The cost of displacing fossil fuels: some evidence from Texas

Peter Hartley Although technological progress can alter the relative costs of different energy sources, depletion inevitably must raise the costs of fossil fuels leading to their displacement by alternative energy sources. What energy technology will likely be used when fossil fuels are no longer dominant? More importantly, what will be the cost of that alternative “backstop” energy supply? The higher the cost, the longer will fossil fuels remain viable as an energy source. A higher cost of energy at the time of transition also implies that more total fossil fuels will have been used by then, regardless of the prior trajectory of fossil use. This has implications for the total stock of emissions released by fossil fuel combustion. Finally, a higher cost of the backstop technology will imply there is more of an “energy crisis” around the transition time as resources devoted to energy production and investments are taken from other productive activities. Currently, wind or nuclear are the most feasible alternatives to fossil fuels for electricity generation. Bulk electricity storage will be required to enable wind to meet load, and it may also assist nuclear by allowing plants to operate at full capacity at all times. While many believe that batteries are the storage technology of the future, pumped hydroelectric storage represents more than 99% of current worldwide bulk storage capacity. It is the most mature technology, and is capable of storing large amounts of energy for substantial periods of time. Capacities of operating systems range up to more than 3GW. The plants have 70-85% cycle efficiency and a lifetime of more than 40 years. Batteries currently have limited capacity, limited lifespan, high self-discharge rate, and high maintenance costs. Data from the Energy Information Administration (EIA) implies that the levelized cost of the lowest cost battery system is currently at least 50% higher than the cost of pumped storage. We therefore used the cost of the latter as a reasonable lower bound for costs that could be attained by other bulk electricity storage technologies after further R&D. The ERCOT ISO in Texas provides a realistic model for examining the costs of replacing fossil fuels by wind generation and storage, and for comparing wind power with generation based on nuclear and storage. ERCOT is relatively isolated from neighboring grids, and wind power was almost a quarter of its total generating capacity at the end of 2016. The paper contrasts the cost of meeting the ERCOT hourly loads for 2016 using wind plus pumped storage versus using nuclear plus pumped storage. Both systems also included natural gas open cycle turbine (GT) capacity equivalent to 10% of maximum hourly demand as reserve capacity and to provide ancillary services. We used data on capital and operating costs of different types of generation from the EIA report, Capital Cost Estimates for Utility Scale Electricity Generating Plants. The cost estimates presented in the report use, where possible, data on actual or planned projects in the United States combined with generic assumptions for labor and materials costs. The cost estimates were developed using a common methodology across technologies. They represent the costs of a generic facility in a location that does not have unusual constraints or infrastructure requirements (including needed transmission upgrades). The EIA uses the estimates to develop energy projections and analyses, including forecasting retirements of old plants and the mix of generating capacity additions needed to serve future electricity demand. We found that the wind plus storage system required almost double the storage of the nuclear plus storage system. The reason is that storage has to serve two functions in the wind system. As in the nuclear plus storage system, it has to cope with variations in demand. In the wind system, however, storage also is needed to offset the large daily and seasonal fluctuations in wind output. The high cost of storage then implies that the wind plus storage system is more costly even at unrealistically high real weighted average cost of capital (WACC) values of 10% per annum. Such high discount rates normally would be expected to greatly disadvantage capital-intensive nuclear generation. This result has an important implication. It is often argued that storage would solve the problems with wind generation – its intermittency, non-dispatchability, and generally negative correlation with system load. Our result implies, however, that far from making highly variable and uncontrollable sources of generation more competitive, storage would in fact better advantage stable and controllable generation. With storage, such sources can be used to continuously and reliably supply the average load at low cost. When we allow natural gas combined cycle (CC) and open cycle turbines (GT) to be included in the cost minimizing system, the natural gas plants can provide backup for the wind or nuclear plants at lower cost than pumped storage. Overall system costs are, of course, much lower, especially for recent natural gas prices in the United States, which are very low by historical standards. In fact, the cost of natural gas generation is currently so low that, at a realistic real WACC for electricity investments of 7.5%, natural gas prices would need to be more than triple the 2016 average value before wind or nuclear capacity would be included in the minimum cost system. At a WACC of 7% or above, the cost minimizing solution over some range of natural gas prices involves wind and natural gas with no nuclear or storage. At still higher natural gas prices, nuclear is added. Eventually, as already stated, once natural gas prices are high enough to eliminate natural gas from the system (except for GT contributing emergency backup capacity), only nuclear and storage remain. The fact that the cost of a wind plus natural gas system is less than the cost of nuclear plus natural gas, but nuclear plus storage is less costly than wind plus storage might appear contradictory. The explanation, however, is that wind needs much more backup capacity than does nuclear. When that backup is expensive storage, the system with wind has higher cost, but when it is less costly natural gas plant, the combined system including wind can have lower cost. The fact that a wind plus natural gas system includes more natural gas to backup the variable wind output also means that wind capacity is much less effective at reducing natural gas use, and thus emissions, than is nuclear generation. At a WACC below 7%, nuclear rather than wind displaces natural gas generation as natural gas prices rise. Where the transition is from natural gas to wind, the reduction in natural gas use is on the order of 30%, while when nuclear displaces natural gas the decline in fuel use is more like 50%. A related point is that we find that increases in the cost of natural gas have very little effect on the total amount of fuel used until the price is high enough to trigger the entry of wind, or especially nuclear, generation into the system. A given percentage increase in the price of natural gas raises costs by around 40 times the percentage that it reduces natural gas use. We also found that wind was included in the minimum cost system for a fairly narrow range of natural gas prices (about 3.15–3.7 times 2016 prices for a realistic real WACC of 7.5%). Furthermore, for these prices, constraining wind capacity to zero does not raise total costs by very much. Although it would slightly delay the exit of natural gas capacity from the system, it also advances the use of nuclear. As a result, the ultimate effect on natural gas use and CO2 emissions (especially cumulative emissions) would be trivial to non-existent. Finally, greater uncertainty about the potential marginal climate impacts of CO2 emissions might also favor the use of more nuclear power in the short term by increasing its option value. In particular, if new information reveals a greater urgency to transition away from fossil fuels for environmental reasons, this will be much easier if there is more nuclear and less wind capacity in the system. Link to the forthcoming paper (unfortunately behind paywall).  An earlier working paper version can be found [here].   This article appeared on the Climate Etc. website at https://judithcurry.com/2017/12/14/the-cost-of-displacing-fossil-fuels-some-evidence-from-texas/]]>

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