Beyond coal

Coal is no longer cheap -- so what comes next?

Posted by Sean Casten (Guest Contributor) at 10:08 AM on 05 Jun 2008

This article first appeared in Spark, and is reprinted here with their permission. It's somewhat long, and it's got numbers and graphs. It helps if you imagine Scarlett Johansson reading it.

When it comes to power generation, coal isn't cheap. Both power plant and fuel costs are up by nearly 300%, and projected to rise farther¹. Even before factoring in the risks of future greenhouse gas legislation, this has conspired to make a bet on coal-fired central station power equivalent to a bet on massive retail power price increases. Increasingly, this is a bet that neither equity nor debt providers are willing to take.

And yet we continue to operate under the assumption that coal is cheap -- to the extent that we have largely framed our greenhouse gas policy conversation as a tradeoff between environmental stewardship and the cheap coal fantasy.

On balance, this is good news, because it means that the perceived conflict at the heart of our current climate change debate is false. We need not quibble about whether or not we can afford to address global warming; indeed, we can lower greenhouse gases and grow the economy. But first, we have to get beyond coal.

The Electric Sector's Role in Greenhouse Gas Emissions

In the United States, coal is primarily a power plant fuel, and the electricity sector is our single biggest source of greenhouse gas (GHG) emissions. As a result, any discussion of greenhouse gas reduction must confront coal-based electricity. Figure 1 shows total US greenhouse gas emissions by sector, and Figure 2 shows how the electric sector has steadily increased its share thereof.

Figure 1: 2005 US Greenhouse Gas Emissions, By Source²

2005 US greenhouse gas emissions by source

Figure 2: US GHG Emissions History and Percent from Electricity Generation: 1949 -- 2005³

US GHG emissions history and percent from electricity generation, 1949-2005

The trends seen in Figure 2 reflect our nation's steady and inexorable electrification -- first as we switched from candles to electric light, then as we shifted away from mechanical power, then later as waves of computerization and air conditioning enabled great leaps in our national standard of living. As we now shift from a manufacturing- to a service-intensive economy, this trend will undoubtedly continue -- and so we will increasingly find that efforts to curtail greenhouse gas emissions must focus on our electric sector.

For rather perverse reasons, this is good news. The electric sector today is only half as fuel efficient as it was in 1910, implying that we could cut CO2 emission from the electric sector in half and lower electricity costs simply by deploying century-old technologies and regulatory models.

Figure 3: US Electric Sector Fuel Efficiency History, 1880 -- Present

US electric sector fuel efficiency history, 1880-present

How did this happen?

Thomas Edison's first power plant was much less efficient than today's grid at converting fuel to electricity, but Edison wasn't in business to make electricity: he was in business to make money. Therefore, he recovered as much of his waste energy as possible in the form of thermal energy and sold that to neighboring commercial and industrial facilities. This combined heat and power generation continued as the standard approach during the early part of the 20th century when, to speed electrification, governments created electric monopoly franchises. The monopoly model sped up electrification but removed the free-market impulse that drove the first three decades of the industry. In place of competition, the industry was ceded to protected monopolies, wherein profits were earned not by controlling costs and increasing revenues, but rather by deploying commission-approved capital to earn a commission-approved return. Under these rules, operating costs are simply passed along to customers, on the theory that monopolies should not be rewarded for spending money. As a practical matter, this eliminated the incentive to reduce operating costs. Since power plant operating costs are dominated by fuel, this has both economic and environmental consequences.

This regulatory flaw is the elephant in the room. Fix the regulation, and good things will happen. But until we do so, we cannot assume that GHG mitigation is incompatible with economic growth.

Let us now look at how the conventional wisdom that "coal is cheap" is also at odds with reality.

The Coal Truth, and Nothing but the Truth

Coal is a cheap fuel. Relative to natural gas, oil and even biomass, coal remains quite cheap, even after 200% price increases in spot coal since 1999. But who cares? You can't run your iPod with coal. And if it was only the variable costs of fuel that mattered, we would have a nation full of solar and wind-powered generation, which have zero fuel cost. The economic number that matters is not the price of fuel, but the delivered cost of electricity, including fuel cost, capital recovery, pollution control costs, maintenance expense, transmission and distribution capital recovery and line losses.

Let us then look at how investors -- who have good reasons to factor all capital and operating costs into their calculus -- have allocated their capital amongst generation technologies.

From a generation perspective, the US power grid has only four significant fuel sources: hydro, nuclear, coal and natural gas. Of the four, hydro has the lowest marginal costs and runs whenever the water flows. However, the US hasn't built any hydropower of any significance in 50 years, largely because the biggest potential sources have already been tapped⁴. As a result, even while the total generation from hydropower stays relatively consistent from year to year at 200 -- 300 billion kWh, it has become an ever smaller percent of our total mix due to load growth, from 32% in 1949 to just 6% today.

Nuclear has the next cheapest variable costs, but has the highest capital costs. As such, it has only been built when governments have agreed to subsidize plant capital cost and insurance risks. However, with variable costs in the range of 1 cent/kWh, nuclear plants tend to run as often as they can once built.

Coal has historically been next on the marginal price curve, at 2 -- 4 cents per kWh marginal operating costs at the generator buss bar, followed by natural gas at 6 -- 8 cents/kWh (at current fuel prices).

This "dispatch order" explains how marginal electric pricing works, but says nothing about the investment thesis for any given generation technology. After all, no investor wants to build a power plant that only earns marginal pricing. As a result, we infer something about total costs by looking at which technologies were built in response to variable electric prices. Given the long time horizon of power plant investment and operation, we will look over the past 30 years, going back to the beginning of the OPEC energy price run-up in the late 1970s.

Figure 4 shows the inflation adjusted, retail price of power in the US over this period.

Figure 4: US Average Retail Electric Price (2006 $)⁵

US average retail electric prices 2006

The increase in electricity price in the late 1970s was based in large part on a global increase in all energy costs as a result of OPEC price shocks. What accounts for the current increase?

First, recall that we can't build the really cheap stuff (hydro) anymore -- which means that everything we have built since has tended to increase the average price. However, the cessation of hydro investments occurred decades ago -- far too long to explain the 2000 price inversion.

Things get a bit more interesting if we look at the nuclear fleet. As Figure 5 shows, we haven't added any new nuclear capacity since 1990. (While the 1979 accident at Three Mile Island turned public opinion against new nuclear plants, we continued building those plants that were already "in the pipeline" over the subsequent decade.)

Figure 5: US Retail Electric Rate History and Nuclear Capacity History

US retail electric rate history and nuclear capacity history

At first glance, the slowdown in nuclear plant construction doesn't appear to explain the 2000 uptick in power costs. But a generator doesn't have any impact on power prices unless it runs. Thus, it is not only the capacity of the generator that matters, but also the number of hours the generator operates.

Figure 6 shows the nuclear fleet's capacity factor over the same period, calculated as the number of GWh generated from the entire fleet relative to the maximum it could have generated if it ran at full rated power output for 24 hours/day, 365 days/year.

Figure 6: US Retail Electric Rate History and Nuclear Capacity Factor History⁶

US retail electric rate history and nuclear capacity factor history

A cause for the recent price increases now comes into focus. While we stopped building new nuclear capacity in 1990, the fleet had a lot of "spare" room, running at only 60% of its potential. But by 2003, nuclear fleet capacity factor had saturated at 90%, about as high as it can go given maintenance constraints.⁷ As the nuclear fleet capacity factor leveled off, we see power prices rise; after all, with no more increases of marginal nuclear generation available, load growth had to be served by higher priced alternatives.

Now let's shift our focus to coal. Interestingly, the coal fleet also sees a leveling off of generation additions in about 1990, just about concurrent with the curtailment of new nuclear capacity additions.

Figure 7: US Retail Electric Rate History and Coal Capacity History

US retail electric rate history and coal capacity history

Like the nuclear slow-down, the causes of the coal slowdown are -- in hindsight -- understandable. The 1976 Clean Air Act (CAA) dramatically raised the cost of new coal plants, but grandfathered the existing coal plants out of compliance obligations. This essentially eliminated the economic logic for new coal plant construction -- and explains the absence of coal fleet growth over the past two decades⁸.

