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One of the more unfortunate metaphors in recent energy news has been "the natural gas bubble." That phrase always brings to mind kids in a bathtub. From the viewpoint of electrical energy production, the bust in gas-fired generation has met the formal definition of a "bubble" - economic activity driven by "momentum" rather than fundamental supply and demand. The participants have been playing their dreams rather than listening to their customers and suppliers. As is inevitable for bubbles, it has ended in economic waste - in our case, too much hardware and not enough gas. And "not enough gas" really means uncompetitive gas prices that appear here to stay.
The excellent series of articles here in Energypulse.net by Mr. Weissman (1) over the last months have documented well the issues the US faces in our supply of natural gas. His analysis and projections generally match those of the National Petroleum Council’s (NPC) report to Secretary of Energy Abraham (2) – both viewpoints may be succinctly phrased as don’t count on natural gas to provide cheap fuel for future electrical generation. Fields in the lower 48 states are on the decline – an inevitable consequence of resource extraction. Possible significant new supplies inside and along the continental United States are largely locked up due to environmental opposition. Canadian gas is either in the same boat or is expensively distant. Even with a new pipeline to Alaska’s North Slope and deepwater drilling in the Gulf of Mexico, we will need to get into imported liquefied natural gas in a big way just to keep home heating and industrial customers supplied.
The most surprising news to me in the NPC report was the capital cost for LNG infrastructure. To import a benchmark one billion cubic foot per day (bcf/day) of LNG requires a terminal in the country of origin to liquefy the gas, a fleet of tankers, and a terminal on the US coast to re-gasify it and inject into domestic pipelines. All of this, exclusive of gathering fields on the producer’s end and distribution pipelines on our end, is estimated by the sages at NPC to cost $5 to 10 billion.
Let’s take it one step further and estimate the future system costs on LNG-fueled power plants vs. new nuclear power plants.
Given the simplifying financial analysis I’ll be using, we’ll have to estimate the useful lifetime of the LNG delivery system that NPC is proposing. I would guess that the terminal in producing country would have a shorter lifetime than a receiving terminal, given the inevitable depletion of gas but let’s say that the total LNG capital costs can be amortized over 30 years. I’m sure the tankers don’t have a productive life longer than that – I’ve been told in personal communication that an LNG tanker has a design lifetime of 25 years which is rather long for an ocean-going commercial vessel. However, we don’t know since the big ships haven’t been sailing that long. Using 30 years for the whole enterprise seems a reasonable guess - the analysis is not particularly sensitive to lifetime in any case.
Further, the cost of private capital, involving as it does political risks in a foreign country and ships on the high seas, would be relatively steep, say 20%. Receiving terminals in the US have a history of being shut down due to price fluctuations adding volatility to domestic returns. Frankly, setting a hurdle rate for such a massive undertaking is how the Board of Directors of a giant oil company earn their perks. I’m going to use 20% but remember that I have no inside information on the major oil companies’ profit expectations and an actual internal decision analysis would be much more sophisticated.
Since LNG transport is a reasonably mature technology, let’s take the mid-point on NPC’s capital estimate or $7.5 billion. Some projects are going to be cheaper but some are going to be more expensive. A cynical rule of thumb in the US is that the more useful the energy project, the more fierce the opposition. And with the widespread meme amongst the professional worrywarts that each tanker load contains the equivalent energy of a small tactical nuclear weapon, opponents have plenty of ammunition for stirring up the NIMBYs (3). And we can hope that nuclear proponents will not resort to the competitive tactics that the oil interests used against early nuclear power plants. (4)
Putting the above assumptions together into a simple straight-line amortization schedule, just like calculating the payments on a 30 year, fixed rate mortgage, the annual capital carrying cost would be $1.5 billion a year.
It’s going to cost something to keep those sailors on the high seas making the transoceanic shuttle with our fuel. Parts wear out even in LNG liquefaction plants. The harbor masters and the pipe fitters will expect to be paid - we’ll have to add something for operations and maintenance. Until someone has a better guess, let’s say it will cost $150 million a year to operate a one bcf/day system. I’m really playing outside my sandbox here but it wouldn’t matter even if O&M were zero, as you’ll soon see.
The producing countries are going to expect something in return for giving up their gas. It would not be free. I’ve read estimates, maybe wishful, that we can buy plenty of gas at $1.50 per million BTU delivered to the foreign liquefaction terminal. That’s the energy equivalent of $9 a barrel oil. And remember, production costs are no surrogate for prices, only a floor. Our one billion cubic feet a day is going to mean we send someone a check each year for about $560 million. The trend today is for buyers and sellers to prefer spot market pricing for gas, both liquefied and otherwise. Hence, this price will be subject to considerable volatility (5). If the world comes to depend of imported LNG, can an “OLNGEC” (Organization of LNG Exporting Countries) be far behind?
The unit price for landed gas is then about $6 per MMBTU from this set of assumptions. That is somewhat higher than the expectations the gas industry has been promoting of less than $5 gas from LNG yet still within the bounding estimates. (6) If we go with the high end of the capital cost estimate, landed gas looks like $7.45 per MMBTU or the equivalent of over $43 a barrel of oil! Natural gas is good, but is it THAT good?
But we will be needing new, additional combined cycle gas turbine (CCGT) plants to burn this gas. They’ll cost money too, once we’ve supplied the existing merchant plants adequately. If they ran at 100% capacity factor and we use a round number of 10,000 BTU/kW-hr for their heat rate, a billion cubic feet a day would power 4,200 MWe of constant, base load capacity. If we assume that our gas turbines can meet the performance of our nuclear fleet, which is pushing a capacity factor of 90%, then the total installed capacity to use the billion cubic feet a day is about 4700 MWe. At $750 a kW (7), 4,700 MW of combined cycle would cost $3.5 billion. Giving them a break on the cost of capital, we’ll assume that they are in cost-of-service regulation and their capital costs are 10%. We’ll do the same for new nukes latter. Giving the gas turbines a 40 year amortization period seems generous too.
