firebox wind-gas paper
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The Economics of Wind Energy ◆ NAPAC May 2011
1
Wind-‐Gas Hybrid Power Plants Next Generation Power Resources
North American Petroleum Accounting Conference | May 2011
Michael Schiller Managing Director
Firebox Research & Strategy LLC
The Economics of Wind Energy ◆ NAPAC May 2011
2 Gas-wind relationship: one view…
“Wind and Natural Gas: Frenemies Forever” Wall Street Journal, August 18, 2009
• Key point: – Wind displaces gas as a
source for power generation
The Economics of Wind Energy ◆ NAPAC May 2011
3 A different view
“Calpine’s Cartwright Plots Renewable Shop” Power Finance & Risk, July 16, 2010
• Key point: – “We think [hybrid facilities] are
going to be the workhorse of the power industry going forward.”
Peter Cartwright
The Economics of Wind Energy ◆ NAPAC May 2011
4 Our discussion today
• The goal of this presentation is to look at this potential direction for power generation facility development over the next few years – With the question of do wind-gas hybrid projects make sense?
• Our Analysis – Driving factors pushing wind-gas hybrid facilities – Operating Characteristics – Benefits – An opportunity?
The Economics of Wind Energy ◆ NAPAC May 2011
5
DRIVERS TOWARD HYBRID PLANTS
The Economics of Wind Energy ◆ NAPAC May 2011
6 The holy grail of power production
• Is low cost, stable fuel and generating technology • That ended with the 1974 Oil Crises
• After 1974 the power industry moved away from petroleum fuel to first coal, then nuclear and now toward greater diversity in fuel sources
• Today utilities seek to create diverse fuel portfolios that minimize the risk of being too dependent upon a single or even just two sources of fuel
• But getting there is difficult…
The Economics of Wind Energy ◆ NAPAC May 2011
7 The primary power fuel
• Coal is the leading source of fuel for power production in the US
– It’s cheap, it’s plentiful and getting it from the mine to the power plant is easy and reliable
• It fuels nearly half of all power in the US
– And for many states, coal is almost the only power fuel
Fuel Source
Coal Natural Gas Nuclear
Hydro Renewables Fuel Oil
55% Coal or greater Primary fuel is Natural Gas Primary fuel is Nuclear
Primary Fuel is Hydro
Diverse fuel mix
The Economics of Wind Energy ◆ NAPAC May 2011
8 But coal has its challenges
• Environmental challenges – SO2 – NOx – Mercury – Arsenic – Heavy metals – Ash disposal – CO2 emissions
• The EPA is seeking new rules to further reduce coal plant air pollutant emissions and to reduce or constrain disposal of toxic solid wastes
• Cost challenges – Rising coal production costs – Volatile transportation costs
• The financial investment community believes that smaller coal plants will be forced to retire due to the costs of meeting these challenges beginning in 2014
Utilities will be forced to build new power production facilities to meet existing demand let alone new demand
The Economics of Wind Energy ◆ NAPAC May 2011
9 Other fuels have their own issues
• Hydro – Limited availability – Habitat impacts impact other industries
• Oil – Similar environmental challenges as
coal – Cost, cost, cost
• Nuclear – Got Permit? – Got Insurance? – Got PR?
• Renewables – Wind – plenty of it, just can’t move it – Solar – cost and scale – Biomass - scale
The Economics of Wind Energy ◆ NAPAC May 2011
10 Gas is attractive, but…
• Natural Gas is a significantly cleaner fuel • But over the last 10 years price volatility has been very high
Utilities have long memories and won’t commit to short-term fuel contracts to supply long-term power assets
$-‐
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
1976
1978
1980
1982
1984
1986
1988
1990
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1994
1996
1998
2000
2002
2004
2006
2008
2010
Average Annual Price of Gas ($/MMCF at the Wellhead. Source: EIA)
-‐140% -‐120% -‐100% -‐80% -‐60% -‐40% -‐20% 0%
20% 40% 60%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Percent Change from Previous Year (Delta on $/MMCF at the Wellhead. Source: EIA)
The Economics of Wind Energy ◆ NAPAC May 2011
11 And electrics are under pressure
• States are passing Renewable Portfolio Standards and Renewable Electricity Standards in the absence of Federal legislation – California: 33% by 2020 – Colorado: 30% by 2020 – New York: 29% by 2015 – Illinois: 25% by 2025 – Ohio: 25% by 2025 – Minnesota: 25% by 2025