And what about coal plant capacity factor? Today's fleet has a 72% capacity factor, suggesting that it still has room to grow. This figure is deceptive though. In many regions of the country, the total generation capacity represented by the combined nuclear, hydro and coal fleets exceeds the off-peak demand. As the most expensive of these three sources, central coal plants are the first source curtailed during low demand periods, and it is thus not possible to run the coal fleet at the capacity factors seen in the nuclear industry until the base power demand grows. Thus, the relevant question for coal is how the total fleet MWh output has grown relative to the growth in overall retail electricity purchases⁹ , as shown in Figure 8.

Figure 8: US Retail Electric Rate history and Coal MWh growth relative to load¹⁰

US retail electric rate history and coal MWh growth relative to load

Note that since 1990, coal growth relative to retail sales growth has been essentially zero. In other words, the coal fleet is already running as hard as it can, subject to the limits of demand. As demand has risen, the coal fleet has been able to increase its capacity factor to keep up, but it has essentially been a non-factor in the provision of peak loads since 1990. In other words, since the nuclear fleet capacity factor saturated in 2003, peak load has had to come from sources other than old hydro, old nuclear and old coal.

We are thus faced with a question: if coal is cheap, why isn't anyone building it? And more broadly, if we're not building nuclear, not building coal, and not building hydro ... what are we building?

Which brings us to natural gas.

Unlike nuclear and coal, natural gas is a relatively low-risk fuel from an environmental perspective: Clean Air Act compliance is (comparatively) minor, and the siting challenges are orders of magnitude lower than either nuclear or coal-based assets. In addition, the cessation of nuclear and coal construction in 1990 was followed shortly thereafter by the 1992 Energy Policy Act and FERC order 888 which -- for the first time -- allowed private capital to meaningfully participate in wholesale power markets. This combination of environmental considerations and market liberalization persuaded many independent power producers to invest in new natural gas plants, as seen in Figure 9. The power industry added nearly 200 GW of natural gas-fired capacity in just 5 years -- a growth rate that was unprecedented in the history of the US electricity industry, for any fuel type.

Figure 9: US Retail Electric Rate History and Natural Gas Capacity History

US retail electric rate history and natural gas capacity history

Note that even before the 1992 wholesale market liberalization, the gas fleet was growing, albeit more slowly. However, the rate of gas fleet growth slowed dramatically in the wake of rising fuel costs at the beginning of this decade.

The impact of rising natural gas costs on the investment thesis for natural gas-fired generation is readily apparent in Figure 10. As higher costs forced these plants to curtail production, equity investors lost their appetite for new gas plant construction (among other things).

Figure 10: US Retail Electric Rate History and Natural Gas Capacity Factor History

US retail electric rate history and natural gas capacity factor history

And thus we saw a wave of bankruptcies in the merchant power industry: equity capital that was deployed in anticipation of 30% utilization simply evaporated. The largest publicly-traded IPPs lost over $200 billion of shareholder value between June of 2000 and the end of 2001. This lesson is not lost on today's would-be coal plant investors as they try to figure out whether there investments will also be driven down to run at their marginal generation costs and sacrifice capital recovery.

And so we see that the retail electric price increases that began in 2000 were the result of the cessation of nuclear and coal plant construction ten years earlier (and due to causes that occurred 10 -- 15 years prior), coupled with an increase in natural gas price. This more or less comports with conventional wisdom.

But now we return to our question. If coal is so cheap, why have investors exclusively invested in natural gas plants? Even after the spike in gas prices and collapse in capacity factor, gas-fired plants remain the only technology that is still increasing generating capacity. Moreover, as Figure 11 shows, natural gas-fired generation has comprised more than 100%¹¹ of all our capacity additions since 1996. This would imply that no one thought it was a good idea to build coal-fired plants prior to the recent increase in electricity costs -- which is hardly consistent with the thesis that coal is inherently cheap.

Figure 11: US Retail Electric Price History and Percent of Total Capacity Additions from Gas¹²

US retail electric price history and percent of total capacity additions from gas

That's because coal isn't cheap. Clearly, the fuel is cheap -- and if society is willing to tolerate pre-Clean Air Act levels of SOx, NOx, particulate and mercury emissions, you can build a relatively cheap coal plant. But society will no longer tolerate dirty coal -- and investors will not tolerate an investment that doesn't pay off its equity. Taken together, this has made central-station coal a lousy investment.

Consider these recent estimates of the capital costs for modern coal-fired power plants, remembering that old dirty coal plants cost about $800 to $1,000 per kilowatt of capacity to construct:

"... well north of $2,500 per kilowatt for supercritical coal plants ... "¹³

"Duke said it would cost $1.83 billion [for an 800 MW power plant in North Carolina]."¹⁴ ($2,300/kW)

"GE ... company executives Monday gave figures ... of $2,000 to $3,000 [per kilowatt for new coal-fired power plants]."¹⁵

"Indiana utility regulators approved Duke Energy's proposed $2 billion coal-fired ... 630 MW power plant." ¹⁶ ($3,174/kW)

"West Virginia regulators have approved American Electric Power's plan to build a $2.3 billion [629 MW] clean coal plant"¹⁷ ($3,700/kW)

It is worth noting that none of the plants cited above include any provision for CO2 recovery or sequestration which -- if FutureGen is any indication -- would roughly double total capital costs and reduce net generation efficiency.¹⁸ But even these "conventional" coal plants are averaging over $2,500/kW, and increasing dramatically with each subsequent commission-approved facility.

Even with no further increases in coal plant construction costs, the economics stink. Consider a coal plant with a total installed cost of $2,500/kW and assume no cost overruns. At the low costs of capital that ratepayer-guarantees provide for regulated utilities, $2,500/kW and 70% capacity factor requires 5 cents/kWh just to recover the capital costs associated with generation.¹⁹ Fuel and operating costs add 3 -- 4 cents, and transmission and distribution add another 2-3 cents. Add all together and one quickly concludes that the investment in these coal plants simply doesn't pencil below anticipated retail prices of 10-12 cents/kWh. Even after the recent run-up in electricity rates, this would represent a 17% increase in average retail electric prices -- and even more in the coal-belt, where these plants would likely be built.

Here, then is the question facing prospective coal plant investors: will you put billions of dollars at risk, in order that you can return below-market (e.g., utility-level) returns in exchange for assuming the risk that (a) retail prices will spike and (b) you will never have to pay for your greenhouse gas emissions?

Not surprisingly, no one is making that bet without first getting utility commissions or state legislatures to guarantee their equity returns. Consequently, we see much of the "cheap coal" thesis emanating from what are essentially public relations efforts directed at utility commissions and state legislators. But the PR cannot hide the fact that coal isn't cheap, or that no one is building coal without public guarantees.

Environmentally, this is good news -- because if cheap coal doesn't exist, then there is no conflict between greenhouse gas mitigation and power from cheap coal. But -- and here's the catch -- while we have massive opportunities for clean and cheap power, our current regulatory model stands in direct opposition to their deployment. The 200 GW of gas-fired generation deployed after the 1992 EPACT shows us just how quickly the private sector can act once the regulatory shackles are removed -- and that was in response to very modest reform, which applied only to wholesale power. Comparable reform today could unleash a comparable flood of low-cost, low-carbon generation. But we must first reform.

Better Options

Understanding our better options first requires that we confront one final piece of flawed conventional wisdom: namely, that the US energy industry optimally allocates capital. Per this conventional wisdom, there can be no better options than the current mix of power on the grid, because markets would have seen to it to allocate capital more efficiently if such options existed. Ergo, reducing fuel consumption must impose unacceptable costs, since otherwise the changes would have already been made.

This conventional wisdom is refuted by the fuel efficiency history seen in Figure 3. Fuel is the single biggest variable cost associated with power generation. Why did the industry shift capital allocation to electric only plants that could not recycle byproduct thermal energy to displace boiler fuel? Why did industry double its fuel consumption per kilowatt-hour of delivered electricity over the last century? The answer, at core, is that the power industry does not allocate capital efficiently. This is not to say that the industry does not behave rationally with its capital: rather, it is responding rationally to regulation-enforced incentives for inefficient capital allocation.

