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The Costs of Going Green

Carbon costs will reshape the generation fleet and affect retail rates.

Fortnightly Magazine - June 2009

to about 1.2 million GWh, as existing plants are retired in increasing numbers. At $80/ton, production from existing coal plants in 2030 would fall off the cliff by 85 percent, perhaps just reaching 300 million GWh, if such plants generate at all by then. If gas is less expensive, this conclusion is even stronger.

In sum, what happens to CO 2 prices, whether allowances are granted to existing coal facilities for an extended period to cover their emissions, and what happens to any allowance allocation if a unit retires, all make a huge difference in the mix of generation from existing plants, and the cost of that generation as well. If these plants dispatch less, this in turn affects the amount and type of new capacity required.

Impacts on New Generation

For new generation plants, there also are key break points in evaluating the cost impacts of carbon regulation. However, the impact on the types of new capacity that get built is more dramatic than the impact on existing capacity, as the levelized costs of technologies tend to be grouped more closely together than existing plants, so the CO 2 price has a relatively larger impact. Baseload options and wind facilities have the most impact on providing new sources of power, and they would be the most affected by CO 2 prices. 13

The cost of the new plant clearly is a key factor in making the best decision on plant development. Construction and commodity costs have escalated sharply in the past few years ( i.e., the cost of steel had risen about 70 percent until the early fall of the past year, although it has fallen more recently as a result of the world-wide recession).

The data and projections in Figures 2 through 5 combine into one single levelized figure ($/MWh) all the elements of such costs, including: the capital and financing cost of the plant; the cost of the fuel; the cost of O&M; and the cost of traditional emissions controls (SOx and NOx). For example, Figures 2 indicates that combining all these factors, the current levelized average cost of building and operating a new combined-cycle plant over its lifetime is just under $80/MWh, while the levelized cost of building and operating an uncontrolled (for CO 2) coal plant is about $70/MWh (in 2006 dollars). This suggests that with no carbon controls or regulatory objections, coal plants would be built ahead of gas from a purely economic perspective. However, as the price of CO 2 rises, the cost of generation from coal increases faster than the cost of generation from gas, since coal’s emissions of CO 2 are higher due to both the carbon content of the fuel and the relative efficiencies (heat rates) of the units.

Figure 2 also shows that the break point between building coal and combined-cycle plants (under the model’s expected case) is about $15/ton. The higher the cost of CO 2, the greater the gap, such that at $50/ton of coal, it’s about $13/MWh cheaper, or about 10-percent cheaper, for a plant