Basic economics of thermal

power plants

Sam Cross

19.11.2021

Starting 12:30

–Video first!

(yes, it has

something

minor to do

with energy

plants!)

“For your eyes only”

Kick-off questions…answer in the chat

What is the name of Bond villain dropped down the flue

stack?

About the energy plant there. It was a “coal gas plant”:

- What process is used to make gas from coal?

- What is one of the key reasons why it closed down (in

1970)?

- What is one of the key reasons why natural gas is so

costly in the UK energy market today? (related to the

last question)

- What has been the economic consequence of that for

energy retailers?

Ernst Stavro Blofeld

Carbonisation (Pyrolysis)

North Sea gas

Decline in North Sea gas

production

Some have gone bankrupt, as they are subjected to a regulated

ceiling price on energy sales

Introduction

Basic LCOE methodology

Detailed LCOE

Exercise

Other factors

Summary

Contents

Introduction

Basic LCOE methodology

Detailed LCOE

Exercise

Other factors

Summary

Contents

Key economic indicators:

LCOE: Levelized cost of electricity

> We will cover this today

NPV: Net present value (of a power plant investment)

> We will not cover this today but it is quite simple to

do once you understand LCOE. Join Renewable

Energy Engineering course in spring to understand

better (AAE-E3090)

(TPP = Thermal Power plant)

Capacity cost (or investment,

capital cost)

€/kWe

Or

€/MWe

Remember when looking at data

throughout this lecture:

Generation costs

€/kWh

Or

€/MWh

Easy, but just but careful….

What is LCOE, Levelized cost of

electricity? Average net present cost of electricity generation for a generating

plant over a defined period

OR

Average revenue per unit of electricity generated that would be

required to recover the costs of building and operating a generating

plant over this time period

…thus LCOE is a critical first step to assessing the viability of a

generation project

Introduction

Basic LCOE methodology

Detailed LCOE

Exercise

Other factors

Summary

Contents

Calculating LCOE……

Sum of costs over lifetime

Sum of electricity produced over lifetime

(CAPEX)

(OPEX)

Considering some key LCOE

factors….

1. CAPEX….

Investment (capital) expenditure for different

power plants RES vs TPPs (aka CAPEX)

Source: Lazard 2021

OCGT is

cheapest but

costly to

operate (low

efficiency)

Nuclear is

costliest and has

been increasing

in costs in last

years

More details on capital costs

Here is some IEA data on

capital cost for TPPs (note

some variations compared

to the Lazard source on

previous slide, especially

for nuclear*)

All figures in USD/kWe

Technology Median

Biomass 1 095

Biomass (CHP) 4 689

Coal 1 785

Coal (CCUS) 4 572

Coal (CHP) 2 240

Gas (CCGT) 955

Gas (CCGT, CCUS) 2 619

Gas (CCGT, CHP) 1 092

Gas (OCGT/int. comb.) 668

Gas (OCGT/int. comb., CHP) 684

Lignite 2 973

Lignite (CCUS) 6 891

Lignite (CHP) 1 015

Nuclear 3 370

Solar thermal (CSP) 5 857

Source: IEA Cost of Generating Electricity 2020

*Local case, Olkiluoto 3, €11bn, 1600MW = €6875/kWe = $7800/kWe

2. FUEL COSTS….

Fuel expenditure

Energy content of fuel purchased =

Power generation x 1/Plant efficiency

i.e.

MWh (in year t) x 1/η

= MWh of fuel purchased

So this gives the amount of fuel needed in MWh. So you will need:

Plant efficiency, Fuel energy content conversion factors, Fuel price….

Example Plant efficiencies

For nuclear you could assume e.g. 35%

https://www.volker-quaschning.de/datserv/CO2-spez/index_e.php

Conversion factors for energy

content of fuelsYou can easily find Net Calorific values (NCV) for different fuels online.

But these will generally be in GJ/t (e.g. for coal), GJ/m3 or Btu (for gas).

These can be converted to MWh using tools such as the IEA unit

converter https://www.iea.org/reports/unit-converter-and-glossary

But here are some examples:

Coal: 1MWh p.e. = 0.33 tonnes

Gas: 1MWh p.e. = 100m3 = 3.4Btu

(these are just examples, energy content varies for specific types)

p.e. = Primary energy (content)

Energy content: https://tinyurl.com/5e4vjh5p

Example fuel prices

Coal:

US – Average 2020 sales price: $31.4/t Energy Information

Administration, EIA https://www.eia.gov/coal/annual/pdf/table33.pdf)

Europe: Contract for 2022 supply: $110/thttps://www.bloomberg.com/news/articles/2021-10-27/coal-s-drop-to-a-two-month-low-in-europe-weighs-on-power-

prices

Natural gas:

EU Industrial average, H1 2021: = €0,03/kWh = $0,034/kWhhttps://ec.europa.eu/eurostat/statistics-explained/index.php?title=Natural_gas_price_statistics

NB: Both Coal and Natural gas prices have been very unstable recently!

Fuel price fluctuations – Coal

Fuel price fluctuations – Gas

With these fluctuating fuel

prices, it is hard to predict long

term plant economics!

3. ANNUAL ELECTRICITY

PRODUCTION….

