Cost of wind, Solar and Natural Gas Electricity at the Plant Fence
Usually the cost of electricity generation is computed at the plant fence. Often the cost of wind and solar is quoted with the subsidies included. Sometimes only part of the subsidies are not included. The cost at the plant fence is not a fair metric because wind and solar require backup plants. The backup plants are sufficient to operate the electric grid if the wind and solar were to be missing. Thus the only economic benefit of wind or solar is the fuel saved in the backup plants when the wind or solar is actually generating electricity and displacing generation by the backup plants. The table below shows the cost in cents per kilowatt hour for wind, solar and natural gas generation. The assumptions that go into these estimates are taken from information compiled by the National Renewable Energy Laboratory (NREL). The cost of electricity is the cost at the plant fence without subsidies. Because the economic contribution of wind or solar is to reduce fuel consumption at backup plants, usually natural gas, the cost of fuel per kWh for natural gas is shown in cents per kWh of electricity generated. The last line in the table is the subsidy per kWh. That is just the cost of the wind or solar less the value of fuel saved in the backup plants when the wind or solar is generating electricity.
The cost of electricity from a generating plant has these major components:
1) The capital cost allocated to each kilowatt hour. 2) The fuel cost allocated to each kilowatt hour. 3) The operation and maintenance cost allocated to each kilowatt hour.
The spreadsheet below illustrates the details of how the cost of electricity is computed. The capital cost is dependent on the capacity factor or the power generated as a percent of the maximum power that could be generated if the plant could run continuously at nameplate output. The assumption is that the capital cost is spread over 25 years at 8% interest (discount) rate. These are typical numbers used in the industry. The cost of fuel per kilowatt hour for the natural gas plant, 2.2 cents, is a critical number because saving fuel is the economic contribution of wind or solar power. The difference between the cost of wind or solar and the cost of fuel saved is the subsidy for wind or solar– close to 5-cents per kilowatt hour. The subsidy is paid for by direct subsidies and higher cost of electricity. These costs are from the National Renewable Energy Laboratory. The cost is the levelized cost of electricity assuming a constant cost per kilowatt hour over 25 years. Get the spreadsheet below in Microsoft Excel format. Download
Notes on the Spreadsheet I used the National Renewable Energy Laboratory (NREL) mid costs for wind, solar and gas. NREL gives values in 2015 dollars. I have adjusted this to 2018 dollars, a factor of 1.05. The cost can vary depending regional costs and the quality of the wind or solar resource. I assumed a 25-year plant life and an 8% discount factor. These values are reasonable according to industry practice. The advocates of wind and solar are likely to forecast radically decreasing prices in the future. Projections of future costs by the NREL don’t support this.
Nameplate capacity is the amount of power a generating plant can deliver when running flat out. Capacity factor is the fraction of nameplate capacity actually delivered on average. Capacity factor for wind is typically 33% for existing installations. It depends on the quality of the wind resource and the design of the wind turbines. For solar capacity factor is typically 19% for solar panels oriented south at a fixed angle. The solar capacity factor varies with latitude and weather. Capital cost per kW is the money required to build a generating plant for each kW of nameplate capacity. For example, if a combined cycle gas plant costs $1000 per kW, then a 600-megawatt plant will cost $600 million. Plant lifetime is an assumed productive life of the plant for accounting purposes. I assume 25 years, though plants often last longer. Discount rate recognizes that money delivered in the future is less valuable than money delivered immediately. Discount rate is related to interest rate and is higher riskier transactions. Eight percent is a commonly used value for renewable energy projects. Discount rate with inflation – if future costs, such as payroll, are assumed to increase with inflation, then the discount rate to compute the present value of the future payment is adjusted by using a lower discount rate. Plant thermal efficiency – A fuel such as natural gas releases a certain amount of energy as heat when burned. But all this energy can’t be converted into electricity. The best combined cycle natural gas plants running at capacity may achieve conversion of 64 percent of the energy. A combined cycle natural gas plant burns natural gas or oil. It uses a two-stage system, the first stage generator is driven by one or two gas turbines similar to an aircraft jet engine. The hot exhaust of the gas turbines is used to make steam and drive a second stage steam turbine that drives another generator. Fuel cost per Btu – A Btu, like a kWh is quantity of energy. 3420 Btu equals one kWh. Natural gas is sold by units of MMBtu or the amount of gas that can supply one million Btu’s of energy when burned. That amount of gas is close to 1,000 cubic feet and currently (2018) costs about $3.20. The metric system countries use completely different units instead of Btu. But watts are the same in both English and metric units.