That means that the mortgage payments for new generation hardware will run us $360 million a year. Add in a $100 million for power plant O&M (yet another SWAG but Googlefiable) and the total annual bus bar cost for electricity from running a fleet of CCGTs on one billion cubic feet a day of LNG will cost us about $2.7 billion a year.
Compare that to an equivalent productive capacity in nuclear power plants. A typical evolutionary design nuclear power reactor is about 1500 MW. That ought to cost about $3 billion in capital if we use $2,000 per kW. Given that recent turn-key fixed price bids have been less than that, this includes hefty raises for the nuclear engineers who design and build them (like your author). Amortizing over 40 years at 10%, the mortgage payments would be about $1 billion per year for our 4700 MWe. Of course, the basic hardware is now being designed for a 60 year life with a major overhaul at 40 years but we’ll ignore that. Fuel and O&M should run about $200 million a year per reactor on single sites with some discount for multiple unit sites or another $630 million a year.
Of course, I can hear the screaming now - “What about nuclear waste?” And in a softer, more reasoned tone, “What about decommissioning?” I’ve added the current US Nuclear Waste Fee of one mil per kW-hr sold to my summary of costs. For plant decommissioning, let’s assume a final decommissioning cost of $450 million (8). Reactor licensees use a sinking fund arrangement so I’ll assume a 40 year sinking fund earning a conservative 5%. As you can see from the summary table, both are chump change in the bigger picture.
Bottom line – for the same amount of electricity –
LNG - $2.68 billion a year Nuclear – $1.64 billion a year.
The above is an admittedly simplistic economic analysis but it can not be too far off. For example, taxes are ignored, LNG O&M is a hunch, and non-regulated hurdle rates are only matters of conjecture. Yet, as a matter of national macroeconomic policy, here is a clear business case to prefer nuclear power plants over the LNG-fueled alternative.
Playing with our assumptions a bit, one can force LNG electricity to be roughly equal to nuclear if one assumes the low end of the LNG supply chain capital cost at $5 billion and lower the royalty payments to 50 cents per MMBTU. For perspective on the realism of that latter estimate, the royalties are then just about equal to the cost of nuclear heat IN THE REACTOR. It’s also roughly equivalent to oil at $2.90 a barrel. The spot market might someday see raw feed gas for LNG at that price, but not for long.
We have other choices besides LNG and nuclear. At the delivered prices for LNG, imported oil will be a competitor – if the air quality regulators make the allowances necessary for new oil plants. Combined cycle plants ideally run on natural gas but distillate oil (essentially low quality jet fuel) can be an option albeit at lower efficiency, greater emissions, lower capacity factor, and higher maintenance. The operating and regulatory problems are multiplied if one burns cheaper residual oil. With a current market share of about 2%, it would be a national shame if we were to return to the days circa 1970 when 35% of our electricity came from burning oil. The relative merits of coal-fired generation I’ll leave to others except to say “Not in my backyard!” I can state with confidence that neither oil nor coal would be viable here in my neighborhood (the San Francisco Bay Area) under current regulations.
If I hear another “expert” extol a solar powered future (9), I’m gonna scream. The State of California (who else?) recently built a “demonstration” one megawatt installation, the fifth of its kind and size, at California State University - Hayward. The end result? Electricity at 56 cents a kW-hr (10) averaged over its lifetime excluding the land costs (estimated $4.4 million) and unspecified O&M. The average unit cost for nuclear electricity from our assumptions above is less than 5 cents a kW-hr. Neither price considers capacity credit, for which nuclear is qualified and for which solar is most certainly not. The land dedicated to solar cells required to equal our 1 bcf/day production bogy is over 100 square miles based on the Hayward experience – and Hayward is a fairly sunny place. Can we reasonably expect an order of magnitude improvement in solar costs? I think not.
Of course, the imported LNG-to-electricity scenario is what Enron sold to the Indian government in the Dhabol project, bankrolled in part with a now-defaulted loan of $600 million of US taxpayer moneys from the Import/Export Bank. (11) The stink that project’s failure caused was no bubble in a bathtub.
While my specific numbers are subject to revision and criticism (and tinkering), the take-away conclusion is pretty darn solid – nuclear power will a significantly cheaper source of base load electricity than imported liquefied natural gas. Keep that in mind when you consider our nation’s future energy choices.
http://www.npc.org/ See the Executive Summary, vol.1, page 44, for the capital cost estimate for a reference LNG supply chain.
Here’s a sampling of anti-LNG opinion:
http://www.foepenfro.org.uk/lng.php
http://www.sepp.org/weekwas/2002/Jan5.htm
http://www.thebulletin.org/issues/2003/ja03/ja03havens.html
http://www.greenfutures.org/projects/powerplant/Fay.html
(the last is a cogent and dispassionate accident analysis from an MIT professor)
Experts, Earthquakes, and Nuclear Power Richard L. Meehan, September 1984, MIT Press
For a sanguine view of the LNG market:
http://www.atimes.com/atimes/Global_Economy/EK11Dj01.html
For a more tempered view, see
http://www.netl.doe.gov/publications/proceedings/02/ngt/Quillen.pdf
An optimist’s view of delivery costs is here:
http://www.energypulse.net/centers/article/article_display.cfm?a_id=235
Total agreement with conclusions. What worries me some is a) either current builders of LNG facilities aren't doing this analysis. b) they know something we don't regarding future Natural Gas market prices.
Scary?
James Hopf 2.20.04
Joseph:
I certainly agree with the general conclusion that nuclear SHOULD be used instead of gas for baseload power, for both economic and long term resource management reasons. I'm not sure it WILL happen though, for reasons that I will discuss. First of all, there are some specific errors/omissions in your analysis that should be noted.
Efficiency of Combined-Cylce units:
You assumed a "round number" of 10,000 BTU/kW-hr for the "heat rate" of CCGT units. This heat rate corresponds to the old, inefficient gas units still in use today (i.e., simple turbine or boiler plants). The heat rate for modern CCGT plants is less than 7,000 BTU/kW-hr, and is approaching 6500. This is a significant effect. The fuel costs for gas plants are the great majority of the total power cost, especially under high price gas ($6+) scenarios. We're talking about reducing the fuel cost by almost 35%. This would reduce final power price by at least ~25%. I've also heard that it's $600/kW for CCGT units, as opposed to $700.
