energy, society, and the environment unit 3 energy economics
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Energy, Society,and
the Environment
Unit 3
Energy Economics
Announcements 2/9
• Movie Day this Friday: Who Killed the Electric Car?
Come to class as usual. You have to attend the second part 11:50-12:40,
1-1:50, or 2-2:50. Locations will be announced on Wednesday and posted on D2L.
Announcements 2/9
• Change in the Paper I due date
First draft due: 2/25
Final version due: 3/9
• Paper Topics will be posted today!!
• Change in Office Hours: Mon 1-3 pm
Example QuestionsHow much does energy really cost?
• A coal-fired power plant costs $1,200/kW to construct. Coal was forecast to cost $45/ton but is now $90/ton. What is the average and short-term cost of electricity?
• A PV system will produce electricity for 30 years. What is the cost of
each kWh produced during this period? For a financial institution the
answer determines how much to charge for this electricity. For
homeowner the question may depend critically on not only the ‘balance
sheet’, but also the risk over time, ‘transaction costs’, and the need for
up-front payments versus returns over time.
• If a company makes an investment in energy efficiency improvements,
what is the dollar value of the energy that it saves? What are the risks?
Main Ideas
• When computing costs, one needs to factor in building costs, maintenance, and fuel (where applicable)
• Payback time: Is it worth the investment? • Improvements in technology and
production volumes change costs• Same analysis is applicable to effects on the
environment: e.g., the carbon footprint
2006 costs of electricity generation
Biomass Gasification
Onshore Wind
New Gas
New Coal Nuclear H2 from
GasH2 from
CoalWave / Tidal
Offshore Wind
Cost
of
Ele
ctr
icit
y G
en
era
tion
($
/MW
h)
$400/MWh
Zero carbon energy source Renewable energy sourceFossil energy source
Asterisk indicates approximate cost of electricity generation at oil price of $30/bbl
$400/MWh
Solar PV
Source: BP Analysis, NCI
0
50
100
150
200
250
Approximate costs of electricity at $70/bbl
QuickTime™ and aTIFF (Uncompressed) decompressor
are needed to see this picture.
Historical Average Weekly Coal Commodity Spot Priceshttp://www.eia.doe.gov/cneaf/coal/page/coalnews/coalmar.html
(Dollars per Short Ton)
US monthly production is ~ 100 million short tons
Tons: lbsUS (short) 2000UK (long) 2240Metric (tonne) 2204
Source: http://www.eia.doe.gov/oiaf/aeo/electricity.html#elepriComparisons across many technologies: http://www.eia.doe.gov/oiaf/archive/aeo00/assumption/tbl37.html
mill/kWh = 10-3 dollars/kWh
The Learning Curve
Learning Curves Compared
Learning Curves:
• Costs are observed to decline with production volume and improvement in technology
Simple PaybackSimple payback is the time to recover an investment, through savings, without discounting.
Example: A compact flourescent light, CFL, costs $6 and uses 20 Watts instead of 75 W. The savings is 55 W for the 4 hours a day that it is operated. Electricity costs 12 cents/kWh
The savings:
Energy: (55 watts) (4 hours/day) (365 days/year) = 80 kWh/year
Money: (80 kWh/year) (0.12 $/kWh) = $9.6/year
Time (payback): $6 bulb
$9.6 savings/year=7.5 months
Complications
• For short payback times, simple analysis may suffice
• For longer payback times, have to factor in inflation as well as interest rates from other potential investments. Is this the best investment for your $6? How about for $25,000?
• Pricing and incentives are based on evaluating inflation + interest rates
Life-cycle Cost
Life Cycle Cost -- The overall estimated cost for a particular program alternative over the time period corresponding to the life of the program, including direct and indirect initial costs plus any periodic or continuing costs of operation and maintenance, with appropriate interest and inflation rates factored in
Example: Electricity cost for a Natural Gas power plant (¢/kWh)
Assumptions:• $450 per kW of installed capacity = fixed cost• 80% capacity factor • 98% of operational costs is fuel• 1 kWh = 3414 Btu• natural gas price $3/million BTU• life time of the power plant is 20 years,
energy production efficiency =0.4
Capacity factor: Actual output/maximum nominal outputThe reduction is due to equipment failure, routine maintenance, reduced need for electricity at certain times
Electricity cost for a Natural Gas power plant (¢/kWh)
$ $ $ $ $ $ $
TIMELINE
Initialinvestment
Operational costs+ = Total cost
= Total energy output Total revenues
0
cost=$2388
140,160 kWh=1.7¢/kWh
QuickTime™ and aTIFF (LZW) decompressor
are needed to see this picture.
Technology Comparison
Energy Efficiency is a Superior Investment
Source: The Vanguard Group
AverageAnnualReturn
0% 10% 20% 30% 40%Risk Index (year-to-year volatility)
10%
20%
30%
40%
0%
Small Company Stocks
Common Stocks
Long-term Corp BondsU.S. T-Bills
So far we factored in only the direct monetary costs. Apply same analysisto environmental effects and health effects.
Direct and Health/Environmental Costs ofEnergy From a New Pulverized Coal Plant,
Natural Gas Plant, and Large Turbine
Direct
cost
(¢/kWh)
Global-
warming
cost(¢/kWh)
Other
health/
environ.cost
(¢/kWh)
Total
cost
(¢/kWh)
Coal plant 3.5-4.0a 0.4-1.0 c 1.6-3.3e 5.5-8.3
Natural gas plant 3.3-3.6a 0.7-1.1c 0.5-1.1e 4.5-5.8
Large wind turbine 2.9-3.9b <0.1d <0.1d 3.0-4.1
aDOE Office of Fossil Energy (2001)bScience 293, 1438 (2001)cUNEP (2001) estimates a global warming cost of $304 billion/yr
by 2050. The cost will be less before that and increase
exponentially after that. An integrated 100-yr average of
$300 billion/yr is assumed. This cost was multiplied by the
fraction of the global CO2-equivalent emission rate of
CO2+CH4+BC-SO2 over a horizon of 100 years attributable
to each source and divided by the annual energy output per
source. An error range was assumed. The larger error for coal
Another Application: Should I replace my car?
Carbon Footprint = Carbon Cost for Production + Distribution + CO2 emissions/gallon x mpg x annual mileage x lifetime of the car
In general, keep the car longer (as long as it is getting 20 mpg or so)