So what to do? The political appetite for full deregulation of the electricity industry remains weak -- but the need to mitigate climate change and lower energy costs grows more urgent by the day.

Fortunately, within our past failures lie the seeds of economically and environmentally beneficial reform. After all, the sign-error that is innate to our present greenhouse gas conversation means that we can lower carbon while simultaneously spurring economic growth. Addressing the flaws of our present regulatory model will allow us to access a huge volume of low-hanging fruit. Just as the Soviet bread-regulation model did not facilitate the creation of vibrant boulangeries, our current system does not encourage cheap, clean power. Thus, our failure to deploy cheaper power must be understood as a failure of the system, not as the economic impossibility of a decent bakery.

Consider: According to the US Department of Energy, there are 135,000 megawatts of feasible cogeneration projects which could be deployed in the US, all of which would be at least twice as efficient as the US average²⁰. An EPA study identified a further 65,000 megawatts of electric generation capacity which would recycle industrial waste energy (exhaust heat, flare gas, pressure drop, etc.) and burn no incremental fossil fuel²¹. In aggregate, this 200 GW of power could provide 40% of US electricity needs and reduce total US greenhouse gas emissions by 20%.²² It would also generate attractive returns on equity even while lowering power costs and GHG emissions.

So why aren't they being built? As noted previously, there is no incentive for a regulated utility to build cheap generation. And even if there were, regulated utilities simply don't have the skills. The 200 GW opportunity identified above all requires very close integration with industrial hosts in the design, contracting, construction and operation. This integration is necessary to procure waste energy from those facilities and/or to provide thermal energy to same. But it also introduces a set of design and operational dependencies (not to mention a suite of thermal and industrial engineering skills) that are not native to electric utilities, who are best at building and dispatching big, power-only assets.

And it is therefore again appropriate to revisit our Soviet bread example. The same challenges that face the deployment of cheap, clean power in the United States today faced to a developer who wanted to put an Au Bon Pain in Moscow in 1985. The problem is the paradigm. As we begin to enter a build-cycle in our power fleet, it is urgently important for us to modernize our regulatory model so that generation will be brought on line based on least-cost considerations -- as opposed to the "least cost within the present paradigm" model that currently prevails. Failure to modernize will compel us to build expensive central coal or expensive central gas, which will be disastrous for both the economy and the environment.

Conclusions

The United States is about to enter an unprecedented era of energy price increases, as a flock of thirty year old chickens -- from Three Mile Island to the Clean Air Act -- come home to roost. We saw price increases of a similar scale after the OPEC supply disruptions in the late 1970s, and have direct experience with the massive economic dislocation that can result. But as bad as those price shocks were, they were at least transitory. The coming price shocks are driven by structural shifts in the global economy and environment that will not be so easily reversed.

However, unlike the OPEC shocks of the 1970s, we can see these coming, and we can plan accordingly. Moreover, the challenges we are soon to face have, at their core, a single, and largely fixable cause: an outdated electricity regulatory model. This model can be fixed, but only if we are willing to confront the status quo and take off the blinders imposed by a century of central electric system planning. And when we do, we will play to our national strengths, deploying our prodigious creative and financial talents to address the greatest global problems of our day. We will lower greenhouse gas emissions. We will lower energy costs. We will create new industries and entrepreneurial success stories.

But first, we must get beyond our model of monopoly-only capital allocation. We must get beyond the false premise that economic growth is incompatible with greenhouse gas mitigation. We must get beyond coal.

-----

Footnotes

[1] On March 7, 2008, Merrill Lynch announced that they expect thermal coal prices to rise 200% by the end of the year (Greenwire, 3/7/08).

[2] From US EPA data. Total emissions across all sectors in 2005 were 5,699 teragrams, or 5.7 trillion metric tones.

[3] Source: US DOE/EIA.

[4] And of course, the public has lost its appetite for the environmental consequences of massive hydroelectric dams.

[5] Source: US DOE/EIA.

[6] Capacity factors shown are calculated as 5 year trailing averages.

[7] Nuclear fleet capacity factors before and after deregulation -- and between presently regulated and presently restructured states -- provide compelling evidence of the ways in which our current regulatory model prevents utilities from preferentially deploying their lowest cost generation options. For details, see Casten, Sean, "Deregulation, Phase II", Public Utilities Fortnightly, November 2007, pp 48-54.

[8] This is not to suggest that pollution control is incompatible with low-cost generation -- simply that CAA-compliance is incompatible with low-cost generation. Other regulatory approaches, like output-based standards that incentivize energy efficiency deliver equivalent or greater environmental benefit without the CAA's economic pain.

[9] In truth, one would like to compare coal MWh growth to growth in the "troughs" of demand -- e.g., during winter nights, when electricity demand is at a minimum -- but this is not readily available in the data, and we use total retail sales as a surrogate.

[10] Coal growth data shown is as a 5-year trailing average.

[11] This ratio is calculated as total year-on-year natural gas capacity additions, divided by total fleet capacity growth during the same period. Since both values also include capacity retirements, this ratio can sometimes exceed 100%.

[12] Gas capacity values shown are a 5-year trailing average, comparing total natural-gas fired capacity additions in a given year to total capacity growth. In some years, this value exceeds 100% due to fleet retirements.

[13] Energy Biz Insider, 7/6/07.

[14] New York Times, 7/10/07.

[15] Ibid.

[16] E&E News, 11/27/07.

[17] Greenwire, 3/7/08.

[18] FutureGen is the (recently abandoned) plant slated for construction in Illinois that would have separated CO2 from the exhaust to sequester underground. DOE estimated costs of $1.8 billion for this 275 MW plant, or $6,500/kW. (Greenwire, 11/12/07).

[19] Calculated at 11%, 20 year level amortization.

[20] Hedman, Bruce, Combined Heat & Power and Heat Recovery as Energy Efficiency Options, Briefing to Senate Renewable Energy Caucus, Sept. 10 2007; Energy and Environmental Analysis/USCHPA, Washington DC. This work was done under contract to the US DOE, in support of their goal to deploy 90 GW of CHP by 2010.

[21] Bailey, Owen and Enrst Worrell, Clean Energy Technologies: A Preliminary Inventory of the Potential for Electricity Generation, Lawrence Berkeley National Laboratory (under contract to US EPA under US DOE contract number DE-AC02-05CH11231), April 2005. Note that this report identifies 96 GW of total potential, but some of this total includes fueled CHP applications that are redundant with the DOE-identified 135 GW total.

[22] There is approximately 1000 GW of total generation in the US today, but much of this base runs only during system peaks. The 200 GW of clean generation opportunity -- by virtue of being so much cheaper than the rest of the grid -- tends to run closer to baseload, as is the case for the existing 83 GW of already-installed assets. Thus, 20% of the total GW base can provide 40% of total GWh use.

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43 Comments | Post a Comment

beyond coal and oil -- to coal! and oil!

it's ugly, not saying what the major base fuel for this cogeneration capacity would be: coal-fired power generation and petroleum refining.

quite the admission, in that omission.

by hapa at 12:52 PM on 05 Jun 2008

Questions

Good piece, Sean. It makes sense, except for one statement you make:
Why did industry double its fuel consumption per kilowatt-hour of delivered electricity over the last century?
I didn't see any support for this statement in your graphs. I realize that the total delivered energy per BTU of fuel has dropped since the start of the century, but I thought this was because of the dropoff in cogeneration. Did you mean to say "energy" rather than "electricity"?

by GreenEngineer at 1:01 PM on 05 Jun 2008

hapa,

I never understand this objection. Consider this highly simplified scenario:

Before cogeneration: coal producing 10 MW and 10 tons of CO2

After cogeneration: coal producing 10 MW and 5 tons of CO2

Is there some way in which the latter scenario is not preferable to the former, despite being coal being the base fuel?

grist.org

by David Roberts at 1:04 PM on 05 Jun 2008

GreenE

You're sort of right, but the truth is that either word works. If I consume 100 units of fuel to make 33 units of electricity and I find a way to cut my fuel use to 50, I have cut my fuel use per unit of delivered electricity in half.