Plant financing:
You based your capital (financing) costs on a 10% interest rate with a 40 -year amortization period. This isn't even close to how it's really gonna work. Under such "reasonable" terms, nuclear clearly would have been competative a long time ago, even with $3 gas. I know this point very well, because I used to think that they could get long term loans (like a home mortgage) and was shocked to learn the real truth. It doesn't make any sense, it's unfair, and it is a pet peeve of mine.
Here's how it really works. Apparently, LONG term financing is simply not available, at any price (or interest rate). Apparently, nuclear plants (or other capital-intensive plants) have to get their money from the "venture capital" markets. It being an "ultra-high-risk activity" after all. These people apparently demand to be paid back in full, not in 30 years, or even 20 or 10, but it only a few years. During that time, they demand excessive rates of returm of 20-25%. I've flamed about this in the comment section of many other EnergyPulse articles.
I've seen financial calculations for the "price" of power coming from nuclear plants. The main thing I noticed is that the price can vary wildly, even for a given overnight capital cost and total operations cost (what I thought were the only real variables that affected price), if you merely change arcane variables like "the type of debt (or financing) that you qualify for", "whether or not you have a long term power purchase agreement", "debt-to-equity ratio" (I don't even know what that means!!), etc..., etc..... These "variables" could (apparently) cause price to literally increase by a factor of 2 or more.
To drive these points home (concerning how counter-intuitive it all is) I will stress the following specific point. Whether the plant operates for 30 years, 40 years, 60 years, or 100 years has absolutely NO effect on the calculated price of electricity (whereas the bizarre variables discussed above DO). Basically, Wall St. doesn't give a damn about what happens after the first few years out. The fact that you will then have over 50 years of pure gravy (with no more amortization costs, and total operation costs that are less than half the market price for power) is apparently irrelevant.
You, and many others in our (nuclear) industry, have discussed how the ultra long life of nukes will offset the effect of high initial capital costs. Unfortunately, it doesn't. Not one bit. Doesn't even enter into the calculation. I'm as shocked as you are (and upset). The "free market", and Wall St. are simply way too short-sighted to even think about such things.
This is the reason why we are building ONLY gas, even though it is clearly the more expensive approach if you consider a time period of anything more than just a few years. I heard that investors demanded a 25% rate of return for all those gas plants (~100 GW) that were built recently but never even run (due to lack of demand).
The answer to this (IMO) is to declare that power is too important to be left to the whims of the "free market", in the strictest sense. This is totally at odds with the mindset that it is "vital" and must never be unavailable, etc... Power needs to be thought of as infrastructure. Critical infrastrucure at that. When they build other infrastructure like bridges and roads, etc..., be assured that they do not have to deal with the silly "venture capital market" financing terms I've described above. They can float bonds, at get nice, reasonable, long-term interest rates, with a long borrowing period. All power plants should be able to get the same financing terms. This would help all capital-intensive options, which is pretty much everything except using gas, which is pretty much the sum total of what we want (i.e., clean coal, nuclear, and renewables).
Don't hold your breath..........
James Hopf 2.20.04
continued......
I've seen financial calculations presented by utilities, and what they seem to be saying is that an ABWR with an overnight capital cost of ~$1400-1500/kW would translate into a kW-hr cost of ~4 cents (IF you have a long term purchase agreement, which I think most assume can be arranged). If the capital cost were ~$2000, the price would rise to over 5 cents. The recent MIT study stated that nuclear's cost would be 6.7 cents, and that the estimate is based upon a capital cost of ~$2000/kW. To this day, I can't understand those numbers; how a capital cost of (only) $2000/kW could ever produce per-kW-hr costs that high. Again, those "arcane" factors. They say a capital cost of $1000-1200 only translates into a price of ~3 cents.
By contrast, if gas costs ~$6/MBTU, the corresponding power cost would be ~5.0-5.5 cents/kW-hr (with a fuel cost of ~4 cents/kW-hr, that much is clear). At $4.5 gas, the cost drops about a cent to 4.0-4.5 cents. The basic conclusion is that even the first ($2000/kW ??) plant could compete with gas if it is as high as $6. Following units (for ABWRs at least) will be competative with gas at anything above $4.5. In theory, the "more advanced" units like the AP-1000 could compete with gas at even $3.5-4.0. Based on what I've heard, the future need to use LNG to meet all of US demand will basically set a gas price floor of ~$4. Thus, all but the first nuke or too should be at least about equal to gas plants in the future, with a good likelihood of them being much better.
My final issue with you analysis is more general and philosophical. We've all been conditioned (over the last 10-15 years) to think of gas as the competition, or as the energy source to beat. The radical shift in the gas cost/supply situation has completely changed that. Now the main competition is (once again) coal. You briefly dismissed coal by (suddenly) limiting your discussion to CA, and the Bay Area. Well, a nuclear plant will never be built there either, for that matter, for the same political reasons you cite for the coal case.
It is not the same in the rest of the country. They are open to using both coal and nuclear. And guess which one their utilities are choosing. In response to the ihgh gas costs, more than a dozen new coal plant orders have cropped up (in states like VA, WV, CO, IL, WI, MN, UT, etc.....). NO nuclear plants have been ordered. What's most annoying of all is that none of these plants are the new coal-gassification (IGCC) plants which offer dramatically reduced pollution. The reason given? They are "too expensive". How expensive? Their capital costs are about the same as nukes, translating into a kW-hr cost that is, perhaps, 1.0 cents/kW-hr. Resistance to these non-IGCC coal plants has been pretty token.