RPS Policies
Renewable portfolio standard
Renewable portfolio goal
www.dsireusa.org / May 2011
Solar water heating eligible !"#""Extra credit for solar or customer-sited renewables
Includes non-renewable alternative resources
WA: 15% x 2020*
CA: 33% x 2020
NV: 25% x 2025*
AZ: 15% x 2025
NM: 20% x 2020 (IOUs) 10% x 2020 (co-ops)
HI: 40% x 2030
Minimum solar or customer-sited requirement
TX: 5,880 MW x 2015
UT: 20% by 2025*
CO: 30% by 2020 (IOUs) 10% by 2020 (co-ops & large munis)*
MT: 15% x 2015
ND: 10% x 2015
SD: 10% x 2015
IA: 105 MW
MN: 25% x 2025 (Xcel: 30% x 2020)
MO: 15% x 2021
WI: Varies by utility; 10% x 2015 statewide
MI: 10% & 1,100 MW x 2015*
OH: 25% x 2025†
ME: 30% x 2000 New RE: 10% x 2017
NH: 23.8% x 2025
MA: 22.1% x 2020 New RE: 15% x 2020
(+1% annually thereafter)
RI: 16% x 2020
CT: 23% x 2020 NY: 29% x 2015
NJ: 20.38% RE x 2021 + 5,316 GWh solar x 2026
PA: ~18% x 2021†
MD: 20% x 2022
DE: 25% x 2026*
DC: 20% x 2020
NC: 12.5% x 2021 (IOUs) 10% x 2018 (co-ops & munis)
VT: (1) RE meets any increase in retail sales x 2012;
(2) 20% RE & CHP x 2017
KS: 20% x 2020
OR: 25% x 2025 (large utilities)* 5% - 10% x 2025 (smaller utilities)
IL: 25% x 2025
29 states + DC and PR have
an RPS (7 states have goals)
OK: 15% x 2015
PR: 20% x 2035
WV: 25% x 2025*† VA: 15% x 2025*
DC
These are not inconsequen/al targets and wind is the only realis/c way to get there
The Economics of Wind Energy ◆ NAPAC May 2011
12
OPERATING CHARACTERISTICS
The Economics of Wind Energy ◆ NAPAC May 2011
13 The electric grid
• Is a real-time system that balances load (demand) against resource (generation)
• It is adjusted – Every few seconds or less for the little changes – a light switch, a small
motor, an oven turning off or on – for “regulation” – And on an intra-hour to hourly basis for the cumulative changes – for
“load following” • Plants are scheduled on a daily basis to provide the power required
to meet the forecast
• Utilities manage this by building a mix of different kinds of power plants – each featuring a different kind of performance and cost profile
The Economics of Wind Energy ◆ NAPAC May 2011
14 Generation resource and cost
• Baseload Capacity – High fixed (capital) cost, low variable
cost – Cost effective only with high
utilization (high capacity factor) – Operates around 8,500 hours per
year – Primary fuels are coal or nuclear
energy • Intermediate Capacity
– Mid-tier fixed costs, moderate variable cost
– Cost effective when used over 50% of the year – or 4,000 hours per year
– Plants are usually fueled by gas (combined cycle, CT’s), but some coal plants are operated as intermediate resources
• Peaking Resources – Low fixed cost, high variable cost – Cost effective when used to meet
peak demand – about 700 hours per year
– CT’s
These plants are scheduled to meet the forecast for power and a few are operated to provide load following and regulation – but all are historically dispatchable
The Economics of Wind Energy ◆ NAPAC May 2011
15 Generation portfolio
• How the different resources match up against the load curve
Demand
(MW)
Hours per Year 8760 0
Baseload Capacity
Intermediate Capacity
Intermediate Capacity
Peaking Capacity
Annual Load Curve
Demand
(MW)
Hour of Day
Daily Load Curve (Summer Peaking)
Baseload Capacity
Intermediate Capacity
Intermediate Capacity
24 0 18 12 6
Peaking Capacity
The Economics of Wind Energy ◆ NAPAC May 2011
16 Wind is none of the above
• Wind is a “variable generation” resource
– This means that it can’t be dispatched or called upon when needed, it exists only when the wind blows
– Utilities are having to plan to meet demand with variable generation resources
Hour of Day
Demand
(MW)
Baseload Capacity
Intermediate Capacity
Intermediate Capacity
24 0 18 12 6
Peaking Capacity
Wind can’t be scheduled…
The Economics of Wind Energy ◆ NAPAC May 2011
17 Creating a hybrid solves the problem
• Gas units are very flexible and can operate to match variable demand – and also variable supply
• They have been used and tested in multiple locations going back to the early 1980’s
– Usually in contained areas such as small villages (Bangladesh, 2005) or islands (New South Wales, Australia, 1986)
The conclusion of these studies is that “the choice of configuration is determined by the characteristics of the load and the wind resource.”