If, on the other hand, I recover that energy as heat and shut down a boiler to avoid an equivalent amount of fuel use, the net fuel use per unit of electricity is the same at a global level: from 100 to 50. (In other words, where I choose to "charge" for the fuel between thermal and electric is an issue of accounting.)

This may sound like semantics, but is a rather important point. A gas turbine with a 10,000 Btu/kWh heat rate buying $8/MMBtu gas has a marginal cost of production of 8 * 10,000 / 1E6 = 8 cents/kWh. That gas turbine will shut down if the power price falls below this level (which is why the gas fleet capacity factor has collapsed when gas price rose). But if that gas turbine is operating in cogen mode, displacing a boiler to get down to a 5,000 Btu/kWh heat rate, it will have a break-even cost of just 4 cents/kWh and will run much more often. Thus, the economic decision to run that plant essentially ascribes all the fuel savings to the electric side. And environmentally you get the same result. So even though it sounds like the laws of thermodynamics are being violated, you can use either term.

by Sean Casten at 1:15 PM on 05 Jun 2008
[ Parent ]

i don't see that.

Before cogeneration: coal producing 10 MW and 10 tons of CO2

After cogeneration: coal producing 10 MW and 5 tons of CO2

where does it say it will reduce fuel use on power plants or refineries? all i see is talk about new energy sources to sell to the grid. increasing the productivity of fuel use. offsetting the cost.

so 20MW and 10 tons CO2, emissions to be cut somewhere else. that's my understanding of this. if it were 50% absolute emissions cut to get the same electricity "behind the fence," what would there be to sell to the grid?

that's why i think this is a bridge to get the current grid cleaner while it is being replaced. the temptation to fight to leave these "efficient" facilities operating is too great.

i could be wrong! often am!

by hapa at 5:22 PM on 05 Jun 2008

Hapa - let's follow your logic

You're making a mathematical mistake, although if it's any solace, it's a common one. Increasing the efficiency with which we convert useless energy into useful energy reduces our consumption of the useless stuff. But it doesn't increase our consumption of the useful stuff. If we could run our grid with 1/2 as much fossil fuel per MWh, we would not suddenly consume twice as many MWh.

Or, to put it closer to home, would you drive twice as far if you doubled your fuel economy? Would you leave your lights on if you bought a more fuel efficient lightbulb? Of course not. So why assume that a more efficient power plant magically increases the demand for power? It doesn't do that either. It simply lowers fuel combustion.

One final point: a typical energy consumer doesn't care two whits about the specifics of any given power plant. It's the overall pool of power that matters. So if you truly believe that increasing the fuel efficiency of a single power plant increases power demand, then you'd have to conclude that the same is true if we increase the fossil-fuel conversion efficiency of the overall power pool, since we'll just use up more to make up the shortfall. Which means that renewables are a f***ing waste of time. Since anything short of 100% elimination of fossil fuels would lead to an equivalent increase in production. And even a 100% elimination of fossil fuels would cause us to consume an infinite amount of energy, until we depleted the sun of all it's finite power.

Reducto ad absurdum, but hopefully you get my point?

by Sean Casten at 5:53 PM on 05 Jun 2008
[ Parent ]

Speechless

This article is appalling. Wait, I didn't mean that. I'll start over. This article is fraudulent.

"Coal is no longer cheap" is its subtitle and premise. Backed up by this lede: "When it comes to power generation, coal isn't cheap. Both power plant and fuel costs are up by nearly 300%, and projected to rise farther."

How about that, folks. The cost of the fuel that provides nearly half of U.S. electricity is up almost four-fold ... before carbon pricing. Who knew?

Turns out only the author of the article knew. In the world the rest of us inhabit, the average price of coal delivered to U.S. electric power plants in 2007, all 1,045,000,000 tons of it, was a mere 5% higher than in the previous year (on a per-btu basis). Which in turn was up just 10% over the price from the year before that. Which 2005 price was less than the average price two decades earlier -- in nominal dollars (before adjusting for inflation). Like I say to clueless drivers looking to cut in front of my bicycle in Manhattan traffic, HELLO???

The author's footnote for this assertion (thanks for that) reads: "On March 7, 2008, Merrill Lynch announced that they expect thermal coal prices to rise 200% by the end of the year (Greenwire, 3/7/08)." Could happen, I guess. But "nearly 300%" ain't "200%," costs "are up" ain't "costs are expected to go up," an anonymous Merrill Lynch announcement ain't, okay, you get the point.

Why am I so offended? Two reasons. One, I know something about the coal industry. I studied it intensively throughout the 1970s and into the 1980s. I watched the price of utility coal rise four-fold from 1973 to 1984 -- in 11 years, not 11 weeks -- and I have a feel for what it took for that to happen (which I'll be happy to post about).

Second, if I recall correctly, the author, like me, a Gristmill contributor, has been unimpressed by arguments from people like me that without an urgent, broad-based campaign to put a "climate price" on coal and other fossil fuels, we're not going to come close to getting the levels of energy efficiency and renewable energy we need to avert climate disaster. If the price of coal had indeed quadrupled -- implying a nickel rise in the average price of a coal-fired kWh -- we wouldn't need carbon pricing (and I could fold the Carbon Tax Center and go back to working full-time on other, more fun stuff like free transit in NYC).

Could it be, then, that the author's indifference to carbon pricing rests on his grotesquely mistaken conviction that coal prices have already reached market-clearing levels for EE and RE, without carbon pricing?

Sorry for the vitriol, but this stuff is too important to mess up in public by one to two orders of magnitude.

Charles www.komanoff.net

by Charles Komanoff at 8:19 PM on 05 Jun 2008

sean

i wrote a long thing. it was full of common mistakes.

just say it again.

you think electricity demand is not increasing and will not increase.

you think people will build cogen only to meet their current needs, better.

by hapa at 8:41 PM on 05 Jun 2008

strangeness

i have some kind of otherworldly existence, to be able, reliably, to depart difficult conversations such as this only to be presented, from nowhere, with more on that topic, like i was somehow asking for it.

in this case, the jevons paradox, which appeared from here, via here, where i got by accident.

by hapa at 12:01 AM on 06 Jun 2008

Charles

A few responses:

There's no shortage of evidence that coal prices are up by 3-fold or more. For just one recent example, see here. I don't know where you're getting your 5% figure from, but suspect you are looking at the price of delivered coal to existing coal plants. I am instead looking at the current spot price of coal, consistent with the thesis here which is looking not at the cost of running existing coal plants a little bit harder which (per the capacity factor data) isn't really possible anyway, but rather at the economic premise of building new coal plants. The fact that a 40 year-old coal plant currently has a contract that gives them an economic advantage relative to current spot prices is good for that plant, but doesn't do anything to affect the economic thesis for an investment in a new coal plant.
Even with the increases in coal prices, it is still a cheap fuel on a $/Btu basis - far cheaper than oil or gas. I acknowledge as much in the post. But that alone isn't sufficient to justify an investment in a new coal plant, any more than the cost of solar energy alone is sufficient to invest in a new PV array. You have to factor in the capital costs, and it is once those capital costs are factored in that coal doesn't pencil. I will confess a bit of editorial short-hand in the title, which could be more accurately worded as "central-station power generation in Clean Air Act-compliant coal plants are no longer cheap" Apologies for the misleading title, but the body of the post is all about the all-in, levelized cost of coal-fired power relative to other options. My framing as "coal isn't cheap" is only to counter the pro-coal lobby's argument that we are blessed with abundant and cheap coal. Which to my way of thinking is sort of like saying that China is blessed with cheap labor, and therefore next Friday night when I need a baby sitter I should fly in a baby-sitter from Shanghai. $/Btu comparisons alone are meaningless in the power industry - but they are the only comparison the coal industry seems willing to admit.
Please don't confuse my acknolwedgement that new investments in coal-fired power don't make economic sense with an argument that we need to price carbon emissions. Those are two entirely separate points, and we are in complete agreement on the latter. My argument is simply that so long as we delude ourselves into thinking that a shift in capital away from central-station coal is economically disadvantageous, we will spend our time with a false argument between cheap coal and environmental stewardship - when the facts on the ground actually argue that it is economically irresponsible not to move away from coal, regardless of what one thinks about the associated environmental consequences. Which means that - but for the impact on the coal industry - there is no political reason not to act.
Finally, I accept you have a lot of experience in the coal industry, but am surprised that you disagree so much with the article. In that spirit, I'm interested in how you interpret the same fact pattern. $3000/kW, 33%-efficient Clean Air Act-compliant coal plants are a fact. $1400/kW T&D to connect those plants to load are a fact. 10%, 20 year utility capital amortization schedules are a fact. I can't put those facts together and come up with anything much different than 12 cents/kWh power from coal, even before we add in GHG considerations. Which does a pretty good job of explaining the final fact, which is that as a nation, we haven't put any capital in new coal plants in the last 20 years, even while we have put it in other fuels. If coal were cheap, people would be investing in it. If it takes 12 cents/kWh to recover it's equity, it makes sense that people aren't investing in it - and means that the whole "coal is cheap" propaganda is not only disruptive, but also false. If you have another interpretation of that fact pattern, I'd love to hear it.