This utility behavior is expected. In fact, how could it be anything else? The bottom line is that the utilities make their decisions based upon cost. There is no financial incentive to use cleaner sources (i.e., nuclear or gas). As we all well know, this administration is not about to do anything that will have any measurable impact on coal power prices. There is no signiifcant movement at all to apply significantly more stringent pollution limits, to apply any kind of CO2 limits, or to apply any kind of financial disincentive for pollution (i.e., pollution taxes). I've come to believe that the Democrats would not be significantly different (read Kerry's energy policy carefully).
Under the current (massively unfair, and not about to change) regulatory playing field, nuclear will remain at least somewhat more expensive than coal. The financial risks, and risks of undue external political influence are probably less too (if you can believe that, nuclear being much more environmentally benign and all). For these reasons, I'm not too sanguine about the likelihood of building a lot of new plants right now. It won't happen until policies change so that nuclear gets the credit it deserves for its complete lack of environmental effects.
All of the arguments you gave about nuclear's advantages over gas apply equally to coal, and even more so. Both nuclear and coal are completely domestic sources, with a basically unlimited fuel supply. They both can generate as much power as you want, on large-scale, without having any fear of the fuel running out or getting expensive. From an economic and resource-management point of view, both are just great for baseload generation. They only difference is cost, and coal is less expensive. That is the main "hole" in your argument. We all know that nuclear or coal will have to step in to provide most new baseload generation. The question is which. Here, the only case to be made for nuclear is the enviromnental case (to offset the somewhat higher price). Once again, and in conclusion, unless things change........
Joseph Somsel 2.20.04
Please don’t accuse me of being naïve. I did mentioned that this was a MACROeconomic model and not a particular project business case analysis of a particular firm’s financial situation. It was posted as a discussion of overall energy economic policy concerns. Hopefully, the analysis persuades policy makers that the laws and government policies under which firms operate in the US should be framed to support the more widespread deployment of nuclear power rather than increased importation of liquefied natural gas. Fundamentally, the “big picture” of energy economics operates without regard to tax codes and government-imposed quotas – the art of good government is in NOT writing laws that disregard the eternal verities of economics. Unfortunately, we’ve been busy doing just that since Jimmy Carter and the prospect is for more of the same.
As to specific points – I think the heat rate variance is largely explained by the difference between Higher Heating Value (HHV) vs. Lower Heating Value(LHV). Use LHV unless you want to make your boiler out of stainless steel. The capital cost for CCGT will obviously vary with the site and local air quality jurisdiction and with the market for plants. When there is a three year waiting list for new machinery, the capital price will increase, as it did during the recent boom. You can google these factors and you’ll see some differences in figures – I’ve tried to use those which seemed most realistic and appropriate for the analysis.
My use of a 10% cost of capital for nuclear is predicated on an overall cost of capital for a very large regulated electric utility where the burden of a new reactor is buried in the firm’s overall, on-going cost of capital. James Asselstine, a managing director for Lehman Brothers and a former NRC Commissioner, gives some interesting public presentations on this matter – I’ve adapted (or perverted, depending on your point of view) some of the analysis he has publicly presented. I have heard him respond that 14 to 15% is a reasonable number to use for a new nuke in a deregulated financial environment. Again, I’m advocating a new regulated electric utility structure, not the least because it helps us build more nukes.
The bottom line is nuclear electricity will be a better deal for the nation than electricity from LNG – policy makers need to make sure that they don’t muck it up.
James Hopf 2.20.04
New Energy Policy Act:
To finish this diatribe off, I'd like to discuss the latest, "slimmed-down" version of the Energy Policy Act that has just been submitted to congress.
As many of you know, the original bill contained loan guarantees for 50% of the financing for the first ~6 new nuclear plants. Even though this measure survived a specific amendment vote, they still took the provision out because of "opposition", and replaced it with a production tax credit of 1.8 cents/kW-hr (similar to that received by renewables - but only for the 1st 6 plants and for the 1st few years of operation).
The Act failed last year (over unrelated MBTE provisions). This year, due to unrelated increases in the estimated costs of the prescription drug benefit bill, they were under pressure to reduce the cost of the Energy bill. They cut the overall costs in half. Well guess what! All coal provisions were retained at their original funding level. Loan guarantees for an Alaskan natural gas pipeline? Retained. Extension of the 1.8-cent renewables tax credit (which would otherwise expire this year)? Retained, at the full 1.8-cent level. The nuclear provisions? You guessed it. Were they merely cut in half (to say, a PTC of only 1.0 cents)? Hell no. They were eliminated.
Let me summarize, under current energy policy, and with the changes from the new bill, EVERY energy source receives massive govt. support EXCEPT nuclear, which receives virtually no govt. support at all (just a few dollars for research, but nothing tangible).
This makes it pretty clear to me that nuclear has, by far, the weakest lobby on captial hill. I also can't shake the notion that the powers that be have come to a concensus that we will keep all our existing units, and even extend their lives to 60 years, but we will build no new plants. Even Kerry support life extension (you'll note), but careful analysis shows that there is absolutely no support for building new plants. Despite his lip service, this is the policy of the Bush administration as well. As I discussed earlier, under Bush policy, nuclear will never have a chance to compete against coal, so no new plants will be built, period. It's just meaningless talk (or verbal "support"). It is not backed up with anything tangible. I have read in several places that the administrations real priority is supporting coal (if it wasn't obvioius enough from their policies, like New Source review, gutting of air pollution regulations, etc..) What happened to the coal versus the nuclear initiatives in the revised energy bill is a perfect example of this.
Did you know that, even before the new energy bill, the govt. already offers loan guarantees for 80% of the financing if you want to build a "clean coal" plant? These are similar to the nuclear plant loan guarantees in the Energy Bill that were ridiculed as being way too expensive, or too risky. Senators said that is was "pork barrel" and that these plants should be left to the "free market". What a load of crap! What hypocrisy!
But if your proposing a 20 billion natural gas pipeline from Alaska, apparently these arguments just don't apply. This reminds me of something I forgot to mention on the main article. It discussed the large costs of the necessary infrastructure to support the huge rise in natural gas demand. My response? Don't worry, I'm sure the govt. will just subsidize it.
