How much do you pay for electric power? It’s a question few can answer. On a recent trip to Spain, I asked editors from Europe what they pay in their respective countries, UK, Netherlands, and Germany. No one had a clue. Maybe that’s why the renewable energy industry in Europe is under assault: Discussions of cost are verboten! The most insightful economist of our era, Milton Friedman, often asked after hearing suggestions for action on some suspicious matter: At what cost?
How much to you pay for electricity?
Costs should be an important part of our discussions because someone is paying for the industry we promote whether through purchases, tax dollars, or when an investor risking his own money. This brings us to the cost of natural gas and wind-generated power. They are linked whether developers like it or not because the two industries complement each other.
Let’s start with costs in the wind industry. One way to estimate its costs is with the conservative rule of thumb of $2 million/megawatt of wind power installed. Recent wind farms have been going in at $1.79 million/MW, and that’s good. Quick calculations are easier with the higher figure.
The recent thermal solar complex near Ivanpah, California allows comparisons. It reportedly cost $2.2 billion and is capable of 377 MW peak. So this facility cost about $5.8 million/MW. That is a little pricy but it does have the potential to store a molten salt so power production need not cease when the sun goes down. What’s more, it’s a first of its kind, so if there are follow-on units, well suited for a desert, they should be less expensive.
Turning to natural gas, Bloomberg Energy reports its price, Png, every day. At this writing, it’s $5.12/million BTUs. The figure is useful for answering cost questions. For example, an internet converter tells us that:
3,412,141.63 BTUs = 1 MWh
Hence:
Png = $5.12/ million BTUs x 3.412 MBtus/MWh
= $17.47/MWh
To compare with your home electric bill, the price you pay for power, just move the decimal point three places, like so:
Png = $0.01747/kWh
That is, 1.75 ¢/kWh with 100% burn or conversion efficiency and no additional costs such as overhead, maintenance, or profit.
Assume 40% efficiency (60% wasted) from the power plant, as would be expected if a utility were to convert a coal-fired plant to natural gas. And assume 50% more for overhead and profit. An elementary cost of power, Cp, looks like this
Cp =Png x 1.6 x 1.5
= $17.47/MWh x 1.6 x 1.5
= $41.93/MWh
This is still cheap and the low end of where power purchase agreements start for wind farm owners. But at $5/million BTUs, gas is low in cost and likely to rise. Let’s consider the cost for power at $6 and $8/million BTUs.
Cp6 = $6/million BTUs x 3.412 x 1.6 x 1.5
= $49.13/MWh
Cp8 = $8/million BTUs x 8.188 (8.188 = 3.412 x 1.6 x 1.5)
= $65.51/MWh or 6.55 ¢/kWh, about what we pay in the Midwest.
Xcel recently reported signing PPAs for $25 to $45/MWh and credits its newer wind farms for the low figures. The Production Tax Credit of 2.3 ¢/kWh probably has a hand in the low PPAs as well.
You can adjust the factors as you like. Assume 60% power plant efficiency, a figure possible from new combined cycle plants (1.6 becomes 1.4 but no lower, which would suggest higher and unproven efficiencies), or a higher profit and overhead figure (1.5 could be 1.6 or more).
You see that as the price for natural gas rises much above $5/million Btus it becomes more expensive than power from wind, which should encourage utilities to buy wind power when available and save the natural gas for when the wind subsides.
As suggested, these are estimates and guestimates and I’m open to suggestions. If you have more solid figures, please share.
–Paul Dvorak
Filed Under: News, Policy
This article ignores two very important considerations:
1. The ongoing costs associated with integrating large scale wind generated electricity into an electricity grid are so much higher than for conventional power plants.
2. A MWh generated by happenstance because capricious wind was blowing at that time has a lower value than a MWh generated to order by a dependable power plant.
Any article comparing the cost of generating electricity by wind turbines to that of generating at gas fired power plants which ignores the significant difference in the relative value of dispatchable and capricious MWh to the grid is avoiding reality, thereby damaging the credibility of the argument in support of renewable energy. The truth, even when it hurts is always a good policy, and one which will serve the renewable energy cause better in the long term.