by Sean Casten at 6:35 AM on 06 Jun 2008
[ Parent ]

Order of magnitude

"...this stuff is too important to mess up in public by one to two orders of magnitude."

One order of magnitude is 10x. 2 orders are 100x.

http://en.wikipedia.org/wiki/Order_of_magnitude

http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin

by amazingdrx at 6:52 AM on 06 Jun 2008

Hapa responses

I don't argue that electricity demand isn't increasing. Simply that it doesn't increase as a function of supply. Nothing does. But so long as demand is increasing, it behooves us to talk about the most responsible capital to build to supply that growing demand. Indeed, this is a valid question even if demand isn't increasing. In normal, non-regulated industries, the capacity that gets built is the capacity that has the most economic advantage, and if that means someones old capital plant gets mothballed, so be it. New cell phone technology does not wait to be deployed until the old cell phone plant has fully amortized it's capital. There is no reason this same logic should not prevail in the electric sector, in which case lower cost generation - including, but not limited to efficiency - would shutter inefficient central station plants, even in the wake of flat/falling demand. It is a perversity of the way we've regulated the electric sector that we treat historic capital investments as sacrosanct, but this is just because the regulation is f'ed up. But I digress. The key point is that the directionality of demand really doesn't have any relevance on the question of whether it is in our economic and environmental benefit to use less fossil fuel per unit of electricity delivered.
I have personally built over 70 cogen plants, and can say that universally, they produced power that otherwise would have been purchased from the local utility. The idea that an industrial will increase their demand for power in the wake of on-site supply is inane, for the same reason as above. If you add thicker insulation to your home, do you then turn the heat up to maintain a constant fuel input? If you buy a more fuel efficient car, do you double your commute to keep gasoline input constant? Of course not. For the same reason, a factory, commercial building, hospital, university, prison or anyone else who installs an on-site power plant does not then increase their demand so that they can maintain a constant fossil signature. Quite the contrary, as the investment thesis for them to build the cogen in plant in the first place is to lower their overall energy bills. For that reason...
Jevon's paradox is academic masturbation. OK, I overstate a little, but it's a dumb idea that gets far too much air-time in the environmental community (and, to be fair, the academics-disconnected-from-reality community). If efficiency leads to offsetting increases in consumption, it implies that the demand curve for energy is almost perfectly elastic, such that a $1 reduction in energy costs leads to an increase in demand so that your annual energy expenditure is constant. Does anyone have any evidence outside of a textbook where this actually happens? I sure don't. The aforementioned fuel economy and insulation examples are good to revisit here. Do you buy more fuel when you insulate? Did Jevon?
I go back to my earlier logic. If you really believe Jevon, renewables are in trouble too. As I note in the post, the dispatch order on power plants is ultimately a function of their variable costs, even while the investment thesis for new plant also must take capital recovery into account - which means that a world based on renewable energy is ultimately a world with cheap energy, raising Jevon's ghost again and implying that we exhaust the sun's finite resources one millisecond after we convert to an all-renewable grid.

Let me explain this last point in a bit more detail. Let's say you are considering a power plant that will cost you $100 to build, and $30/year in variable costs to operate. You look at current power prices and calculate that you will receive $50/year in total revenue, or (50 - 30) = $20/year in profit, for a 5 year payback. We will stipulate for the sake of argument that this is sufficiently attractive to convince you to invest. This is the capital recovery test (and the test that new coal plants fail). But now let's look at what happens when the plant is running. If power prices collapse 2 years from now, such that you're only getting $35/year in total revenue, do you still run the plant? Absolutely - because at your $30/year cost, that's still $5/year of profit. Not as high as you were anticipating, but still $5 more than you'd have if you didn't run the plant at all. (By contrast, if power prices dropped such that you'd only get $25, you'd shut the plant down rather than losing $5/year.)

This, in a nutshell is how commodity markets work - including power, at least in the deregulated states. Prices eventually fall down to the marginal cost. (It's also why our lack of new construction in coal, nuke and hydro coupled with an overbuild in the 70s and 80s has given us cheap power for the last 30 years. Those plants would have loved to earn more money than they did per MWh, but they collectively drove down the marginal cost of energy.)

A renewable-intensive grid would be no different, except that the marginal price of operation approaches zero. Is there any price >$0/MWh at which you would choose not to run a wind turbine or a solar panel? Not really. That's not to say that those prices would deliver attractive returns to investors in those assets - but the more renewable-intensive our grid is the more downward pressure we have on marginal power costs.

So here's the rub: if Jevon is so smart, one would have to conclude that renewables are a really dumb idea. After all, power prices that approach $0 imply - per Jevon power demand that approaches infinity.

To wit: Jevon isn't so smart.

by Sean Casten at 7:16 AM on 06 Jun 2008

So Sean --

here I go beating, well, hopefully not a dead horse, but a horse nonetheless -- OK, scotch that metaphor, probably doesn't belong on an environmental blog --

so if the renewable equipment was built, no matter how -- market or government -- once it's up and running, it's very cheap. In fact, it's cheaper than fossil fuels. So wouldn't everybody's electricity bills eventually go down? Isn't that something that greenies can shout from the rooftops?

by Jon Rynn at 7:46 AM on 06 Jun 2008

Jon

Yes, and many have. That said, you need to be careful on a few points:

The investment thesis for many renewables is worse than coal, in the sense that they are less economic once capital recovery is factored in. That's not to say that they wouldn't drive prices down, but rather that if they did, renewable investors would lose a lot of money, in the current regulatory scheme. So be careful how you phrase the argument. Whether we call it a subsidy or a leveling-of-the-playing field, the reality is that many renewables still need some kind of incentive above and beyond the current value of power in spite of the fact that they are cheap on the margin. This is equally true of coal, of course, which is why that industry is working so hard to get their own handouts. And nuke. So make sure you're clear on the distinction between variable production costs and the levelized cost of generation, including capital recovery. The former sets price, but the latter drives investment. And without the investment, you can't drive the price down.
There is a really toxic meme in the environmental community that needs a swift kick in the butt, but it is, at core, contrary to your rooftop shouting. Namely, the belief that expensive energy is in our national interest, as the only way to curtail energy demand. Those with that agenda too often end up either ignoring or silently-praising the sub-optimal economics of renewables as a necessary evil. It's an economically disastrous thought process, but ubiquitous enough to weasel into a lot of debates. (For example, see the whole idea of feed-in tariffs, where renewables get paid an amount of money that is in part calculated based on the capital costs of the technology. Those rates remove any incentive to lower capital, guaranteeing perpetually-expensive renewables. The fact that such ideas have support anyway is - in my opinion - in part due to the "damn the economics" logic of much of the green community.)

by Sean Casten at 7:58 AM on 06 Jun 2008

Yep Jon

Right from the rooftops, the solar pV/heat cogenerating rooftops!

That's it, only our favored path can defeat energy price based inflation. Energy costs will level off. Providing a stable base for our economy, currency, and job base.

