; the two figures are exactly the same).
Table 4.23 presents figures for greenhouse gas emission rates for power plants in the
US based on this methodology. Performs worst of all with an emission rate of 974
t/GWh. Coal is virtually all carbon: when this is burnt it is all converted to carbon
dioxide. Natural gas, by comparison is mixture of carbon and hydrogen: when it burns
in air the product is a mixture of carbon dioxide and water. Natural gas combustion
produces only 469 t/GWh of carbon dioxide, only 48% that of a coal-fired plant.
Table 4.23: Greenhouse gas emission rates for different technologies, US
Emission rate
(Tonnes of CO2 equivalent/GWh)
Wind 14
Photovoltaic 39
Nuclear fission 9
Coal 974
Other types of power generation plant perform much better. Solar photovoltaic
generation produces 39t/GWh of carbon dioxide, 4% that of the coal fired plant. A
wind turbine produces 14 t/GWh, roughly 1.4% of the coal fired plant emissions while
nuclear power shows the best performance of all with an emission rate of 9 t/GWh.
This figure shows why the nuclear lobby is keen to promote nuclear generation as an
71
effective way of reducing greenhouse gas emissions.
Table 4.24 shows greenhouse gas emission rates calculated by Japan's Central Research
Institute of the Electric Power Industry. These figures are broadly in line with those in
Table 4.23 with coal and gas generating over ten times more carbon dioxide than the
worst renewable source of electricity. In this case both an open cycle and a combined
cycle natural gas-fired power plant is included; the open cycle plant generates 608
t/GWh of carbon dioxide while the combined cycle plant generates 519 t/GWh. These
are both higher than the figure in Table 4.25 but the difference is probably not of major
significance.
Table 4.24: Greenhouse gas emission rate for different technologies, Japan
Emission rate
Coal 975
Gas, open cycle 608
Gas, combined cycle 519
Solar photovoltaic 53
Wind 29
Nuclear 22
Hydro 11
Source: Japan's Central Research Institute of the Electric Power Industry32 Business Insights Ltd
The figures in Table 4.24 show solar photovoltaic to be the most costly renewable
source of energy in terms of carbon dioxide emissions with 53 t/GWh, followed by
wind with 29 t/GWh. In this case hydropower is also included and shows the best
performance of all at 11 t/GWh. Nuclear generation falls between wind and
hydropower at 22 t/GWh.
32
These figures are quoted in Energy Analysis of Power Systems, UIC Nuclear Issues Briefing Paper No
57, January 2004.
72
Finally, Table 4.25 shows a similar set of figures produced by the Swedish utility
Vattenfall. Here the worst performance is for an open cycle gas turbine but this unit
was used for peak power generation and should not be treated as typical. Otherwise the
figures for coal and gas plants are much the same as those in the two preceding tables.
When it comes to nuclear and renewable technologies, solar photovoltaic fares worse in
the Swedish figures than elsewhere while wind, nuclear and hydro fare better. The
particularly low rates of emission quoted for wind (6 t/GWh), nuclear (6 t/GWh) and
hydro (3 t/GWh) are probably a result of a difference in the accounting procedure
between this analysis and those quoted previously.
Table 4.25: Greenhouse gas emission rate for different technologies, Sweden
Emission rate
Coal 980
Gas, open cycle* 1170
Gas, combined cycle 450
Solar photovoltaic 50
Wind 6
Nuclear 6
Hydro 3
* This figure is for a gas turbine used for reserve and peak power generation
Source: Vattenfall33 Business Insights Ltd
Although the figures in these three tables hold no surprises they do show quite clearly
the significant difference in greenhouse gas emission rates between fossil fuel, nuclear
and renewable technologies. It is worth noting, however that hydropower, which shows
the best performance of all in the last two tables, can be a much more significant
33
These figures are quoted in Energy Analysis of Power Systems, UIC Nuclear Issues Briefing Paper No
57, January 2004.
73
greenhouse gas emitter. This occurs where a significant quantity of organic material --
usually wood where a forest has been inundated - is locked within a reservoir. Under
these circumstances the organic material will decompose anaerobically, generating
large quantities of methane, which is an extremely effective greenhouse gas. Under
these circumstances a hydropower plant may exhibit worse greenhouse gas emission
performance than a fossil fuel-fired plant. Such situations are exceptional and a result
of poor planning.
The poor rating of solar photovoltaic power generation compared to other renewable
technologies is a consequence of the large amounts of energy required to produce the
pure silicon for the solar cells. Most nations where silicon is produced rely extensively
on fossil fuel to supply the electricity used to refine the silicon and this leads to
significant carbon dioxide emission. In the future, when much more electricity is
supplied from non-fossil fuel sources, the emissions resulting from silicon production
will drop significantly.
Other atmospheric emissions
In addition to carbon dioxide, life cycle emission rates can be calculated for other
power plant emissions. Table 4.26 shows life cycle figures from the International
Energy Agency for methane, sulphur dioxide, nitrogen oxides and nitrous oxide for a
gas fired combined cycle plant, an integrated gasification combined cycle (IGCC) plant
gasifying coal and a conventional coal-fired steam generation plant.
Table 4.26: Emissions from typical fossil fuel power plants (t/GWh)
CH4 SO2 NOx N2O
Gas combined cycle 0.2 - 0.2 -

IGCC 0.15 0.25 1.2 0.04
Coal-fired steam 0.12 0.46 1 0.03
Source: International Energy Agency Business Insights Ltd
74
All the plant types show significant methane and nitrogen oxide emissions. However
the combined cycle gas turbine plant exhibits negligible emissions of both sulphur
dioxide and nitrous oxide. Both types of coal plant show more significant emissions of
these two gases. As with carbon dioxide emissions, the emission rates for renewable
technologies can be expected to be an order of magnitude better than these in most
cases. The exception is biomass combustion, which is likely to exhibit significant
emissions of nitrogen oxides but little methane or sulphur dioxide.
Policy making
Today a decision to build a particular type of power plant is usually made on economic
grounds. Net energy analysis or net greenhouse gas emission figures will be of no
relevance unless there is a cost attached to greenhouse gas emissions or efficient use of
energy. This will then be factored in to the economic equation. However lifecycle
analysis will be used increasingly by policy planners when devising energy policy. It
offers the only realistic means of devising an environmentally sensitive energy policy.
75
76
CHAPTER 5
Structural costs
77
Chapter 5 Structural costs
Introduction
Traditionally-structured network systems, in which power generation/distribution hubs

and spokes overlap, become rationalised by backbone transmission system structures
will continue to operate successfully provided generation is based on large central
power stations. However such networks cannot easily or cheaply absorb large
quantities of renewable energy, which is usually generated in small quantities in a large
number of locations, often nearer the periphery than the hubs of the networks and often
on an intermittent basis. Other networks and network operating strategies can be
devised that can accommodate renewable energy but these will require some expensive
changes to existing systems.
The cost of such changes is often used as an argument against renewable energy,
particularly by commentators with an interest in the status quo. This chapter will look
at the origins of these structural changes and their costs.
Renewable characteristics
Many renewable sources of electricity differ in important respects from conventional