When you look at Kerry's energy policy, he supports literally everything else BUT new nuclear (he supports renewables, gas, and new "clean" coal). When you closely examine Bush's policy, he clearly supports coal, as opposed to nuclear. He will NEVER give nuclear financial credit for its environmental advantages (you'd have to care about the environment to do that!). When you look at the Energy Bill, it clearly support everything else except nuclear. Perhaps I'm being too negative/paranoid, but right now the writing seems to be on the wall. The new energy bill just submitted made it all perfectly clear to me. This is especially true when you consider that this bill was produced despite the fact that one of the industry's main supporters is head of the energy committee. In other words, as bad as it is now, it can only get WORSE from here (i.e., if anyone else were in that seat).
Let me finish with an apology, Joseph, for being so negative. My attitude here (over all 3 posts) is largely due to the fact that I had just read the latest energy bill text (the latest insult!), and I'm in a very negative mood. It's part of the reason I was being so criticial. The only thing I really would hate to see is massive use of coal (non-IGCC coal at that!). At this point, it looks like that's all I'm going to see in the future. That along with a trivial amount of renewables thrown in for PR window dressing. Screw the enviromnent! Screw global warming! I just can't stand the hypocrisy.
Len Gould 2.20.04
James: Your experssed disappointment with capital markets is exactly why I am negative about "deregulated" for-profit energy generating companies. The only way to finance projects with a net return horizon of 20, 30, 40+ years is with assurances of a government regulator that, no mater what happens, a reasonable return on capital will be assured.
All the hot air about the greater efficiencies of free market investment is just that. Hot air. Pitched by fast-buck artists to fleece rubes and suckers. Too bad it can't be harnessed for generation.
Joseph Somsel 2.21.04
Mr. Hopf,
Your comments came out to over 2500 words -so far. The original article was only about 2000 words. May I suggest you submit your own article and go through the normal editoral process.
James Hopf 2.21.04
Joseph:
Perhaps I was the one who was naive, concerning CCGT heat rates. I wasn't aware of significant variability in heat rates for a given unit. The numbers I've always read about were those published by the builders of these systems. I should have been more cognizent of the degree to which it may have been a "sales job".
Concerning financing, all I can say is that I'm hearing different things from different sources, and I do not understand the economic calculations enough myself to determine who's right. I've heard about the very high ROI terms and the few-year payback period from a few sources. Some of the cost numbers, and statements about the variables that affect cost, come from presentations given by Entergy, and others, i.e., the utilities that are considering building the 1st new plants. Once again, I dont know who to believe. I hope that your sources are right!
I feel the way you do about returning to a more regulated structure. I'm sure new nuclear would pass financial muster under such a system. I'm not sure exactly what market structure Entergy was basing its numbers/presentation on. I think it was under a market system, for the most part. I feel (as you do, I think) that there are many limitations of the "totally free" market, and long-term public goods that it is blind to. As pertains to nuclear, IMO the financial market's have an excessive percption of risk, and have an extremely unhelpful short-term focus. I must stress that my comments were not criticism of you or your article, but were a venting against current Wall St. attitudes and practices that I abhor.
As you discussed in your 1st comment post, this issue will require policy input. You characterised it (the two potential paths) as a policy decision, one that you hope they don't "muck up". I agree that policy input will be required. Based on my understanding of the "purely free" market, it seems that that "market" will choose the LNG path, if there is no policy intervention, despite the fact that it will cost more in the long term. Concerning whether they will "muck it up", I'm afraid my attitude is not positive right now. As discussed in my 3rd post, the "new" energy bill seemed to make policy-makers attitudes towards nuclear power pretty clear to me.
I read your upbeat article just after reading the energy bill. I apologize for using the (public) comment forum for your article to vent my frustration about the bill. You're right, perhaps I should have written an article about it. Let me finish by stressing that we actually agree on just about everything concering energy policy, nuclear energy, etc... It was just a (temporary) divergence in attitude and outlook (neg. vs. pos.).
Tom Tanton 2.23.04
The persepctive of Wall Street to look at short term returns is through no fault of theirs--it has been driven into them by regulators and a fickle public who decide to change the rules every so often. Of courses nobody finances for a 20 year term only because ten yars from now that investment may look poor because some government policy wonk decides he doesn't like the technology. 35-40 years ago nuclear was favored--then dispised. Before that coal was favored--then dispised. 15-20 years ago natural gas was favored--now dispised. Today's favored (wind) is beginning to see disfavor.
I share everybody's frustration--let's just place it where it belongs, which is not Wall Street.
Len Gould 2.24.04
Regarding your estimates of new nuclear generated electricity costs, you're way too high. Ontario Power Generation "a statement by Ontario Power Generation in January 2002 claimed that electricity from the refurbished Pickering A plant (see related FAQ) would cost CDN$0.03/kWh," Thats about US$0.025/KWhr. Further, AECL's new ACR is anticipated to significantly reduce that through a 30% reduction in capital cost/MWe.
Also of interest, this statement. Reference "Chernobyl Ten Years On: Radiological and Health Impact" at http://www.nea.fr/html/rp/chernobyl/c05.html
"Regarding overall cancer incidence or mortality, no increase has been observed that could be attributed to the accident. The risk of leukemia (normally a sensitive indicator of chronic radiation-induced effect in a population, due to its short latency period and well-understood radiogenic behaviour) does not appear to be elevated, even among the hundreds of thousands of recovery workers who particpated in the clean-up following the accident. There is also no scientific evidence of any other non-malignant disorder due to the accident."
Martin Koller 2.25.04
Josef
I strongly disagree with your argumentation concerning heat rate and unit price. With 700$/kW you took the upper range for a modern high efficiency combined cycle plant. With 10'000Btu/KWh you took a number that is correct for gas fired single cycle peakers. A modern high efficiency combined cycle plant has a heat rate around 6000 Btu/kWh - LHV (ALSTOM's KA24-1: 6028 Btu/kWh - LHV).
Martin Koller
Jim Harding 2.25.04
There are a number of problems with the analysis.
First, the combined cycle heat rate assumption is far too high. (High and low heat values refer to variance in the BTU value of a cubic foot of natural gas, not conversion efficiency in a gas turbine.)
