energy, society, and the environment unit 3 energy economics

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Energy, Society, and the Environment Unit 3 Energy Economics

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Page 1: Energy, Society, and the Environment Unit 3 Energy Economics

Energy, Society,and

the Environment

Unit 3

Energy Economics

Page 2: 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.

Page 3: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 4: Energy, Society, and the Environment Unit 3 Energy Economics

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?

Page 5: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 6: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 7: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 8: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 9: Energy, Society, and the Environment Unit 3 Energy Economics

The Learning Curve

Page 10: Energy, Society, and the Environment Unit 3 Energy Economics

Learning Curves Compared

Page 11: Energy, Society, and the Environment Unit 3 Energy Economics
Page 12: Energy, Society, and the Environment Unit 3 Energy Economics

Learning Curves:

• Costs are observed to decline with production volume and improvement in technology

Page 13: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 14: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 15: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 16: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 17: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 18: Energy, Society, and the Environment Unit 3 Energy Economics

QuickTime™ and aTIFF (LZW) decompressor

are needed to see this picture.

Technology Comparison

Page 19: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 20: Energy, Society, and the Environment Unit 3 Energy Economics

So far we factored in only the direct monetary costs. Apply same analysisto environmental effects and health effects.

Page 21: Energy, Society, and the Environment Unit 3 Energy Economics

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

Page 22: Energy, Society, and the Environment Unit 3 Energy Economics

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)