sources such as fossil fuel and nuclear power plants. The most important differences
are the variability and the unpredictability of their output. These two factors are
different and should be carefully distinguished. Variability refers to the regularly
changing output with time of a renewable energy source. The output from a tidal power
plant generally varies between zero and maximum output twice each day. The output
is, hence, variable, but it is extremely predictable. It is possible to define well in
advance what that output will be at any particular time on any particular day.
78
A solar power plant also has a variable output. The plant produces electricity during
hours of daylight and none during hours of darkness. However the solar output is
unpredictable. During daylight hours, when it is generating electricity, the amount it
generates will depend on the cloud cover. When it is cloudy there will be less solar
energy available to convert into electricity than when there is no cloud. And while the
diurnal variations can be predicted accurately, the daily fluctuations in output cannot be
predicted with ease.
Wind power does not show the regular variations associated with either tidal or solar
energy but it is highly unpredictable. Though good forecasting can help, it is difficult to
predict with accuracy the output of a wind turbine over either the short term or the long
term. There are ways to overcome at least part of this unpredictability, as we shall see,
but it remains a significant handicap to wind power. In contrast, biomass power
generation based on combustion of biomass is much like fossil fuel power generation in
a central power plant. It is predictable and stable.
Since wind power is both the most difficult and the most economically attractive
renewable sources of energy available today, this will be used as the basis for the
discussions of variability and unpredictability. Most of the studies into the utilisation of
large quantities of wind power have been carried out in Europe where wind capacity is
rising rapidly. The results of these studies apply to the use of wind power, or to other
variable and unpredictable sources of electricity, worldwide.
Structural costs of renewable generation
The structural costs associated with the addition of significant quantities of renewable
energy to a national power generation network can be broken down into two primary
areas. The first of these is associated with grid extensions necessary to accommodate
the new capacity while the second relates to the operational contingencies that must be
put in place in order to account for the variability and unpredictability of the renewable
source. Of these, the second is the most expensive.
79
Grid extensions are necessary for a variety of reasons. In the UK, for example, the best
wind sites are either offshore or in the north of England and in Scotland. In both cases
the source of the power is far from the places where it is most needed. Thus additional
transmission capacity may be needed in order bring the power to the consumer34. Other
costs will be associated with the connection of a renewable power station to the local
distribution or transmission system. How these transmission and distribution system
changes are paid for affects the economics of renewable energy.
Variability and unpredictability are also costly but they affect operations in different
ways. Variability represents a relatively long-term change in output on a network
dispatching time scale. Unpredictability can lead to short term changes in output. Each
requires its own solution.
Grid extension
Renewable generation interacts with a transmission and distribution system in complex

ways some of which may reduce costs while others will increase them. Small
renewable generating units such as small wind farms are often widely dispersed,
usually at some distance from central power plants. Such units can act as distributed
generation, supplying their power to local users. As such they lead to a reduction in
transmission losses compared with the same power being transmitted from a distant
central power plant. They may also save money by avoiding the need to upgrade the
transmission system and local demand grows.
Very large renewable generating plants, or equally a large concentration of renewable

plants in a single geographical area, present a different problem. In this situation there
34
In fact there is already a strong system in place for transporting power from Scotland to central and
southern England but it may need reinforcing in the future.
80
is a need to transport large quantities of power from a region that has previously been
at the periphery of the transmission system. Extensive grid reinforcement is often
necessary to make this possible. Results from a range of European national studies
collated by an EU sponsored study35 found that there was a relatively linear increase in
the cost of grid extension based on the percentage of renewable generation (primarily
wind) included in the generation mix. These results are shown in Table 5.1.
Table 5.27: Grid extension costs as a function of renewable penetration
Renewable generation (%) Cost (Euro/MWh)
0-1 0
1-2.5 0.3
2.5-5 0.5
5-7.5 1.0
7.5-10 1.5
10-15 2.0
15-20 3.0
20-25 4.0
25-30 5.0
Source: European Union36 Business Insights Ltd
The cost of a small quantity of renewable generation (up to 1%) is negligible but the
costs begin to rise so that by the time the percentage reaches 10%, the cost is around
Euro 2/MWh (Euro 0.003/kWh). By the time the renewable penetration has reached
35
Pushing a Least Cost Integration of Green Electricity into the European Grid, GreenNet Cost and
Technical Constraints of RES-E Grid Integration Work Package 2, Hans Auer, Michael Stadler, Gustav
Resch, Claus Huber, Thomas Schuster, Hans Taus, Lars Henrik Nielsen, John Twidell and Derk Jan
Swider, February 2004
36
81
30%, the cost is half a cent for each kWh generated.
Figure 5.9: Grid extension costs as a function of renewable penetration
5.0
4.5
4.0
Cost (Euro/MWh)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0-1 1-2.5 2.5-5 5-7.5 7.5-10 10-15 15-20 20-25 25-30
Renewable generation (%)
The UK has already set a target of generating 10% of its electricity from renewable
sources by 2010. A recent UK study38 looked at the cost implications of increasing the
amount of electricity demand met by renewable sources in the UK from this 10%
renewable contribution planned by 2010 to 20% or 30% of total generation by 2020.
Broadly, the study found that increasing the renewable contribution from 10% to 20%
would increase system costs by between £140m and £400m each year. An increase
37
38
Quantifying the System Costs of Additional Renewables in 2020, produced for the UK Department of
Trade and Industry, Ilex 2000
82
from 10% to 30% would raise system costs by between £330m and £920m each year.
Table 5.28: Transmission and distribution costs in 2020 associated with

increasing UK renewable contribution above 10% after 2010 as a function of
renewable penetration
Transmission Distribution Total