Second, the cost of money used for investments in LNG, combustion turbines, and nuclear power probably isn't all that different. All will require rates of return and equity/debt ratios that are higher than you'd have in a stable, vertically integrated, cost of service based industry. I'd start with a 15% return on all these investments, whether they are undertaken in Indonesia or North America. I do not believe that you can wish your way back to a lower cost of money any time soon, regardless of industry structure. Restructuring is not just a matter of shifting state and national regulatory policy. You also have cyclic markets for gas and electricity, technological changes in both generation and transmission, and legal and political forces - any one of which can rear up and make a long term investment look stupid, and ultimately unrecoverable. Those factors affect the investment perspective of utilities (or independent generators) whether they are in deregulated markets or traditional markets.
Finally, didn't see an adjustment for the nuclear capacity factor.
I'd pencil it out as follows.
A one BCF/d LNG system would support 7100 MWe of CC capacity operating at 6700 BTU/kWh and 90% capacity factor. At 15% ROR for the various capital investments, and using the author's numbers for the other components, the annual cost is a little over $2.5 billion. Ca 4.6 cents/kWh.
To get the same output from reactors (assuming 75% capacity factor), you'd need about 8500 MWe of capacity. At $2000/kW, with the author's assumptions for O&M and fuel, I get about $3.7 billion of annual revenue requirement. Ca 6.6 cents/kWh, and not too far off from the math in the MIT report.
Robert Booth 2.25.04
Joseph:
Although I would agree with a number of comments raised by Jim H. and others, it is refreshing to see an author presenting figures and assumptions to back up a conclusion. Apparently this inspires a synergistic, dialectic process as industryexperts help refine your analysis by taking shots at your straw man.
I hope you will consider submitting a revised summary after the straw settles. Bob Booth
Len Gould 2.26.04
Jim Harding: Refreshing input, though I take some exception to:
a) Your use of all advantages of most recent developments for CC gas (6700 BTU/kw is very agressive), yet grant no new technology to nuclear in 30 yrs. (No new design would accept a 75% capy. factor. Best operators currently can get >100% of original design capy's).
b) Using authors $1.5/MMBTU royalty hides a huge uncertainty factor which would have to be factored into any calculation. My guess, for the long time frame considered e.g. 30yr capital amort., this should be adjusted to be equal to comparable figures for crude oil and given a risk escalator factor for Hubberts Peak World.
c) Using 15% on all capital is failing to account for author's stated additional risk of over half of capital for LNG being invested in high-risk overseas areas of the world. I think his 20% / 10% ratio should be fair even if low according to your 15%. Can capital markets really demand a 15% return on something like an nth of kind repeat nuclear generation station? If so, we need to go back to regulated monopolies.
d) Risks of LNG supertankers en route and in harbour may add significantly more.
My penciling would still put nuclear below LNG, and the further out the time frame, the further below.
Alceste RILLI 2.27.04
Dear Mr. Somsel,
I agree with your overall statement that the cost of the infrastructure plus power plants for gas is way greater than that for nuclear.
However, I believe that many of the costs of the infrastructure for gas have been severely underestimated.
The cost of the pipeline for gas is about 3 million dollars per chilometer. This is in the case of very favourable terrain. For unfavourable terrain or tunnels or underwater, the cost can double or triple. In case LNG tanks are used instead of pipeline, the cost is 50% higher than that of pipeline.
Since gas will be coming from outside the USA, no less than 6,000 km must be covered (from “the other gulf” it is going to be an additional 3,000 km). That is, minimum. For 6,000 km some 50 tankers (a gas tanker costs 3 times a comparable size oil tanker) would be floating on water at any given time to allow for that flow rate of methane (by the way, along the trip, they evaporate methane to the atmosphere, to keep it liquid). The cost of that infrastructure cannot be much different from 50 billion US dollars (from “the other gulf”, much greater). Unless it is done as it has been done in the past decades, i.e., to force gas into the throats, claim portentous technology improvements, never occurred, while in reality subsidizing the cost of the infrastructure (Enron, the housewife, etc), as you correctly mention in your article. You cannot blame them too much afterall: this is common practice; when you buy a car in the price you do not pay for traffic lights, asphalting the roads, paint the zebra crossing etc, while when it comes to nuclear they see subsidizing every where, exactly where there is none and none is necessary. The heavy subsidizing of gas? They do not notice.
Plus we need to bring that gas to the power plants. Say 5 1000 MWe plants, 400 km each, one gets an additional 8 billion dollars. This is not included in your analysis. Remember that the “it-is-included-in-the-price-of-the-gas-company”-game cannot be played anymore.
So your 7,500,000,000 must be replaced with 58,000,000,000 (very minimum). In fact with your estimate you end up with a 6 $/GJ, which barely covers the cost of a 2,500 km pipeline on easy ground, 3% interest rate, and if wellhead gas is sold at 3 $/GJ (today, heavily subsidized, it sells at 6 $/GJ).
You use a 34% efficiency for gas, but for combined cycle, they can now claim 51% (even if it is much less in real life and at the cost of zero flexibility on load following).
In your article greater emphasis should be given to the comparison between the cost of the gas infrastructure versus that of nuclear (all included) before financing. It would then be very clear who needs subsidizing.
To finance the gas infrastructure you correctly use 20% for interest, but only 10% for the gas power plants. It is hard to understand why the risk of financing the plant should be less than that of the structure needed to fuel it: a plant with no fuel will not pay back the capital. The capital is lost. For nuclear, being the risk zero once undue encroachment of external forces during construction is removed, the interest rate should be 5% (2% for inflation and 3% for profit on invested capital. i.e. capital remuneration). Ensuring 3% profit over inflation will make the investor jump up and down with joy nowadays, in the real world.
I also believe that all the costs for maintenance that you use are too high for nuclear and too low for gas.
For the NPP construction cost, today nuclear power plants designers sign contracts at 1400 $/kWe and are ready to do so at 1000 $/kWe for four or more plants.