The Economics of Wind Energy ◆ NAPAC May 2011
18 Operational Control
• The key will be operational control – The two plants will be operated as a single system with an integrated
control room • The wind farm will be backed off to meet power blocks optimized
against the operation of the gas machines when wind output is less than 100%
• The gas plant needs to consist of a series of units combining larger power blocks – such as smaller turbines (e.g., 66MW LM6000PH units) to provide larger blocks of efficiently produced gas power with a cluster of small reciprocating engines (e.g, 8.55MW Jenbacher units) that can produce power efficiently in small amounts
• You then operate the plant as an integrated whole
The Economics of Wind Energy ◆ NAPAC May 2011
19 Hybrid plant design
Grid
Wind Energy
NG Energy
The variable energy produced by wind is balanced by natural gas fired genera_on to produce a constant amount of energy and capacity to be injected into the grid
When the wind power exceeds “x” MW, excess gas power is available for use as a peaking resource
• Where “x” MW is the minimum capacity of the smallest gas unit in the gas plant array
Up to n MW
Up to n MW
n MW Minimum Output
The Economics of Wind Energy ◆ NAPAC May 2011
20 Wind Energy Production
0.0
1.0
2.0
3.0
4.0
5.0
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1 4 7 10
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22 1 4 7 10
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22 1 4 7 10
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Wind Speed (in m/s)
Power Produc_on (in MW)
Hour Ending April 23 through April 26
Energy Produc_on based on the sample turbine using a 3MW power
curve for a proven turbine
The Economics of Wind Energy ◆ NAPAC May 2011
21 Integrated Dispatch vs. Wind Production
Wind ProducJon
Gas ProducJon Wind Genera/on
Line
Wind Dispatch Line
-‐
0.500
1.000
1.500
2.000
2.500
3.000
1 5 9 13
17
21
25
29
33
37
41
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53
57
61
65
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73
77
81
85
89
93
Megaw
afs
(00’s)
1 8 16 24 8 16 24
Hour Ending April 23 through April 26
8 16 24 8 16 24
The Economics of Wind Energy ◆ NAPAC May 2011
22
BENEFITS
The Economics of Wind Energy ◆ NAPAC May 2011
23 Benefits…
• The benefits of a hybrid wind-gas power facility are manifold: 1. Can be scheduled 2. Provides “ancillary services” – including regulation and load following 3. Reduces fuel cost to $0.0 when the wind is blowing at full capacity
• Reduces overall fuel cost 4. Reduces prescribed emissions significantly due to cleaner than coal
fuels of natural gas and wind 5. Reduces carbon emissions by greater than the 50% normally captured
by switching from coal to gas – and can increase the reduction by as much as an additional 30% by use of wind
6. Reduces risk of fuel price volatility associated with gas prices
The Economics of Wind Energy ◆ NAPAC May 2011
24 …with a caveat
• There is that caveat though… 1. The plant incurs a higher capital cost than either a wind farm or a gas
plant would incur 2. It also incurs higher non-fuel operating costs associated with
maintenance and operations • But it is comparable with the cost of a coal facility in terms of capital
expense and general non-fuel operating expense
The Economics of Wind Energy ◆ NAPAC May 2011
25
THE BIG CAVEAT
The Economics of Wind Energy ◆ NAPAC May 2011
26 Power plant capital costs
• Baseload power plants – In 2008, Alliant projected the cost of a 300MW coal plant to be built in
Wisconsin to be over $1 billion – a cost of $3,400/KW installed – Among the most recently completed coal plants
• Omaha Public Power District’s Nebraska City 2 unit (682 MW) was completed in May 2009 at $950/KW installed – and it came in on time and under budget
• SRP in Arizona Springerville 4 (400MW) was completed in March 2010 at ~$2,500/KW installed
– The NW Resource Planning Council in 2002 estimated the cost of a baseload gas facility (540MW CC design based on 2 GE 7FA CT’s with a steam turbine) at $621/KW installed
• Today they are estimated at $750/KW installed under the new EPA rules • Peaking resources – simple cycle turbines – are estimated at $850/KW
The Economics of Wind Energy ◆ NAPAC May 2011
27 Wind farm capital costs
• The estimated cost for the Flat Water wind farm in Falls City, NE, constructed in 2010, is $165 million for 60MW – about $2,700/KW installed – Less the 1603 grant the project cost is about $2000/KW installed
• The Dry Lake wind farm in central Arizona was constructed in 2010 for $100 million for 63MW – about $1500/KW installed – Less the 1603 grant the project cost is about $1000/KW installed
• Using today’s turbine prices, the project might run $1200/KW before the grant
The Economics of Wind Energy ◆ NAPAC May 2011
28 Combined plant costs
• Assuming… – $1,200/KW for wind capacity – $850/KW for the gas capacity – Total capital cost of $2,050/KW installed
• Significantly lower capital cost than coal but higher than combined cycle baseload
• However, significantly lower fuel costs offset somewhat higher maintenance costs and improve debt service coverage
The Economics of Wind Energy ◆ NAPAC May 2011
29 Conclusion
• Wind-gas hybrid systems work – Proven history – Best use experience is in isolated locations
• Capital costs are significantly lower than coal – with similar fuel cost profile – while higher than combined cycle
• Operating costs are lower than both coal and gas due to free fuel for a significant portion of the year • Which suggests that as wind generation technology matures and costs
drop, wind-gas hybrid plans will become more attractive
• BTW… Utilities already do this on a portfolio bases