costs (£m/y) costs (£m/y) (£m/y)
20% renewables -6 – 91 6 - 23 0-114

30% renewables -8 - 242 13 - 55 5-297
*Note. The low cost in each case represents a scenario comprising a mix of wind an biomass while the high
cost option involves all intermittent renewable generation
Source: UK Department of Trade and Industry39 Business Insights Ltd
Most of this increase is associated with the variability and intermittent nature of the
renewable energy. Table 5.28 shows the costs associated with transmission and
distribution reinforcement. For an increase to 20% renewable generation in 2020, the
increased transmission costs varied from a reduction of costs of £6m each year to an
increase in annual spending of £91m. Increased annual distribution costs were between
£6m each year and £23m each year. When an increase to 30% renewable generation
was considered the change in transmission costs varied between a reduction £8m each
year and an increase of £242m. Distribution costs in this case increased by between
£13m and £55m each year. (The low cost option in the study involved a mix of reliable
renewable sources such as biomass an unreliable sources such as wind. The high cost
option involved only intermittent sources.)
These costs represent only a small part of the total increased costs identified in the
report. And as the report points out, they should be compared with the predicted
39
83
wholesale value of the electricity generated in 2020 of around £9 billion.
Capacity credit and balancing
Grid extension is necessary to move electricity from the point of generation to the point
of use. In contrast, the unpredictability and variability of renewable energy affects the
way a network is operated. Renewable energy generally costs very little to generate, so
it is normal to assume that when the renewable electricity is available it will all be
accommodated by the network. What happens when it is not available?
In the case of a tidal plant the solution is simple, if rather expensive. The tidal plant
output will drop to zero twice every day, so there must be conventional or replacement
capacity available on the system equal in capacity to the tidal plant if the ability of the
network to meet its peak demand is to be maintained. (Energy storage, which is an
option in this and other situations, will be considered separately later.)
The variability associated with a tidal plant or the diurnal variations in solar output
present a long time scale security issue. If a network has to be capable of supplying
100MW of power then there must always be capacity able to generate 100MW on
demand attached to the system. If the network capacity includes a 10MW tidal plant,
then the system will not be secure if it relies on only an additional 90MW of
conventional power generating capacity; it must retain 100MW to cope with the
situation of peak demand when the tidal output is zero.
It is clear from this that a tidal power plant cannot replace any conventional capacity on
the network without affecting its security. This can be defined by saying that the
Capacity Credit of the tidal plant on the network is zero.
The capacity credit of wind power is more difficult to ascertain. It has often been
defined as zero too, suggesting that there must always be sufficient conventional
84
capacity available to completely replace the connected wind power. While this might
be true if there was only one wind turbine or wind farm attached to a system it is not
true when there are wind turbines and wind farms spread across the network.
In this case there tends to be some cancelling out of the wind variability. When the
wind stops blowing in one place, it still blows somewhere else. The more widely the
wind farms are spread, the less correlation there is between wind farm outputs and the
more reliable - taken as a whole - the wind capacity becomes. While one wind turbine
may become becalmed, it is extremely unlikely that a whole country will be
becalmed40.
A more reasonable assumption allows wind a capacity credit, but one that varies with
the proportion of wind capacity on the network. For low levels of wind penetration on a
network the capacity credit is roughly the installed capacity of the wind plant
multiplied by its capacity factor (see Chapter 2). Thus a 100MW wind farm with a
capacity factor of 30% will have a capacity credit of 30MW. This is equivalent to the
working capacity of the plant. In other words the network will remain secure with
30MW less conventional capacity when the 100MW wind farm is connected. (Note
that this is the effective generating capacity of the wind farm, in the same way as a
100MW gas turbine plant with a capacity factor of 80% has capacity credit of 80MW.)
40
There are commentators, however, who claim this is possible in the UK.
85
Table 5.29: Wind capacity credit as a function of penetration level*
Wind Capacity Capacity Credit

(GW) (% of installed capacity)
3 35.2
9 30.6
15 26.5
21 22.9
27 22.9
33 19.8
*This table refers to a UK scenario with a 50:50 mix of offshore and onshore wind capacity and a
peak demand of 53GW
As wind penetration levels increase, and the proportion of wind generation vs

conventional generation rises, the capacity credit of the wind capacity starts to fall.
Beyond a certain penetration any additional wind capacity must be virtually all covered
by conventional capacity to maintain security. Table 5.29 shows capacity credit figures
for wind energy as a function of installed wind capacity. This is based on a UK
scenario with a mixture of offshore and onshore wind but a similar trend will be found
whatever the mix. As the figures show, with small levels of penetration the capacity
credit is roughly one third of the installed wind capacity. However by the time the
installed capacity reaches 50% of the total peak demand (27GW in Table 5.3), the
capacity factor has fallen to around 23%.
The capacity credit of an renewable source of energy represents the amount of

conventional generating capacity it can replace to maintain long term security. Equally
41
86
important, however is short-term security of the network. This is affected by the short
term unpredictability of a renewable source such as wind.
The nature of electricity means that supply and demand on a network must always be
kept in balance. If demand either exceeds or falls below the level of supply, power
quality suffers. Conventional power plants are predictable in their output so balancing
supply and demand can be accomplished in a straightforward manner. However the
variability of wind generation makes balancing the network more difficult.
If wind output falls, there must always be fast reserve capacity available to replace it.
Similarly if wind output rises unexpectedly, output from a conventional plant must be
cut back. There is also the possibility, when wind penetration on the network is high,
that during a low demand period the absolute wind output will exceed network
demand. Then either wind output must be throttled back of there must be some means
of exporting it. (In Denmark, where wind penetration is high, wind power is exported
across the Scandinavian grid when output exceeds demand.)
How variable is wind-generated electricity? In general, if the wind capacity is widely

dispersed it should be small. Figures from a UK study42 suggest that the standard
deviation in wind output over 30 minutes and four hours is 1.4% and 9.3%
respectively. This translates into an output variation of +/-420MW over 30 minutes and
+/- 2,790MW over four hours for a wind capacity of 10GW. The cost of meeting this
additional burden involves costs of keeping conventional plants operating at part load,
with an associated loss in efficiency. There will also be increased maintenance costs for
part load operation and increased numbers of starts and stops. All these must be added
to the generation cost of wind energy to arrive at its real cost.
42
87
Table 5.30: Capacity cost of wind generation (Euro/MWh)
Without capacity credit With capacity credit
Capacity cost 7.39 2.8

Balancing cost 3.7 1.4
Total 11.09 4.2
Table 5.31 presents figures based on an EU sponsored study, which incorporates data
from other studies across several European countries. The first line shows the cost of
additional capacity needed to maintain security when wind in introduced into a system.
The study found that broadly the balancing costs are roughly half the capacity costs.
These are shown in the second line of the table. In the case where no capacity credit is
allowed, the total cost was found to be Euro 11.09/MWh (1.109 cents/kWh). When a
capacity credit was allowed, the cost fell to Euro 4.20/MWh.
Table 5.31: Capacity cost of wind generation (Euro/MWh)
Balancing and capacity costs (am/year)
20% renewables 143-284