Due to all the above it is possible for you at the end of your article to find conditions under which the enormous capital bourden necessary for fossils (coal included) can be made to approach the comparatively tiny one necessary for nuclear.
In conclusion a fair and balanced comparison of the capital to be financed, would show nuclear to be half of that for pipelined gas and 1/6 of that for liquefied gas. That’s why gas is subsidized at federal, state, local and company level.
Best regards
Alceste RILLI
Engineer – CIRN (Comitato Italiano per il Rilancio del Nucleare, Italian Committee for Restart of Nuclear)
Roma 040227V1052
Joseph Somsel 2.27.04
Thanks to all for your constructive and enlightening contributions. Let me address some of the points raised.
First, heat rate assumptions. I think I dated myself by using 10,000 BTU/kW-hr – that’s solid for a gas-fired steam turbine. I did some research before using this number in my initial calcs but apparently, not enough. A call to a friend at a leading A/E revealed that a reasonable design target is 8,000. I checked the EIA historical databases of actual plant performance and found that last complete annual data set to be for 2001. The preliminary reported production and consumption figures, assuming 1030 BTU/cubic foot gas, shows that the top ten utility CCGT plants averaged 7800 BTU/kW-hr. All 22 plants over 1 million MW-hr production in 2001 averaged 8,725. Congratulations to the City of San Antonio’s von Rosenberg plant for highest efficiency at 7,070. Merchant plants may or may not beat these numbers. I propose that 8,000 is a good number for prediction of future performance.
This changes the numbers somewhat. It increases the CCGT capacity needed and available. Likewise, an proportional step in nuclear capital costs is necessary. O&M costs for both options increase too. This will decrease the nuclear advantage. I’ll provide a recalculation later (Monday?) using the 8,000 BTU/kWe heat rate.
As to Mr. Harding’s question about relative capacity factors, the US nuclear industry has established a solid performance record of 90% capacity factor industry-wide for several years now. I explicated stated in the 12th paragraph that I would share this enviable record with CCGTs so both options use nuclear’s historical performance.
I purposely ignored internal gas transmission expenses in my analysis. First, for the US, most of our population is on the coasts yet most of our production is on the interior or otherwise distant from population centers. LNG terminals will likely be on the coasts too, near the CCGT plants and other power consumers. Only a few our inland waterways could handle ocean-going LNG tankers at competitive tonnages. Hence, gas pipeline transmission will be displaced by LNG, not increased. Transmission will be shifted from end-loads on the coasts to interior consumers. This may not be the actual case but I tried to give LNG the benefit of the doubt and did not debit pipe transmission infrastructure costs. Italy and other countries may have a different set of circumstances of which I’m ignorant and for which gas transmission costs may be a relevant factor.
Mr. Rilli’s point about the risk of the consuming device should be covariant with the risk of its fuel supply is well taken. However, for the US, the market share of LNG will be small for many years to come and so the CCGTs may have optional sources of supply besides LNG. That means that the CCGTs should share only a fraction of the risk of the LNG supply chain. This is an interesting second-order effect that certainly should increase LNG electricity costs.
In the longer run, as the LNG infrastructure and markets expand, LNG will become a wider substitute for petroleum on a global scale. Hence, market prices for LNG and crude oil will equilibrate - LNG at $43 per Barrel Oil Equivalent (BOE) will not happen if oil is $20 a barrel. Likewise, LNG at $3/BOE is not likely to be a realistic planning figure for a multi-billion dollar investment.
As to cost of capital, a major goal of cost-of-service utility regulation is to reduce capital charges. Using 10% for CCGT plants and for nuclear plants requires that these generation assets be under classic regulation. The rate payers can decide through the political process whether they want to assume the risk at 10% or pay Wall Street investors to assume the risk at 15%. I think it unlikely that new nukes will be built at 15% where the higher initial cost is a large disadvantage. CCGT have been built at 10% and at 15%, depending on ownership structure. I again shared the benefit of lower capital charges with LNG. While specific financial arrangements will be made between stakeholders, a broad brush cost of capital analysis as I’ve provided here captures the costs of societal investment and should be the basis for policy formulation.
And, yes, coal is the competitor to both nuclear and LNG electricity. “Dirt burners” are a vital part of our energy infrastructure and will remain so. I’m choosing my battles here and will leave coal to others, or at least to a later time.
Len Gould 2.27.04
Following are what I came up with for the LNG supply chain efficiency and costs. Extremely difficult to separate out fuel use in process from other O&M, so O&M w/out fuel use simply an estimate at 5% of capital/yr
3.3 mmt (170 milliom MMBtu) / anum LNG compression and loading faciltiy in Oman cost US$2 bilion. [] http://www.omanlng.com/htm/lng_facts/calculator.asp
LNG initial liquifaction uses approx 12% of input energy. http://www.transportation.anl.gov/pdfs/TA/281.pdf Guessing a good negotiator could get this cost deducted from the royalty for the first few years.
LNG ships 24 day round trip, 50,000 tons ($170 million ea)
LNG ships fuel use 1.5% http://www.transportation.anl.gov/pdfs/TA/281.pdf
1 BCF/day (7.3 mmt/yr) LNG recieving terminal (Texas) US$600 million
Bottom line is, a single port with 1 BCF/day capacity (12,000 Mwt) needs 2.25 loading terminals + 10 ships to operate continuously from Mideast. Total capital = $6,800 million, or about $500,000 / MWt.
Adding in the current $655,000 / MWe for a new CC Gas generation plant (http://www2.bv.com/news/solutions/sol22003pdf.pdf) and fixed O&M $25/Mwyr and using BV's 7070 heat rate takes us to ( 7070/3412 * $500,000) + $655,000 = $1,691,000 / MWe capital cost for a barely working system.
Given the large proportion of capital exposed to high risks in foreign countries or on high seas, the short life expectancy of ships and the uncertainty of e.g. Sultan of Oman's valuation of the source gas (A single 48" pipeline into India, China orTurkey would put ten of these systems out of business) it seems almost insane to consider this for electrical generation when, as A. Rilli points out or AECL will confirm, you can put up a group of reactors for the same investment and ignore the $1.5/MMBTU royalty for the price of a few fuel rods.