Human labor input will produce a gradually increasing output, with greater efficiency and innovation, and energy will be a stable part of total production cost. That's what renewable/conservation energy revolution can do.

http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin

by amazingdrx at 7:58 AM on 06 Jun 2008

Well, on Feed-in tariffs...

...my understanding is that they are designed to decrease, that is, I think, using the "infant industry" idea, that you help out an industry while in its infancy, and that it should be able to walk on its own after a while. In Germany, this has given rise to economies-of-scale, and also very critically, a very healthy PV manufacturing sector -- as has also occurred in Japan. So I understand your point, but I believe that the feed-in tariffs have generally taken that into account.

But to get back to the main point, I can already see a meme emerging from the extreme right -- even here in comment-land -- that greens want higher energy prices -- and this just happened with the L-W legislation -- so it would be very powerful to counter that we're attempting to make energy cheaper. And if the energy is carbon-free, it depends particularly matter if Jevons is right or wrong (so long as the renewable energy equipment is also produced carbon-free, from recycled material, etc).

That being said, yes, I know that the fixed costs are a problem with renewables, but at the very least, if the public starts to understand this, and they understand that once you get over the hurdle you get to the "promised land", as it were, then I think the political debate becomes more rational.

by Jon Rynn at 8:30 AM on 06 Jun 2008

@sean, ok i see what you're saying.

my problem basically stays, though.

1) i don't see how coal use is being reduced. it looks like the coal that isn't being burned is virtual -- for argument, let's say the electricity being replaced here was generated in a single central power plant -- and freeing up capacity that plant can/will/must then sell.

it's odd for me to end up writing opposite of negawatts, but how energy is bought and sold now, across the country, means that there is no closed system of demand how it seems like you're implying. someone will buy what that plant can sell.

is there actually a net reduction in coal use here?

2) we are talking about the need to eliminate fossil fuel power generation, coal first. feedbacks going from bad to worse as sinks fill up or die.

a plan to have some fraction of fossil use doing double duty, reducing the growth in that sector, is completely blown away by what i've been reading for a couple years now as a need to phase out coal by 2030, absent massive CCS, which itself faces the very capital cost hurdles you talk about.

in your estimation, how many of the plants you've installed would continue to operate, at a $50/ton carbon price? $100? let's assume there's a commensurate cut in payroll taxes. would the facilities with which you contract choose to keep their cogen setup? if we're talking about a space-heating furnace, would they be able to replace that furnace with something that burns safer material, and still use your CHP installation?
in a more drastic example, let's say we -- not you, just someone, one of our fellow countrypeople -- installs heat capture on a petroleum refinery, lowering the cost of operating that refinery. or a cement factory. pick your poison. it looks like the incentive is there. for the power-sector facility, they could even be imagining selling energy back to the grid. we've helped them cut their costs and reduce the impact of carbon pricing on their business. yay!
jevon's paradox is why the population's so big. we fixed a variety of problems impeding the smooth flow of reproduction and we got a mess out of it. in the early adopter countries, the new population equilibrium continues to find ways to justify its far greater resource consumption, on the grounds of per capita thrift and productivity. missing nature's screaming point entirely.

you can find an example in any area of human activity where efficiency turned a cottage industry into a nightmare -- particularly in use of time, but then time is most often the only barrier to massive net destruction, time to gather, time to transport, time to manufacture -- indeed, wasn't that adam smith's point, about the pin factory? how inefficiency stands in the way of personal consumption?

by hapa at 10:33 AM on 06 Jun 2008

Enough silliness, already (please?)

Sean --

Thanks for acknowledging, in paragraph #3, that you agree w/ me on the need to price carbon emissions. Yet you appear to undercut this in your expressed hesitation about expensive energy in your later reply to Jon. Ditto your April 30 post, One hand clapping: Economic naïvete on carbon prices. So I'm not sure where you stand on carbon pricing after all.

But back to the run-up (or not in coal prices). Increases of 50-125% in spot coal prices in the past year (thanks for that useful link) are not the "nearly 300%" increases in fuel prices for coal plants you represented in your lede. Nor are your spot price movements, which reflect a thin and volatile slice of the market, a harbinger of prices over the long haul, for new plants as well as old. (BTW, my 5% price increase figure is from EIA's Web site, sorry I neglected to say that). Your own chart shows that, with a host of sharp increases that subsequently were reversed.

Sure, the price in new coal contracts is headed up, but you have offered no basis for asserting that the increase rate will even be double-digit, let alone the triple-digit you claimed had already happened.

As for the rest of your post and your comment reply, I have to pass ... I haven't the time or, I confess, the inclination. I regret the intemperance of my post last night and I apologize for that. But when I see a blunder of such magnitude and consequence, I stop reading.

A note to amazingdrx: Sean's 280% or so (which is how I translate his "nearly 300%") is 54 times the actual 5% increase in the avg cost of "delivered" U.S. utility coal 2007 over 2006. Using logs, the discrepancy is 1.7 orders of magnitude, which I correctly encapsulated as "one to two orders." So yes I know what an order of magnitude is, thank you. I've known that since approximately 1957.

Charles www.komanoff.net

by Charles Komanoff at 11:14 AM on 06 Jun 2008

Hapa

Responses:

for argument, let's say the electricity being replaced here was generated in a single central power plant -- and freeing up capacity that plant can/will/must then sell.

The argument here reminds me of the arguments France used when they mandated a 35 hour work week, on the theory that by making people work less, they would reduce unemployment. Coal isn't burned by virtue of it's existence. It is burned if you can profitably burn it to convert it into something else useful. Let's say demand for power is 100 MW, and we're using 300 MW of coal to meet that demand. Tomorrow, we reduce that to 200 MW of coal, still serving the same 100 MW. There is no reason to then decide to burn the remaining 100 MW of coal, other than the chance to look at pretty coal flames... because there's no demand for the resulting energy. And to your question, there is a net reduction in coal use there, to the tune of 100 MW worth. (I'm keeping the math in MW to be simple, but it's just a unit of energy.)

we are talking about the need to eliminate fossil fuel power generation, coal first. feedbacks going from bad to worse as sinks fill up or die.

Fine - but what's the old proverb about every journey starting with a step? Cutting coal use in half is a good thing, and half way towards the goal. But just because it isn't 100% of the long-term goal doesn't mean we shouldn't start. If you want to be rich, do you take a job, or play scratch tickets, on the argument that your first job won't pay you the millions you seek? Same deal here, and there's no reason the two must be in conflict. Indeed, efficiency is ultimately fuel-agnostic, no less important for fossil fuels than renewables. Surely we'd like to generate as much solar energy as possible with as little land area as possible. Ditto for biomass, hydro, wind or any other renewable source. Efficiency at core is fuel agnostic.

in your estimation, how many of the plants you've installed would continue to operate, at a $50/ton carbon price? $100? let's assume there's a commensurate cut in payroll taxes. would the facilities with which you contract choose to keep their cogen setup? if we're talking about a space-heating furnace, would they be able to replace that furnace with something that burns safer material, and still use your CHP installation?

The least efficient plant I've ever built is 2.5x as fuel-efficient as the grid. Which means that the answer to your question is "all of them" - because any increase in the cost of fuel is going to drive up the price on the grid 2.5x as fast as it increases my cost, increasing the amount of money I save. (Efficiency, at core is a great hedge against energy price volatility.)

More later...

by Sean Casten at 11:47 AM on 06 Jun 2008
[ Parent ]

Charles

I'm not suggesting 300% year-on-year increase, but rather that absolute price is up 300% from historical norms. Apologies if that wasn't clear. But look at the chart I linked to. Five grades of coal were trading at $5 - 30/ton in 2003, and had been fairly steady going back for quite some time (well before the period in that plot, as you know). Those same five grades were trading in May at $15 - 105/ton. At the low end, that's a three-fold rise (ok, a 200% increase, but x + 2x = 3x). At the high end, that's a 350% increase. Not annually, but overall - and a dramatic change from the stability (and indeed, declining real-costs of all energy sources) that had dominated all US energy sources from 1980 - 2000.

