Energy, Society, and the Environment Unit 3 Energy Economics

Announcements 2/9 Movie Day this Friday: Who Killed the Electric Car? Come to class as usual. You have to attend the second part 11:50-12:40, 1-1:50, or 2-2:50. Locations will be announced on Wednesday and posted on D2L.

Announcements 2/9 Change in the Paper I due date First draft due: 2/25 Final version due: 3/9 Paper Topics will be posted today!! Change in Office Hours: Mon 1-3 pm

Example Questions How much does energy really cost? A coal-fired power plant costs $1,200/kW to construct. Coal was forecast to cost $45/ton but is now $90/ton. What is the average and short-term cost of electricity? A PV system will produce electricity for 30 years. What is the cost of each kWh produced during this period? For a financial institution the answer determines how much to charge for this electricity. For homeowner the question may depend critically on not only the ‘balance sheet’, but also the risk over time, ‘transaction costs’, and the need for up-front payments versus returns over time. If a company makes an investment in energy efficiency improvements, what is the dollar value of the energy that it saves? What are the risks?

Main Ideas When computing costs, one needs to factor in building costs, maintenance, and fuel (where applicable) Payback time: Is it worth the investment? Improvements in technology and production volumes change costs Same analysis is applicable to effects on the environment: e.g., the carbon footprint

2006 costs of electricity generation Biomass Gasification Onshore Wind New Gas New Coal Nuclear H 2 from Gas H 2 from Coal Wave / Tidal Offshore Wind Cost of Electricity Generation ($/MWh) $400/MWh Zero carbon energy sourceRenewable energy sourceFossil energy source Asterisk indicates approximate cost of electricity generation at oil price of $30/bbl $400/MWh Solar PV Source: BP Analysis, NCI Approximate costs of electricity at $70/bbl

Historical Average Weekly Coal Commodity Spot Prices (Dollars per Short Ton) US monthly production is ~ 100 million short tons Tons: lbs US (short) 2000 UK (long) 2240 Metric (tonne) 2204

Source: Comparisons across many technologies: mill/kWh = dollars/kWh

The Learning Curve

Learning Curves Compared

Learning Curves: Costs are observed to decline with production volume and improvement in technology

Simple Payback Simple payback is the time to recover an investment, through savings, without discounting. Example: A compact flourescent light, CFL, costs $6 and uses 20 Watts instead of 75 W. The savings is 55 W for the 4 hours a day that it is operated. Electricity costs 12 cents/kWh

Complications For short payback times, simple analysis may suffice For longer payback times, have to factor in inflation as well as interest rates from other potential investments. Is this the best investment for your $6? How about for $25,000? Pricing and incentives are based on evaluating inflation + interest rates

Life-cycle Cost Life Cycle Cost -- The overall estimated cost for a particular program alternative over the time period corresponding to the life of the program, including direct and indirect initial costs plus any periodic or continuing costs of operation and maintenance, with appropriate interest and inflation rates factored in

Example: Electricity cost for a Natural Gas power plant (¢/kWh) Assumptions: $450 per kW of installed capacity = fixed cost 80% capacity factor 98% of operational costs is fuel 1 kWh = 3414 Btu natural gas price $3/million BTU life time of the power plant is 20 years, energy production efficiency  =0.4 Capacity factor: Actual output/maximum nominal output The reduction is due to equipment failure, routine maintenance, reduced need for electricity at certain times

Electricity cost for a Natural Gas power plant (¢/kWh) $$$$$$$ TIMELINE Initial investment Operational costs += Total cost = Total energy output  Total revenues 0 ¢/kWh

Technology Comparison

Energy Efficiency is a Superior Investment Source: The Vanguard Group Average Annual Return 0%10%20%30%40% Risk Index (year-to-year volatility) 10% 20% 30% 40% 0% Small Company Stocks Common Stocks Long-term Corp Bonds U.S. T-Bills

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

Another Application: Should I replace my car? Carbon Footprint = Carbon Cost for Production + Distribution + CO 2 emissions/gallon x mpg x annual mileage x lifetime of the car In general, keep the car longer (as long as it is getting 20 mpg or so)