30% renewables 319-624
*Note. The low cost in each case represents a scenario comprising mix of wind an biomass while the high cost
option involves all intermittent renewable generation.
Source: UK Department of Trade and Industry44 Business Insights Ltd
43
88
For the specific case study of the UK, the combined balancing and capacity costs for
increasing wind generation in the UK from 10% in 2020 to 20% or 30% in 2020 are
shown in Table 5.30. For an increase to 20% in 2020, the costs are between £143m and
£284m each year while and increase to 30% leads to a cost increase of between £319m
and £624m each year.
Market structural effects
The costs presented in the preceding sections represent estimated actual costs incurred
by the system as a result of the introduction of an intermittent renewable source of
electricity such as wind. However the costs incurred by wind power generators trying
to sell electricity to the network can work out much higher than this because of the way
the electricity market is structured.
The UK offers a good example. Based on the standards imposed by the national grid in
the UK, and with 10% of the UK electricity generated from wind farms, it has been
estimated that the additional costs to the network of wind generation will be between
Euro 2.00/MWh and Euro 3.35/MWh45. However wind producers have had to pay
much more than this.
44
45
D. Milborrow, Penalties for intermittent sources of energy, Working Paper for the PIU Energy
Review, 2001, http://www.cabinet-office.gov.uk/innovation/2002/energy/workingpapers.shtml. These
figures are published in Integrating intermittent energy sources in liberalised electricity markets: from
technical costs to economic penalties as a result of market rules by Philippe Menanteau, Dominique
Finon and Marie-Laure Lamy, The Institute of Economics and Energy Policy (CNRS, University of
Grenoble).
89
Under the UK's New Energy Trading Arrangements (NETA) individual producers were
required to make their market offers of production and consumption at least four and
one half hours ahead46. Producers and consumers that don't meet these commitments
are penalised.
Wind suffers a double penalty under these circumstances. The intermittent nature of
wind means that no wind producer can easily make a firm commitment without
compromising its operations. But further, although over the whole network the
fluctuations in wind production would often cancel one another out, wind producers
gained no recognition for this because each must achieve its committed production
level independently. As a result, the actual penalty paid by wind energy producers
under these arrangements was around Euro 7.5/MWh, at least twice the actual cost to
the system47.
In the Scandinavian Nord pool there is a mechanism which allows the fluctuations in
wind generation across the network to be averaged and all wind generators are
penalised equally based on this average fluctuation figure. The penalty paid by wind
producers is around Euro 3/MWh, much closer to the actual cost to the network.
Clearly, market design can have an important influence on the economics of renewable
energy generation.
46
This has now been modified to make life easier for wind energy producers.
47
Figures from D. Milborrow quoted in Integrating intermittent energy sources in liberalised electricity
markets: from technical costs to economic penalties as a result of market rules by Philippe Menanteau,
Dominique Finon and Marie-Laure Lamy, The Institute of Economics and Energy Policy (CNRS,
University of Grenoble).
90
Energy storage
The traditional way of coping with short-term and long-term variations in supply and
demand on an electricity network is by use of various forms of reserve generating
capacity capable of short and long-term response to changes in demand. Thus a
network may have capacity that it shut down during summer months when overall
demand is low (in a cold climate) and other units kept ready to produce additional
power over the space of a few seconds. There is, however, another solution, energy
storage. Several technologies are capable of storing energy produced on an electricity
network and then feeding it back into the network when required. Such technologies
range from pumped-storage hydropower and compressed-air energy storage to large
batteries, flywheels and superconducting coils. They can usually either absorb or
generate electricity extremely quickly and some can do so in large quantities, thus
coping with both long term and short term security problems. However most are
inefficient and all tend to be expensive.
The use of energy storage has some significant implications for network operation. The
US Energy Technology Support Unit has been promoting (with little success to date)
the expansion of energy storage capacity as a means of making networks more stable
and reducing the costs incurred with peaking units. This applies to conventional
networks without renewable capacity but storage capacity can affect the value of
renewable energy because it can remove the long-term and short-term variations in
renewable output. Thus renewable energy combined with storage can be valued by a
network in exactly the same way as conventional generating capacity.
There has been little work so far studying the costs of energy storage but a recent EU
sponsored study gives some preliminary indication of the likely benefits48. Table 5.32
48
Pushing a Least Cost Integration of Green Electricity into the European Grid. Cost and Technical
Opportunites for Electrical Storage Technologies, a report sponsored by the EU by IT Power, 2004.
91
shows the effect on balancing costs of increasing storage capacity.
Table 5.32: Balancing costs for 20% wind penetration and energy storage
Storage capacity (GW) Balancing cost* (Euro/MWh)
0 4.83
2 2.65
3 2.02
4 1.64
5 1.88
*This is for a medium flexibility generating capacity. Peak demand on the system is 57GW.
Figure 5.10: Balancing costs for 20% wind penetration and energy storage
5.0
4.5
4.0
Storage capacity (GW)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0 2 3 4 5
Balancing cost (Euro/MWh)
Source: European Union Business Insights Ltd
49
92
The figures are based on a network with a peak demand of around 57GW and 20% of
the generation based on wind. As the storage capacity is increased from zero to 4GW,
balancing costs fall from Euro 4.83/MWh to Euro 1.64/MWh. Beyond 4GW, costs start
to rise slightly as the main benefit to the wind power of the storage is exceeded.
Table 5.33: Balancing cost per MWh of annual demand for 20% wind
generation with storage
Storage capacity (GW) Balancing cost ((Euro/MWh)
0 0.92
2 0.50
3 0.38
4 0.32
5 0.36
*This is for a medium flexibility generating capacity. Peak demand on the system is 57GW.
The data in Table 5.32 represents the balancing cost for each MWh of wind generation.
Table 5.33 shows the cost averaged over total annual production on the network, the
cost a consumer is likely to have to pay. The balancing cost varies from Euro
0.92/MWh with no storage to Euro 0.32/MWh, roughly two thirds lower, with 4GW of
storage capacity. Again the balancing cost begins to rise with more than 4GW of
capacity. However, one has to take into account the capital cost of building the storage
capacity and there will be transmission costs too. However they do point to a means of
integrating large quantities of renewable energy into a network without incurring high
system costs.
50
93
94
CHAPTER 6
Factors distorting the price of

electricity
95
Chapter 6 Factors distorting the price
of electricity
Introduction
The cost of a unit of electricity on an open market is normally assessed by calculating