Re: carbon pricing, there is no reason why carbon reductions must imply high carbon prices. Indeed, a functioning market for carbon emissions credits would deploy the lowest-cost reductions first, implicitly meaning that a sign of a working market would be a declining price of GHG emissions. So long as the emissions fall, whether or not the price moves is irrelevant from an environmental perspective. But from an economic perspective, I'd sure prefer that they fall. (And realize that I'm speaking contrary to my own best interest here: high priced carbon would be very good for my business. But it would be disastrous for the economy.)

by Sean Casten at 12:03 PM on 06 Jun 2008
[ Parent ]

Feed In Tariffs

Sean,

If a company is assured a set nominal rate for delivering its power because of a feed in tariff, shouldn't the incentive still be to lower capital costs? Even if the rate was originally devised by considering capital costs, if the rate is fixed (in dollar terms, or adjusted for inflation or w/e) then wouldn't the company still stand to pocket the extra if they lower their own costs, keeping it as extra profit, which would imply a preserved incentive to do just that? Or are feed-in tariffs recalculated to continue to be defined as a percentage of levelized costs, like our regulated industries have acceptable returns on capital they're allowed to earn? Or am I completely off somewhere?

by Max8806 at 12:21 PM on 06 Jun 2008

More Hapa

Sorry - owe you a few more responses.

in a more drastic example, let's say we -- not you, just someone, one of our fellow countrypeople -- installs heat capture on a petroleum refinery, lowering the cost of operating that refinery. or a cement factory. pick your poison. it looks like the incentive is there. for the power-sector facility, they could even be imagining selling energy back to the grid. we've helped them cut their costs and reduce the impact of carbon pricing on their business. yay!

Careful not to pick winners. We all bear complicity in our carbon emissions, and - as your example shows - it is damn hard to live in a world that doesn't have some associated carbon intensity. Idealistically, we may wish we didn't have to, but a world without concrete, rubber, plastic, refrigerants and any number of other products is quite a ways beyond Thunderdome.

jevon's paradox is why the population's so big. we fixed a variety of problems impeding the smooth flow of reproduction and we got a mess out of it. in the early adopter countries, the new population equilibrium continues to find ways to justify its far greater resource consumption, on the grounds of per capita thrift and productivity. missing nature's screaming point entirely.

I think that's a separate point entirely - albeit legitimate - about population growth. There is no question that technological advance and ever greater resource efficiency - from calories per acre to Btus available per capita - has enabled massive increases in the population that can be sustained on the planet. And yes, not all those advances are sustainable. But I for one am not morally comfortable choosing who gets to live and die going forward. I don't mean to be flippant here - but that, at core, is the technology/population conundrum. Given the chance and the technology to feed one more hungry mouth, do you choose to feed or to starve? That's a really hard, morally ambiguous question. Personally, I'm a lot more comfortable making a decision to drive up the efficiency of conversion. Maybe that's morally lazy of me to punt on the hard population decision, but unless you're willing to hold the gun and start naming victims... you may agree.

Now there I go marching beyond Thunderdome...

by Sean Casten at 12:32 PM on 06 Jun 2008
[ Parent ]

@sean

i don't support ZPG. i wasn't clear; "the early adopters" was about the industrial countries -- the former colonial powers -- who are finished with their population increase and are now having trouble convincing themselves to live softer on the planet, because individually, people don't feel like they're living in luxury, and they can't see the forest for the trees.

don't take this wrong. i think you move goalposts, in conversation. it's something to avoid.

by hapa at 9:06 AM on 07 Jun 2008

Orderly

"...280% or so (which is how I translate his "nearly 300%") is 54 times the actual 5% increase in the avg cost of "delivered" U.S. utility coal 2007 over 2006. Using logs, the discrepancy is 1.7 orders of magnitude"

So let's take this to a logical conclusion. If the (claimed) increase were only 1%, then the alleged exageration would be between 2 and 3 orders of magnitude? Approaching the astronomical (and ridiculous) as the claimed percentage decreases towards zero.

A clearer way to put this would be to point out that yes, coal prices have risen 3x over the last 8 years. Sean did not specify a time period in his original statement:

"...Both power plant and fuel costs are up by nearly 300%"

Orders of magnitude based on fractional numbers? Not so clear.

http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin

by amazingdrx at 9:53 AM on 07 Jun 2008

Kelpie on coal

"American electricity consumers are used to hearing that coal is much cheaper than renewable alternatives like solar and wind, but that might not be true for long. Consumers haven't seen the impact of expensive coal yet because most utilities lock in coal supplies with long-term contracts. Electricity rates will begin to shoot upwards when those contracts expire in the years ahead."

http://www.truthout.org/article/the-rising-price-coal

http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin

by amazingdrx at 9:41 PM on 07 Jun 2008

Good material, thanks Sean Casten. Jevons?

Note that it's William Stanley Jevons, not Jevon.

I often see Jevons' Paradox referenced reflexively as a reason to ignore efficiency. Wikipedia's discussion is actually pretty useful.

But in any case, it's one thing to say:

increasing efficiency leads to economic growth
and hence to more use of energy

and it's another to face reality:

the era of cheap, high-EROI fossil energy is drawing to a close; see Charlie Hall's Balloon Graph, although Sean's post seems to indicate the current EROI of coal is lower than shown there.
and we have to work very hard on efficiency just to keep ( work = energy-used * efficiency) ~constant while we spend decades building up renewables and getting them down cost curves.

See Ayres, whose last page shows models of world GDP in the face of Peak Oil+Gas as a functions of efficiency. I.e., world GDP can well stop growing without big increases in energy efficiency.

-John Mashey

by JohnMashey at 10:25 AM on 09 Jun 2008

Ayres is a genius

And worthy of a whole separate conversation. My dad co-authored a couple papers with him, on precisely this link between GDP growth, energy costs and the "bridge" of energy efficiency. I can't link directly to it, but if you click here, then under publications hit the "2007 and Before" expander. If you scroll down, you'll see a couple good Ayres pieces.

by Sean Casten at 10:46 AM on 09 Jun 2008
[ Parent ]

re: Ayres

Yes, thanks. I'd read some of these before, and have read the Sovacool&Brown book, but there were a few new pieces of Tom's to chew on.

I've reviewed a pre-publication copy of Ayres&Warr book "Energy and work as drivers of growth" which has a lot of good material. I don't think it's too long before that gets out.

-John Mashey

by JohnMashey at 4:18 PM on 09 Jun 2008

Coal prices are up only barely

Anazingdrx --

This has gotten really tedious.

The average delivered price of coal to U.S. power plants in 2007 was $1.78 per million Btu. The same eight years earlier (1999) was $1.22. That's a 46% increase. For a base from which the 2007 price was up three-fold (200%), you've got to go back to 1974.

(Monthly Energy Review, Table 9.10)

Coal prices will be rising, as I said at the outset. But for a price path that will let EE and RE displace coal massively and quickly, there has to be a socially decided and delivered carbon emissions price.

Charles www.komanoff.net

by Charles Komanoff at 11:30 AM on 10 Jun 2008
[ Parent ]

Sean

Well designed output based regulation will lead to less carbon intensive sources of heat and electricity. In the short term, CHP is an excellent bridge strategy that can profitably reduce GHG and lower electricity costs, as long we're burning fossil fuels for process heat. So what happens when centralized coal and natural gas are pushed out of the energy mix and CHP becomes relatively carbon intensive (compared to nuclear or renewables)? Are there other good ways of generating high grade process heat? Or is this not an important question because a properly designed market will give an even less carbon intensive solution?

by David Mack at 1:27 PM on 10 Jun 2008

David

CHP at core is fuel agnostic. I can't tell you categorically that CHP has any specific CO2 signature per MWh without also knowing what the fuel source is. At core, it's simply about efficiency, and for any given fuel, an output-based standard creates an incentive for efficiency.