Alceste RILLI 3.2.04
Number of tankers necessary. (1 109 ft3/day) (1/610 gas-liquid) (1/2.3 106 ft3/tanker) = 0.72 tanker/day. So every 1/0.72=1.4 days one 65,000 m3 tanker has to hit the port.
Tanker can go up to 40 km/hr but real life speed (wavy sea, Suez Canal, etc) is 20 km/hr (which includes favourable currents). So tankers must be 20 km/hr 1.4 days 24 hr/day = 672 km apart and closer.
From Oman to the Texas coast there is a 16,800 km distance. One thus must have 16,800 2 1/672 = 50 tankers floating on water at any given time. The round trip will take 16,800 2 1/20 1/24 = 70 days plus 1 day for loading and unloading plus 14 hr for the Suez Canal. Total 71.5 days. 50 71.5/70=51 tankers.
During the liquefaction 8% of methane is used.
During transportation 1 to 7% of methane is used to fuel the tanker every 1000 km; 33,600 km 1/1000 7% = > 33.6 to 235% of methane is used as fuel (I’ll use 33.6%).
Methane is kept liquid by vaporizing it 0.25 %/day 71.5/2 = 8.9%.
Regassification 2%
Piping to and from facilities 2%.
33.6 + 8.9 + 2 = 44.5 (8% and 2% piping to liquefaction not included)
51 tankers 1.445 = 74 tankers. Since storage capacity at the receiving port is 4 days, some more tankers are required to ensure continuity and allow for maintenance (tankers life expectancy not included).
And this is just to fuel 7 1000 MWe combined cycle plants (for efficiency 47% could be fair but real life methane heat power is much less than generally used).
One must remember that the energy plan asks for 1900/20=95 new plants a year.
If the power plants are not located at the center of consumption two problems arise. 1) Blackouts: plants not at the center of consumption with long distance transfer of big amounts of power and local power margin reductions are the cause of all the blackouts that for the first time after 40 years have resurfaced in California, NE USA, Italy, Scandinavia, UK; 2) Subsidization of gas (one of the many); in fact if plants are placed close to the regassifier the consumer will pay (one way or the other) 15 10-3 2.4 109 kWh/yr 7 plants = 0.25 billion dollar per year. Over a 30 years period it is 7.5 billion dollars.
Best regards
Alceste RILLI
Roma 040302M1225
Joseph Somsel 3.9.04
Adjusting for a real world heat rate of 8,000 BTU per kW-hr changes the numbers somewhat but the conclusion not at all - uranium is a significantly cheaper fuel for electricity than imported liquified natural gas.
The production costs for LNG go up about $150 million per year while nuclear costs increase by about $400 million:
LNG $2.8 billion
Nuclear $2.1 billion
I believe my analysis has been generous to the LNG option and rigorous for the nuclear option yet LNG is over a third more expensive for the same electrical production.
Thanks to all for the constructive dialogue.
Joe Somsel
Murray Duffin 3.10.04
This is a most interesting discussion, and I would like to thank everyone, especially for the quantifications. Two points on quantification: 1) I have seen unloading times quoted as 3 to 6 days, never 1 1/2 days.
2) $170 million/tanker seems optimistic. Prices like that were projected briefly, but the demand for tankers is requiring construction of new shipyards, and the price of steel for hulls is already going up. $250 million/tanker is probably more realistic.
Both of these points simply make the case for LNG worse, which brings me to the real point, - there is probably no competition between Nuclear and LNG in the first place. NG production in North America is already in decline, and if the the average decline rate over the next several years is only 1.5%/yr we will not be able to build enough tankers and regasification terminals to keep up, at least not before 2012, and I used a lower number of tankers than Mr Rilli to reach that conclusion.
Since there have been no coal or nuke plants built in a decade, NG plants intended mainly for peaking are being run for base load now at an increasing rate, increasing the demand for a declining supply of NG. No one is going to build new LNG fired plants.
As someone suggested above, the real issue is between coal and nuclear. Murray Duffin
Rodney Adams 3.10.04
All - Extremely enlightening dialog.
Reminds me of listening to the engineering students at my rather technically focused college discussing their homework assignments. They could go on and on about slight variations in assumptions and numbers.
As an English major, I was always a bit more interested in studying human behaviors and motivation through the study of literature. Largely for monetary reasons, I choose to enter into nuclear power training after graduation.
My literature background is now combining with my nuclear training. I understand all of the solid benefits of the technology, and I also understand why it is not very popular among established interests in the energy business.
The fact is that nuclear power development threatens the prosperity of all of those people panting at the idea of building an LNG infrastructure and those who are gleefully anticipating selling oil and coal in an energy market that is expensive enough to include LNG. All of those dollar generated smiles disappear when nuclear power enters the picture and spoils the party.
Nuclear is safer, cleaner, cheaper, more reliable and more abundant that its fossil fuel competitors.
Rod Adams www.atomicinsights.com
Joseph Somsel 3.11.04
I wish that Mr. Dufflin's point about there being really no competition between nuclear and LNG was in fact an obviousity clear to all. Unfortunately, this is not the case. It seems that the current public discussions of future electricity generation are dominated by the LNG option. Until I sat down and did the numbers myself, I too though it was a push.
Even with 1) giving LNG a producer's price a quarter of the current market price for crude oil, 2) taking only a mid-range of petroleum industry capital cost estimates, and 3) giving their CCGTs every performance and cost of capital break, LNG still is the most expensive of our three realistic generation options.
Many of you commenters have pointed out that my analysis of nuclear used unduely harsh assumptions of nuclear costs and expenses. Guilty as charged! Others have complained that CCGT performance is much better than historical evidence supports - to that I can only point out that the EPA says my automobile gets 35 mpg on the highway.
I hope this article makes it clear - even to our poli-sci-majors-turned-lawyers-turned-politicians - LNG is and will be more expensive than nuclear power.