the levelized cost. The levelized cost will exist, whatever the market situation.
However this real cost can be distorted in a number of ways, which can be broadly
grouped as subsidies. Subsidies are primarily designed to:
Provide cheap electricity to the poorest sectors of a community.
Protect key national industries.
Promote particular types of technologies such as renewable energy.
All subsidies change the cost paid by the producer or the consumer for electricity.
When this happens the operation of the market is distorted, sometimes effectively to
achieve the intended aim, sometimes in unpredictable ways. This chapter will examine
the various types of subsidy in use and outline their effects.
96
Types of subsidy
The broad definition of a subsidy, used by an OECD study, refers to any measure that
keeps prices for consumers below market levels, or for producers above market levels
or that reduces costs for consumers and producers51. This includes not only direct
payments but also factors such as preferential tax treatment, quota or trade restrictions
and public investment in targeted research and development or infrastructure as well as
energy sector regulations.
Such subsidies are pervasive and they are usually extremely difficult to quantify. Some
of the more important are considered below. Where possible costs will be associated
with the subsidies. More often, however, it will only be possible to highlight their
existence since quantification will depend on defining a precise set of conditions which
will vary by country or even by region within a country.
There are a international measures of the level of subsidy. One, called the Effective
Rate of Assistance (ERA) quantifies the effect of subsidies on the good in question but
requires detailed inputs. Another, developed by the OECD, is the Producer Subsidy
Equivalent (PSE) which provides a partial picture of the subsidy in question but is
easier to calculate. The Consumer Subsidy Equivalent (CSE), meanwhile, is derived
from the difference between the domestic price in question and the world price.
Global subsidy levels associated with the energy industry are difficult to estimate but
several studies have tried. These suggest global fossil fuel subsidies of between $130bn
51
Improving the Environment Through Reducing Subsidies, OECD, 1998
97
and $230bn each year52. Most of the subsidies are in countries outside the OECD and
preferentially support consumers. OECD subsidies are more often targeted at
producers.
Tariff subsidies
One of the commonest forms of subsidy in the developing world is a tariff subsidy.
Typically this reduces the cost of electricity to one group of consumers. Sometimes this
loss of revenue is recouped by charging other groups a higher tariff, in which case it
can be called a cross-subsidy. Often, however, the money comes from government
budgets. Tariff subsidies of this sort are common in parts of India. In the state of
Gujurat, for example, the agricultural irrigation tariff was 0.20 Rupee/kWh in
1996/1997, 6.6% of the Long Run Marginal Cost (LRMC) of producing the electricity.
At the same time residential users paid less than 30% of LRMC and public lighting and
public water works paid around 50%. These groups together consumed 40% of
Gujurat's electricity.
Subsidies of this type are not unique to India. Their aim is normally social, rather than
purely economic. It is worth noting that in many cases, and Gujurat is probably typical,
the subsidy is poorly targeted and often does not reach their intended group (often
disadvantaged sections of society). If not carefully controlled, such subsidies also
encourage greater consumption of electricity, causing additional economic and
environmental problems. According to a recent United Nations Environment
Programme (UNEP) report53, cutting out tariff subsidies in India would reduce carbon
52
Energy Subsidies: Lessons learned in Assessing their Impact and Designing Policy Reforms, UNEP,
2003
53
Energy Subsidies: Lessons learned in Assessing their Impact and Designing Policy Reforms, UNEP,
2003
98
dioxide emissions by 99m tonnes – one third of all power plant emissions.
Electricity subsidies of this sort favour electricity over other energy sources and lead to
greater growth in the electricity sector than necessary. They can discourage private
sector participation in the power sector by creating artificially low tariffs from which a
reasonable rate of return on investment cannot be made. This may, in turn, affect the
type of power generation technology constructed but in principle tariff subsidies will
not directly affect the cost effectiveness of one type of technology relative to another.
Fuel subsidies
Fuel subsides, subsidies that artificially reduce the cost of a fuel, are found all over the
world. Germany and South Korea have coal subsidies, Iran subsidises all its fossil fuel,
Chile and Indonesia subsidise the use of oil and oil products, Senegal subsidises the use
of LPG while Iran subsidises all its fossil fuel consumption. Unlike tariff subsidies, fuel
subsidies directly effect the cost effectiveness of one type of technology relative to
another. In relation to the electricity industry, they normally promote fossil fuel use at
the expense of renewable technologies.
99
Table 6.34: Coal PSE estimates for some OECD countries, 2000
PSE ($ million)
France 307
Germany 3,917
Japan 375
Spain 730
Turkey 369
Total 5,698
Source: IEA54 Business Insights Ltd
Table 6.34 shows IEA estimates of the Producer Subsidy Equivalent (PSE) aid to coal
producers in OECD countries that subsidise coal production. Germany provides the
largest subsidy, $3.917m each year, followed by Spain with $730m. Although these
subsidies appear substantial, they probably affect coal consumption only slightly since
the quantity of subsidised coal is only around 2% of world production. In the case of
Germany, the removal of the subsidies would result in the power producers purchasing
coal on the world market at roughly the same rate. However the removal of all OECD
subsidies would probably lead to a switch of some capacity from coal to natural gas.
A US Department of Energy study of federal energy subsidies in the US found that

subsidies in 1999 were around $6.2bn. Half of this total subsidised fossil fuel. A
further 8% subsidised renewables.
The Indonesian government subsidises the use of oil products in order to support low
income households. The total subsidy was around $4bn in 2000, around 10% of the
54
These figures are published in Energy Subsidies: Lessons learned in Assessing their Impact and
Designing Policy Reforms, UNEP, 2003
100
state budget. This is expensive and leads to enhanced consumption of oil, diesel, petrol
and other products. As a consequence, there is excessive environmental damage
associated with the combustion of these fuels. From a power sector perspective, the
subsidies probably promote the use of small-scale diesel generation, which is prevalent
in many parts of Indonesia.
101
Externalities
The term externality, when applied to power generation, refers to the external costs
associated with the environmental effects of a particular type of power generation.
These effects, normally the result of some form of emission or by-product of the power
generation process, cause damage to the environment and this damage results in a cost
to society. However the activity creating the damage, in this case a power plant, is not
liable for this cost; it is a cost that is external to the economics of the power generation.
As a result of the failure to internalise these costs, electric power generated by a

polluting power station is cheaper than it should be. This has two effects:
It encourages the consumption of electricity beyond that which would be

appropriate if the cost of environmental damage was included in the cost of
electricity;
It creates an environmental problem for which society or government must pay. In

effect, externalities are a negative subsidy.
These external costs arise from a wide range of sources. Emissions of sulphur dioxide
and nitrogen oxides can destroy natural resources and effect health as well as damaging
buildings. Greenhouse gas emissions cause, or at least exacerbate global warming
while many power stations use water for cooling, affecting water supplies. Land values
can also be affected both by the siting of power plants, by the solid and liquid effluents
they produce and by factors such as increased traffic. Costing externalities is difficult.
The most comprehensive attempt was carried out by the European Commission under
its ExternE programme. This was initially carried out with cooperation of the US
Department of Energy, who pulled out before the project was completed.
102
Table 6.35: External costs for various power generation technologies within
the EU
Euro/MWh
Coal/lignite 18-150
Oil 26-109
Gas 5-35
Nuclear 2-7
Onshore wind 1-3
Table 6.35 provides figures from ExternE for external costs of various power
generation technologies within the EU. One factor is immediately clear. The highest
external costs are associated with the consumption of fossil fuels, coal, oil and gas. In
particular, as the table shows, coal and lignite combustion cost between Euro 18/MWh
and Euro 150/MWh in external costs. Gas combustion is much less of a burden, costing
between Euro 5/MWh and Euro 35/MWh while nuclear power costs less still, Euro 2-
7/MWh. The technology with the lowest external costs of the figures quoted, however,
is wind with external costs of Euro 1/MWh-Euro 3/MWh.
Table 6.35 does not include the whole range of renewable technologies but the results
of other studies suggest that they all have lower external costs than fossil fuel
consumption. In fact most of the external costs associated with renewable technologies
are related to the use of fossil fuel in their manufacture and installation. This can be
assessed using a Net Energy Analysis (see Chapter 4).
There is little consensus about whether external costs of power generation should be
55
Externalities of Fuel Cycles ExternE Report, published by European Commission in 1998. These
figures are taken from Seawind Europe, a report by consultants Garrad Hassan for Greenpeace,
published in 2004.
103
internalised, and if so how. Various initiatives such as the UN's International Panel for
Climate Change are attempting to tackle some of these issues. Meanwhile some regions
and countries are introducing their own measures, which are discussed briefly below. It
is difficult to convert the effect of these initiatives directly into an cost per unit of
energy. However from an objective economic perspective the external costs discussed
above should be used when attempting to arrive at a realistic levelized cost.
Legislation, quotas and green certificates
Ideally, external costs would be incorporated transparently into the costs of all types of
power generation and the cost of the power they generated would be increased in direct
relation to the level of these external costs. In practice, this is impossible to achieve
because the external costs, by their nature, never enter into the economic cycle of the
power plant.
In theory, external costs could be incorporated if international consensus could be

reached on the cost of externalities and this cost was recovered from each power
generator based on the amount of pollution it produced each day, month or year. In
practice, this will not happen because it is unlikely that any such consensus can be
reached. Even if it could, most environmental initiatives are not concerned with
charging power producers for the economic burden of their pollution; they are
concerned with stopping the pollution. This is eventually likely to impose heavy
penalties on producers responsible for high levels of pollution, but the cost will be the
cost of prevention, not the social cost of the pollution.
Already there are a number of measures being used to distort the market in favour of
renewable resources and away from fossil-fuel base resources. These can be seen as the
renewable energy equivalents of fossil fuel subsidies. Their effects can be equally
unpredictable. The most important of these are quota-based systems and feed-in tariffs.
104
Quotas
Quotas, also known as Renewable Obligations (UK) or Renewable Portfolio Standards