But to your question, the idea behind an output-based standard as articulated here is that the buying and selling of GHG permits occurs north and south of the average per MWh (or per MMBtu as the case may be), with the average re-calculated each year. Thus, if the average CO2 intensivity falls, the payment one gets for being below that average also falls. And to the extent it falls below your intensivity, you shift from being a net seller to a net buyer of credits.

by Sean Casten at 2:52 PM on 10 Jun 2008
[ Parent ]

Carbonless world endgame

I'm talking about 20 to 60 years in the future when CO2 emissions are down 40-80% from today's level. Let's assume we're in an ideal world where the output based regulation you propose goes through (as well as deregulation of the electricity market and amendments to the clean air act) and we're in a low carbon world where all energy technologies are competing on a level playing field. Centralized fossil fuel generation (without sequestration) has been removed from the energy mix because it by definition has a higher CO2/(MWhr or MMBtu) than CHP. So at this point, CHP is a high carbon energy source compared to whatever carbonless alternatives exist(nuclear, solar, wind or some future technology). I'm asking you to speculate what would happen to the deployed CHP assets. Off hand, I can think of carbon sequestration, burning biofuels or hydrogen (electrolyzed by a carbonless electricity). Or can you imagine a world where CHP combustion is not the most efficient way to generate process heat? It's a bit silly to think this far ahead, but if you can't imagine a world where CHP becomes obsolete, it's not only a bridge strategy, but an endgame strategy in a carbon free world. It would allow you to make the same arguments as the coal utilities about an end game strategy (sequestration in their case) but guarantee a lower cost.

by David Mack at 4:40 PM on 10 Jun 2008

David

Of course. And if/when that happens, fossil-fueled CHP should lose. We have no disagreement there. But that's a laugh-all-the-way-to-the-bank scenario, since - as you note - it is predicated on the precondition of 40 - 80% CO2 reductions. It is, however, the beauty of an output based standard, because it's only good so long as you're beating the average.

It's also why markets do such a better job than regulation. Who cries when Motorola builds a cell phone plant that is renders obsolete by Nokia's new technology? No one outside of the Motorola shareholders meeting. And yet in the power sector, we agonize over what might happen if (God forbid!) someone built a power plant that was rendered economically obsolete by next generation technologies that presented a better value proposition. With all due respect... F**k 'em! Why should society care? What matters is that new actors come along and deploy capital that lowers the cost of power within the context of the regulatory environment, including carbon regulations. If a plant can't compete on those terms, it deserves to lose, be it a coal plant a CHP plant, a solar plant or anything else we might think of. Who loses doesn't matter. Who wins doesn't matter. What matters is that GHGs are priced and the low-cost provider in that environment has an economic advantage.

by Sean Casten at 6:41 PM on 10 Jun 2008

Carbonless world midgame

So CHP is a good investment now (even better if you could capture its full value), but at some point may not be. My understanding is that power generation is very capital intensive and takes many years to amortize the investment. In today's uncertain regulatory environment, how long of an amortization period does an investment need to pencil out? If we had your wish list laugh-all-the-way-to-the bank regulatory regime, how would that affect the amortization period for new projects? I'm guessing that with more certainty about regulation, there would be less risk so investors or bankers would expect less of a premium and you could afford to take longer to recoup your investment.

by David Mack at 8:29 PM on 10 Jun 2008

It all depends, David

I've done CHP projects ranging from 2 - 5 year simple paybacks. How quickly that gets amortized is a question of financial engineering. But my earlier point is that it doesn't matter. Either investors will invest if they won't - but once the investment is made, there ought not be any societal obligation to ensure that equity is recovered (notwithstanding current electric regulatory models to the contrary.)

Would carbon pricing accelerate returns, to the degree it recognized efficiency? Of course. And it would therefore accelerate the deployment of those projects. After that, if the payments slow down and the investment doesn't get paid off as rapidly as was anticipated, it's not Society's problem. The Motorola example is instructive here. If they don't recover their capital because a sexier technology comes along to displace their plant, why should we care?

by Sean Casten at 4:31 PM on 11 Jun 2008
[ Parent ]

Sean, it also depends on management

In the early 1960s, when the US steel industry was being very conservative and was not much interested in losing any returns form their factories, the Japanese were doing the exact opposite -- in fact, they actually tore down steel plants that were never used when they discovered more efficient steel-making techniques. they eventually kicked our butts in the steel industry.

So if a management is hell-bent on sucking every last dollar from their investments, they are going to be much less efficient than managements that, like the Japanese, are thinking about long-term market share. Well, in the electricity generating sector, there seems to be noone around to kick their butts, which is why I find Community Choice Aggregation interesting, it's a way to open up the generating game -- and which is actually a form of deregulation, and of course it should be easier to put electricity on to the grid.

by Jon Rynn at 7:55 PM on 11 Jun 2008

"Fraudulent?"

"...That's a 46% increase"

Whoops I thought you said it was more around " a mere 5% higher ".

Upon which you based this very dramatic pronouncement of "orders of magnitude" of error!

As the graph presented shows quite clearly, in may 2008 coal prices were about 3 times what they were in 2000. having jumped violently this past year.

I am sensing you have based much of your argument for pricing carbon on the "fact" that the market is not making coal prices, and coal fired electricity prices rise on its own.

In my opinion the whole carbon pricing scheme is flawed and motivated more by corporate chicanery and lobbyist trickery than a real concern for the climate. Hedge fund trading our way to GHG cure?

I think your pet project is going the way of ethanol and you are worried. Hehey.

http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin

by amazingdrx at 10:00 PM on 11 Jun 2008

Jon

You're absolutely right that Japanese businesses have historically taken a longer-term view of their investments - a topic on which much ink has been spilled, and not one which I can add much to, other than to note that the couple times I've had Japanese clients, I've found the stereotype to be true.

But note that the issue at hand here isn't a cultural one specifically, but rather one of regulation. In a competitive business, there is an incentive to make capital investments that will lower operating costs. There may be cultural differences that affect the investment thresholds needed to justify the upfront capital, but the incentive remains.

In a regulated utility, that incentive not only isn't there, but a universe of language has evolved that ignores it's absence. Thus, instead of talking about competitive considerations, we talk about our capacity sufficiency, effectively assuming that once a power plant is built, it will always run, and can never be shut down for more competitive alternatives. We talk about average power plant age (about 42 years in the US), and don't stop to think about what that means competitively. (Is there any other industry where a 42 year old plant is still sufficiently competitive to keep running 24/7? I'll grant you, there are a couple examples in the rust belt - your steel mills - but those plants have been throughly overhauled and reconfigured since they were first built. The power plant is largely unchanged.)

That's the point of my comment to David: only in the power sector do we worry about whether or not power plant developers are earning acceptable returns. And it's a dumb thing to worry about. We should worry about whether the economic incentives are such to induce investment in societally beneficial generation. But once that's built, we should not worry about whether actual returns match those that were predicted in their spreadsheets.

We are far off the topic of the original post here, but hopefully this makes sense?

by Sean Casten at 6:16 AM on 12 Jun 2008
[ Parent ]

Yes, it makes sense

My late, great friend, Professor Seymour Melman, was one of the few people that did global analyses of the machine tool industry, among other things. One of the measures that would make him go ballistic is if he found out that a country's machine tool stock was more than ten years old. Now, machine tools are different than power plants, but over 40 years for average age of a power plant is ridiculous.

It may be that the size is part of the explanation, although steel plants are obviously big, and it may be that if the power plants were more modular it might help -- so maybe Csp and wind farms will be more amenable to upgrading one piece at a time, much less a more decentralized system.

Guaranteed return is also something Melman wrote about, but in the military-industrial sector. Those guaranteed profits help lead to cost overruns, lack of reliability, and engineers that picked up bad habits. I don't know if the electrical sector is that bad, but it certainly points to the need for decentralized generation, and things like CCAs.

by Jon Rynn at 6:50 AM on 12 Jun 2008

It's not size, it's regulation

Our current utility regulatory model is driven to a very significant degree by an undue love for the 14th Amendment to the Constitution (the "takings" clause). This has been interpretted through numerous legal decisions, all the way up to the Supreme Court as follows:

Regulated utilities are granted monopoly franchises by the state.
Those franchises include rate-setting to ensure a fair return on capital investment.
Ergo, the state has entered into a contract guaranteeing capital returns to regulated utilities. Any change in regulation that diminishes that capital return is a constitutional violation, since it "takes" cash from utilities that were contractually guaranteed.

It's a logic that has a certain legal logic, but has had disastrous economic and environmental consequences. From PURPA to net metering to utility restruct