Annual Electricity production >

Capacity factor

Capacity factor (CF) = Percentage of full load hours over a year

In reality capacity factor will impact plant efficiency (partial load,

ramping up and down but we do not cover that here)

Source:

4. OPEX….

Operation & Maintenance costs

Other terms: O&M, OPEX

Maintenance costs for power plants are composed of:

- A fixed part (€/kW capacity installed)

- A variable part (€/MWh production)

Overview of plant CAPEX & OPEX

Source: IEA Cost of Generating Electricity 2020

5. DISCOUNT RATE…

Discount rate

“Real interest rate” = rate of return used to discount future cash

flows back to their present value

For companies making investments, WACC is the most

appropriate term….

What’s WACC?

Weighted average cost of capital = A company’s cost of capital, the

average rate the company expects to pay to finance it’s assets. Raising

capital is done by borrowing (debt) and listing shares (equity) – hence

the need to weight between the two.

WACCnom = Nominal WACC, as above

WACCreal = WACCnom plus inflation, as follows:

Where Infl = Inflation

6. LIFE OF SYSTEM

Life of system (Plant lifetime)

Some default values used by IEA:

Wind and solar plants: 25 years

Natural gas-fired CCGTs: 30 years

Coal-fired power and geothermal plants: 40 years

Nuclear power plants: 60 years

Hydropower: 80 years

Source: IEA Cost of Generating Electricity 2020

Now we’ve looked at the basic

factors, let’s move to a worked

example….(post link in chat)

LCOE calculator for PPP

v3.xlsx

Now: Save a version of the last

file for yourself, you’ll need it

soon. You can familiarize

yourself with it during the

break.

BREAK

Introduction

Basic LCOE methodology

Detailed LCOE

Exercise

Other factors

Summary

Contents

Detailed LCOE

(CAPEX)

(OPEX)

Carbon costs - Intro

Fossil fuel power plants in EU now have to pay for CO2 emissions

by buying permits under EU Emissions Trading scheme….

And these permits have been getting rather expensive…

Evolution of EU carbon prices (post COVID; Fit for 55)

You can also see how difficult this cost component is to predict into the future!

Carbon costs – Fuel emission factors

Each fuel has its own emission factors in CO2 per energy content,

some examples:

https://www.volker-quaschning.de/datserv/CO2-spez/index_e.php

Carbon costs – Plant emission factors

A simple approach that we can use to understand overall trends is to look at

power plant average emission factors in CO2/kWh, examples (these

correspond to both the fuel emission factors AND plant efficiency:

https://www.volker-quaschning.de/datserv/CO2-spez/index_e.php

(OCGT)

Other factors

1) Decommisioning costs at plant end of life > This is especially

important for nuclear plants

2) Capacity cost reduction with economies of scale > If 2 units of

the same type of plant are being built on the same site

I will not cover these in detail but we do look at them in the

following detailed LCOE & exercise…

Lets look at LCOE with all the

extra factors….

LCOE calculator for PPP

v3.xlsx

Introduction

Basic LCOE methodology

Detailed LCOE

Exercise

Other factors

Summary

Contents

Now to exercise…..

PPP Econ Plant

comparison.xlsx

Introduction

Basic LCOE methodology

Detailed LCOE

Exercise

Other factors

Summary

Contents

Other economic factors…

Construction period, investment cost profile

Examples of construction periods (from IEA)

….this implies that in reality, the capital costs do not all come in

one year…

NPV: Net Present Value & LCOE

The NPV of a plant investment project is the difference between the

present value (PV) of the revenue and the costs* resulting from the

investment:

(a) A positive NPV implies that the investment is profitable

(b) A negative NPV indicates that that the project is a financial loss.

(c) Zero NPV means the project breaks even (present value of all

benefits over the useful lifetime is equal to the present value of all the

costs

SO: Costs we already know from what we have done for LCOE. Thus in

principle, the power price for the electricity sold from the plant just need to

exceed the LCOE in order to make it profitable.

But sold electricity is not the only revenue for TPPs in

some countries…..capacity payments

Capacity

mechanisms (CM):

Payments for

available

dispatchable TPP

capacity to ensure

security of supply,

usually limited

scope, only some

plants

Source: 2019:

https://fsr.eui.eu/new-

publication-the-clean-energy-

package-and-capacity-

remuneration-mechanisms/

Introduction

Basic LCOE methodology

Detailed LCOE

Exercise

Other factors

Summary

Contents

Summary

Remember the LCOE definition:

Average net present cost of electricity generation for a generating

plant over a defined period

OR

Average revenue per unit of electricity generated that would be

required to recover the costs of building and operating a generating

plant over this time period

Summary (2)

PLANT CHARACTERISTICS

Capacity factor (%)

Plant efficiency (%)

Carbon intensity (gCO2/kWh)

COST INPUTSFuel cost ($/kWh) Cost of capacity ($/kWe)Discount rate (%)Annual O&M Cost – fixed & variable ($/kWe & $/kWh)ETS CO2 permit price $/tCO2Decommissioning cost $/kwe

In reality, factor such as fuel price and CO2 permit price will vary over life of

plant….

…and factors such as plant efficiency, carbon intensity, O&M cost will

depend on how the plant is used (capacity factor, ramp up/down, partial

loads)

Very complex to assess LCOE in reality!

The key factors needed to calculate LCOE are:

Many thanks!Please fill in presemo for feedback at https://presemo.aalto.fi/pppecon

Sam Cross

Manager – Energy

Aalto Networking

Platform

samuel.cross@aalto.fi

+358 50 4096615

energy.aalto.fi