(US) set a target for a fixed proportion of electricity production based on renewable
generation. In a deregulated market the quota will oblige the company selling power to
a consumer to meet the quota requirement by sourcing a fixed percentage of its electric
power from renewable producers56. In a market served by a government controlled
monopoly the quota becomes part of the utility's operation mandate.
The design of the quota system is critical to its success. The system must set reasonable
and achievable targets for renewable generation, it must utilise appropriate penalties in
the event that quotas are not achieved and it may need to require that the quota is
served from new rather than existing generating capacity. The use of quotas is
relatively new and experience is limited but it would appear that well designed systems
can be effective57. Economically the cost of buying power from a renewable generator
must be less than the cost of penalties for failing to do so if the system it to work. The
additional cost is spread over all consumers.
Feed-in tariffs
The main alternative to the quota is the feed-in tariff. This pays a fixed sum for
electricity generated by renewable generators. This sum must be paid by the system
operator or by the monopoly utility depending on the type of market. The tariff is
56
The quota may be enforced at a regulatory level or it can be enshrined in state or government
legislation.
57
Evaluating Experience with Renewable Portfolio Standards in the USA, Ryan Wiser, Kevin Porter,
Robin Grace, Global windpower, Chicago, Illinois, 2004
105
normally set at a level, which will make it economical for renewable generators to
operate. However it offers no control over the amount of renewable generation installed
since every unit of renewable energy must be purchased at the feed-in tariff rate.
Feed-in tariffs have been used successfully in European countries such as Germany
where they have encouraged significant wind power generation. As with quotas, the
additional cost of the renewable energy is normally borne by all consumers. And as
with quotas, the feed-in tariff needs to be designed carefully if it is to be effective. If
the tariff is too high, the market will be swamped with renewable generation, too low
and there will be none. Normally the tariff should operate on some sliding scale,
reducing with time as the renewable technologies it supports become technically more
sophisticated and less costly.
Other measures
In addition to quotas and feed-in tariffs there are other measures that can be used to
promote renewable technologies for power generation. Tax incentives and support for
research and development are two of the most important. Market incentives to promote
the purchase of green power have also had some success.
Green certificates
Green certificates are not, on their own, a means of subsidising or encouraging the use
of renewable energy. However they can form an important part of quota systems and
green power marketing initiatives because they simplify renewable energy accounting
and quota policing. In a system involving green certificates, a renewable energy
generator is credited with one green certificate for each unit of green energy it
produces. This certificate can be traded completely independently of the actual unit of
electricity.
Under this system the unit of electricity is sold for the market price of electricity,
106
irrespective of its source. The green certificate is then sold on the green certificate
market (these certificates are often called Tradable Green Certificates or TGCs) for an
additional sum, which represents a bonus for the green energy (or the additional cost of
generating the green energy). In a quota system, each electricity retailer must be able to
produce green certificates equivalent to its quota of renewable energy, determined by
the amount of energy it has sold. In order to meet this requirement it must buy green
certificates on the green certificate market. Similarly a marketer of green energy must
be able to show green certificates for every unit of energy it has sold.
Provided the green certificate system is properly controlled, it simplifies considerably

the operation of both quota and green energy operations. In both cases, however, the
value of the green certificates is determined by some external legislation (quota), or by
the strength of consumer demand (green energy marketing). Without these the
certificate is worthless.
Government policy
All the subsidies discussed in this chapter result from decisions by governments. They
are matters of government policy58. As such they are determined by the aims of the
government of the day. This means, first, that they can be economically irrational and
secondly that they can be subject to regular change.
This report is not concerned with the reasons for the adoption of such policies.
However when planning any power project, the developer should ensure it is aware of
government policy and its effect on the energy market. Equally, the developer should
attempt to gauge the likelihood of policy change. Either can have a critical effect on the
economics of a projected scheme.
58
Even international agreements are subject to national governments agreeing to implement them.
107
CHAPTER 7
Conclusions
108
Chapter 7 Conclusions
Introduction
The answer to question, "How much does electricity cost?" is neither clear nor precise.
The cost of electricity is normally determined as the cost of electricity from a new
power station being built today. The purpose of the question is to determine which is
the least cost option for new generating capacity. The answer to that question depends
on costs that must be met both today and up to twenty or thirty years hence. Thus it
involves a good deal of guesswork based on economic modelling.
The economic relationship between the construction of a power plant and the cost of its
operation is relatively simple. For renewable and nuclear plants the operating costs can
also easy to assess. However, the operation of fossil fuel plants involves the purchase
of fuels whose prices will fluctuate. This is a major source of uncertainty.
The addition of significant amounts of renewable generating capacity to a network

incurs structural costs for which only (uncertain) estimates can be made. Finally, all
power generation technologies involve costs which are external to the economics of the
plant. How these are assessed and whether they should also be included in the final cost
of generation is a political as much as an economic issue.
109
The cost of renewable vs traditional power
This report has looked all these costs for a wide range of generation options. For
comparison purposes, analysis of all the costs for four technologies will be considered.
Coal. Coal-fired generation based on a pulverised coal boiler and a steam turbine
generating unit forms the base load generating capacity in many parts of the world
and is likely to do so for many years yet.
Natural gas. Combined cycle gas turbine power plants are considered the least cost
option today in most developed countries where natural gas is available and they
are being built in large numbers.
Wind. Wind power is the most cost effective of the new renewable generation
technologies and is typical of an intermittent source of power.
Nuclear. Nuclear power plants are unfashionable in the west but are still being
constructed in several parts of Asia.
Table 7.36: The cost of power (Euro/MWh)
Coal-fired Gas-fired Onshore Nuclear

steam Combined cycle wind
Levelized cost 36.7 32.0 53.7 32.9

Levilized cost with fuel risk 36.7 32.0 53.7 32.9
Structural costs - - 4.2-11.1 -
External costs 18-150 5-35 1-3 2-7
Total 55-187 37-90 59-92 35-40
* These figures are taken from Table 2.8 using a £/Euro exchange rate of 1.46
** There is a small additional fuel risk associated with fluctuating coal prices but this has been ignored here.
Source: These figures are derived from various tables in the preceding chapters Business Insights Ltd
Table 7.36 presents data for these four generating technologies from the preceding
110
chapters. The basic levelized estimates in the first line of the table are from a recent UK
study, but converted into Euros. They show a gas-fired combined cycle plant is the
least cost option of the four at Euro 32.0/MWh, closely followed by nuclear power with
a generating cost of Euro 32.9/MWh. A coal-fired steam plant is not far behind with
generating costs of Euro 36.7/MWh and onshore wind trails at Euros.
When the levelized includes fuel risk, the cost of gas-fired generation rises
significantly, to Euro 55.2/MWh. This now puts it on a par with wind turbine based
generation. There will be a small additional cost associated with coal price risk, but this
has been ignored here.
Structural costs included capacity and balancing costs. Grid extension costs have been
omitted since there are likely to be grid extension costs associated with any new power
plant. (The validity of this omission may be disputed. Grid extension costs for wind
power are probably around half the sum of capacity and balancing costs, Euro 0-
5/MWh. This can be added to the data in Table 7.36 to provide an upper limit for
wind.) Capacity and balancing costs are primarily associated with intermittent
renewable sources of electricity. In the table, these costs push the cost of wind power
up to between Euro 59/MWh and Euro 65/MWh.
External costs are the most controversial since they penalise fossil fuel power stations
more harshly than any other type of power plant. External costs can be as high as Euro
150/MWh for coal-fired generation and as low as Euro 1/MWh for wind power.
Nuclear power is the cheapest option available today with a generating cost of Euro 35-
40/MWh. This figure includes no cost for decommissioning or for waste disposal
though neither is likely to raise the cost enormously. Neither does it include a cost for
security. However the unpopularity of nuclear generation in many parts of the world
make it an unlikely option for most countries today.
Of the remaining three options presented in Table 7.36, a gas-fired combined cycle
111
power plant offers the lowest generation costs, with a range of Euro 37-90/MWh, with
a caveat If we incorporate an optimistic estimate for future gas price risk in the
calculation then the minimum cost for gas-fired generation rises to Euro 60/MWh. A
realistic level of risk would probably push the cost higher still.
When fuel price risk is taken into account, gas-fired generation becomes almost as
costly as wind generation which, is capable of generating power for Euro 59-92/MWh
(compare Euro 60-90/MWh for gas-fired generation when fuel price risk is included.)
Coal-fired generation is competitive, provided its external costs are kept low with a
generating cost of power of Euro 55/MWh. However, in the worst case this can rise to
Euro 187/MWh, far higher than any of the other technologies considered.
On the basis of economics alone, nuclear power remains an attractive option. There are
moves in the US to try and relaunch nuclear power generation. Some environmentalists
are now taking a more pragmatic approach to the nuclear option. Even so, it is difficult
to see a major nuclear building programme being launched within the next decade.
Apart from nuclear energy, gas-fired generation in combined cycle power stations
appears the least cost option when the traditional method of calculating the levelized
cost is used. However, as soon as a fuel price risk-based element is introduced, gas-
fired generation becomes no more attractive than either wind or coal-fired generation.
In fact it now becomes virtually impossible to chose between these three.
In terms of renewables versus traditional fossil fuels: On the basis of the data analysed
either type prevails, depending on what is included in the calculation. Certainly there is
a strong case for wind generation. Large hydropower, although not included in this
final analysis, is almost certainly equally, if not more, competitive than wind. Other
renewables are probably less competitive today. Depending on calculations, the case
for natural-gas fired generation, or even coal can be supported. Hopefully, however, the
analyses presented in this report will allow some relatively objective decisions to be
drawn.
112
Industry executive survey
Relative competitiveness of power generation technologies
In January 2005, Business Insights carried out a survey among executives within the
electricity industry about future of renewable and green technologies and the rate at
which they are expected to advance59. Respondents were asked to rank power
generation technologies in terms of competitiveness today and the expected
competitiveness in ten years.
Table 7.37: Relative competitiveness of power generation technologies now

and in ten years
Current In ten years Change
Gas 1 1 -
Coal 2 4 -2
Hydropower 3 2 +1
Nuclear 4 3 +1
Onshore wind 5 5 -
Biomass 6 6 -
Offshore wind 7 7 -
Solar 8 8 -
(1=most competitive 8=least competitive)
Source: Business Insights Business Insights Ltd
Gas-fired power plants are currently considered the most competitive, followed by
coal, hydropower and nuclear power. The high rating for hydropower is instructive
given its generally poor perception today, at least among environmentalists. New
renewable technologies are ranked as the least competitive. Of those, onshore wind is
59
The survey is based on 146 respondents. The respondents were mostly based in Western Europe
(71.6%) but 6.1% were from Eastern Europe, 10.1% were from North America, 0.7% were based in
Japan and the remaining 11.5% were from the Rest of the World.
113
considered most competitive, followed by biomass, offshore wind and finally solar
energy.
Figure 7.11: Relative competitiveness of power generation technologies now

and in ten years
Most competitive Least competitive
Onshore
Gas
wind Offshore
Nuclear wind
Hydropower Coal Biomass Solar
In Ten
Years
Now
Gas Coal Nuclear Biomass Solar
Hydropower Onshore Offshore

wind wind
Gas will remain the most competitive in the opinions of the respondents in ten years
time too. However hydropower is then considered to be the second most competitive
source of electricity followed by nuclear power. Coal has slipped from second to fourth
most competitiveness. The ranking of the new renewable technologies is expected to
remain unchanged, with onshore wind still leading in fifth place. These results are
broadly in line with the economic findings of this report.
114
Factors affecting the market price of green energy
Respondents were also asked to rate subsidies, renewable quotas, green certificates and
environmental legislation in terms of their effect on the marketing of green energy.
These results are shown in Table 7.38.
Table 7.38: Factors affecting the market price of green energy
% respondents Not Quite Important Very Total

important important important
Subsidies 10% 22% 25% 43% 100%

Renewable quotas 2% 26% 42% 29% 100%
Green certificates 8% 29% 39% 23% 100%
Environmental legislation 3% 15% 36% 45% 100%
Figure 7.12: Factors affecting the market price of green energy
Very
Importance to the uptake of renewable energy
Important
Important
Quite
important Subsidies Renewable Green Environmental
Environment
quotas certificates legislation
Most of the respondents considered all these factors important or very important.
Environmental legislation and subsidies were considered very important by 45% and
115
43% respectively and considered important by 36% and 25%. Renewable quotas and
green certificates were considered important by 42% and 39% and very important by
29% and 23%. The results suggest that the industry considers environmental legislation
the most important factor driving the green energy market. Subsidies are also seen as
important though this seems to be the issue with the widest spread of opinions; 10% of
respondents considered it to be not important.
Factors affecting the uptake of renewable energy
Respondents were asked about the influence of structural factors on the uptake of
renewable energy, as shown in Table 7.39.
Table 7.39: Factors affecting the uptake of renewable energy

Electricity storage capacity 29% 21% 31% 19% 100%

Changes to grid operation 5% 21% 34% 41% 100%
and structure to accommodate renewable sources
Reliability of generation 6% 16% 36% 42% 100%
of renewable energy
Increased use of distributed 14% 34% 35% 17% 100%
generation
116
Figure 7.13: Factors affecting the uptake of renewable energy
Very
Importance to the uptake of renewable energy
Important
Important
Quite
important Electricity storage Changes to grid Reliability of Increased use of
capacity operation and generation of distributed
structure to renewable energy generation
accommodate
renewable sources
Note: Graph is based on averaged ratings of importance

The results in Table 7.39 are significant in showing that the two main factors expected
to affect the uptake of renewable energy are changes in grid structure and operation and
the reliability of renewable energy, the two subjects discussed in Chapter 5. Over 40%
of the respondents thought these very important and a further 34-36% in thought them
to be important. In contrast, energy storage was not seen to be very important by most
respondents and almost 30% thought it not important. Clearly, energy storage
technologies have an uphill battle persuading the industry of their utility. Finally
distributed generation found some support, with nearly 70% of the respondents
considering it either quite important or important to the uptake of renewables.
117
Factors affecting the future of fossil-fuel fired generation
Table 7.40: Factors affecting the future of fossil-fuel fired generation

Concern about energy security 8% 19% 43% 30% 100%

Reliability of supply 7% 21% 41% 31% 100%
Environmental costs 1% 22% 45% 31% 100%
The cost of gas supplies 3% 17% 39% 41% 100%
The cost of coal supplies 6% 26% 42% 26% 100%
The danger of global warming 5% 23% 37% 35% 100%
associated with Carbon dioxide emissions
Most respondents considered all these factors at least quite important. The most
significant factor on the basis of this response is the cost of gas which 80% of
respondents considered either important or very important. This puts the issue of fuel
risk discussed at some length in this report in sharp focus and lends weight to the
alternative costing of this risk discussed in Chapters 2 and 3.
Of the other factors, environmental costs were considered very important by 31% and
important by 45% (76%), concern about energy security was considered very important
by 30% and important by 43% (73%), reliability of supply was considered very
important by 31% and important by 41% (72%), the danger of global warming was
considered very important by 35% and important by 37% (72%) while the cost of coal
supplies were considered very important by 26% and important by 42% (68%).
118
Figure 7.14: Factors affecting the future of fossil-fuel fired generation
Very Importance to the uptake of renewable energy

Important
Important
Quite
important Concern Reliability Environmental The cost The cost of The danger of
about of supply costs of gas coal global
energy supplies supplies warming
security associated
with carbon
dioxide
emissions
Note: Graph is based on averaged ratings of importance

119
Share of global electricity production that will be supplied by renewable
energy by 2015
Respondents were asked what percentage of global electricity would be generated from
renewable sources ten years hence, in 2015. The average of all respondents was 12.7%,
which falls in line with the ambitions of many developed countries but is an optimistic
target for the world. Over 80% believed that the percentage would be less than 15%.
31% believed it would be 6-10%, 28% chose 11-15% and 22% believed a meagre 1-5%
was likely. At the other end of the scale only 3% believed it would be 26% or more.
Table 7.41: Share of global electricity production to be supplied by renewable

energy by 2015
% of global electricity production % respondents

applied by renewable energy by 2015
1-5% 22.1%
6-10% 31.0%
11-15% 27.6%
16-20% 11.7%
21-25% 4.1%
26+% 3.4%
Average answer = 12.7%

Answers ranged from 2-45%
Mode answer = 10%
120
Timeline for renewable energy supplying 50% of global electricity
production
Table 7.42: Timeline for renewable energy supplying 50% of global electricity
production
% respondents
5 years 0.0%
10 years 0.7%
20 years 8.9%
50 years 44.5%
100 years 25.3%
Never 20.5%
Respondents were pragmatic and cautious when asked the timeline for 50% penetration
of global electricity production. A clear 45%, almost half, believed it would take 50
years to achieve this target with another 25% believing it would take 100 years and
21% thought it could never be achieved. These results are shown in Table 7.42.
The results, as well as some of the economic analysis presented in this report, suggest
that renewables have a considerable distance to go before they achieve a real
breakthrough and parity with conventional power generation technologies.
Nonetheless, as results below indicate, there is considerable optimism and interest
about the prospect of the hydrogen economy.
121
The significance of the proposed hydrogen economy
Table 7.43: Significance of the proposed hydrogen economy for future
electricity generation
% respondents
Insignificant 18%
Quite significant 30%
Significant 32%
Very significant 20%
Total Respondents 100%
Results suggest that there is considerable interest in the prospect of the hydrogen
economy, with 32% rating it a significant consideration for the future and a further
30% considering it quite significant. Nearly 20% thought it very significant while an
almost equal proportion, just under 19%, thought it insignificant.
122
Figure 7.15: Significance of the proposed hydrogen economy for future
electricity generation
35%
30%
25%
Share of respondents
20%
15%
10%
5%
0%
Insignificant Quite significant Significant Very significant
123

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ENERGY

The Future of Power Generation

Copyright © 2005 Business Insights Ltd

While information, advice or comment is believed to be correct at the time of

Chapter 1 An introduction to the cost of

Chapter 2 The traditional approach to

Chapter 3 Historical costs 42

Chapter 4 Lifecycle costs 64

Chapter 5 Structural costs 78

Chapter 7 Conclusions 109

The question is particularly important in relation to renewable energy. How much

Given the manifold difficulties, it might appear impossible to arrive at a definitive

When calculating the levelized cost of electricity, a common discount rate is

Factors which distort the price of electricity

An introduction to the cost of

The traditional approach to

Table 2.1: Global capital costs of power plants

Bare cost US$/kW Cost including

Open cycle gas turbine 909 1,100-1,400

Source: Creative Energy Concepts1 Business Insights Ltd

Figure 2.1: Global capital costs of power plants

Cost inc infrastructure (lower estimate)

Source: Creative Energy Concepts Business Insights Ltd

Table 2.2: Capital cost of power plants in New South Wales

Capital cost (A$/kW) Capital cost (US$/kW)

Coal fired thermal plant 1380-1840 838-1117

Source: Intelligent Energy Systems2 Business Insights Ltd

Table 2.3: New electricity generating technology costs in the US

Capital cost US$/kW*

Coal-fired steam 1,079

Source: US Department of Energy, Energy Information Administration4 Business Insights Ltd

Type Capital cost (£/kW) Capital cost (US$/kW)

Biomass-fired fluidised bed combustion 1840 2919

Source: Royal Academy of Engineering5 Business Insights Ltd

Coal-fired combustion in a conventional pulverised coal steam plant is expected to cost

Analysis of capital cost figures

Figure 2.2: Country comparison of capital costs of selected power plants

1400 Australia (NSW)

Source: Various, Business Insights analysis Business Insights Ltd

Capacity factor (%)

Gas turbine combined cycle 80-90*

Source: Author’s research Business Insights Ltd

Figure 2.3: Typical capacity factors for power generating plants

Source: Author’s research Business Insights Ltd

The capacity factors of renewable technologies have an important consequence when

Levelized cost of electricity

Table 2.6: Present value of $1m as a function of discount rate

Year Present Value, $ Present Value, $

Figure 2.4: Present value of $1m as a function of discount rate

200,000 Present Value, $(5% discount rate)

Present Value, $(10% discount rate)

Global levelized costs

Average cost (US$/kWh

Figure 2.5: Typical global levelized power generation costs

Table 2.8: Levelized cost of electricity estimates for typical US utility

New coal plant 0.032-0.036

Cost(£/kWh) Standby Cost(£/kWh)

Conventional coal-fired steam 0.025 -

Source: Royal Academy of Engineering7 Business Insights Ltd

Fuel cost and fuel risk

Levelized cost of gas Levelized cost of electricity

Traditional model 0.020 0.029

Source: Power Economics9 Business Insights Ltd