The Cost of Electricity Generation from Coal-Fired Power Stations
The cost of electricity from a coal-fired power station depends on the capital cost of building the plant, the cost of servicing any loans taken to finance the project, the cost of operating and maintaining the plant over its lifetime and the cost of the fuel needed to fire the power station. All these factors can be estimated before a power plant is constructed using an economic lifetime model called the levelized cost of power (LCOE) model. Using this model it is possible to compare the expected cost of electricity from different types of power generation technology in order to find the most economical in any given situation. While the model is far from perfect it can offer valuable guidance, if used correctly, when considering new power generating capacity.
Keywords
capital cost; levelized cost of electricity; LCOE; lifetime cost; cost of fuel; discount rate; labour cost; carbon capture cost
The cost of electricity from a power station depends on a range of factors. First there is the cost of building the power station and buying all the components needed in its construction. In addition, most large power projects today are financed using loans so there will also be a cost associated with paying back the loan, with interest. Then there is the cost of operating and maintaining the plant over its lifetime. In the case of a coal-fired power station, or indeed any power station that relies on a combustion fuel, there is the cost of buying and transporting the fuel to the plant. There are costs associated with the management of any waste materials from the plant, which in the case of a coal-fired power station will include some boiler slag, waste from the desulfurization unit, ash from the particulate collection system, and – in the future – carbon dioxide. Finally, the overall cost equation should include the cost of decommissioning the power station once it is removed from service.
It would be possible to add up all these cost elements to provide a total cost of building and running the power station over its lifetime, including the cost of decommissioning, and then dividing this total by the total number of units of electricity that the power station produced over its lifetime. The result would be the real lifetime cost of electricity from the plant. Unfortunately, such a calculation could only be completed once the power station was no longer in service. From a practical point of view, this would not be of much use. The point in time at which the cost-of-electricity calculation of this type is most needed is before the power station is built. This is when a decision is made to build a particular type of power plant, based normally on the technology that will offer the lowest-cost electricity over its lifetime.
In order to get around this problem economists have devised a model that provides an estimate of the lifetime cost of electricity before the station is built. Of course, since the plant does not yet exist, the model requires a large number of assumptions and estimates to be made, from the cost of construction to the future cost of fuel to supply the plant. In order to make this model as useful as possible, all future costs are also converted to the equivalent cost today by using a parameter known as the discount rate. The discount rate is almost the same as the interest rate and relates to the way in which the value of one unit of currency falls (most usually, but it could rise) in the future. This allows, for example, the cost of coal purchased 20 years into the future to be converted into an equivalent cost today.
The economic model is called the levelized cost of electricity (LCOE) model. It contains a lot of assumptions and flaws but it is the most commonly used method available for estimating the cost of electricity from a new power plant.
When considering the cost of new power plants the levelized cost is one factor to consider. Another is the overall capital cost of building the power station. This has a significant effect on the cost of electricity but it is also important because it shows the financial investment that will have to be made before the power plant generates any electricity. The comparative size of the investment needed to build different types of power stations may determine the actual type of plant built, even before the cost of electricity is taken into account. Capital cost is usually expressed in terms of the cost per kilowatt of generating capacity to allow comparisons between technologies to me made.
When comparing different types of power station there are other factors that need to be considered too. The type of fuel is one. A coal-fired power station costs much more to build than a gas-fired power station but the fuel it burns is relatively cheap. Its price rarely changes dramatically either. Natural gas is more expensive than coal and it has historically shown much greater price volatility than coal. This means that while the gas-fired station may require lower initial investment, it might prove more expensive to operate in the future if gas prices rise dramatically.
Renewable power plants can also be relatively expensive to build. However, they normally have no fuel costs because the energy they exploit is from a river, from the wind, or from the sun and there is no economic cost for taking that energy. That means that once the renewable power plant has been paid for, the electricity it produces will have a very low cost. All these factors may need to be balanced when making a decision to build a new power station.
Capital Cost
A coal-fired power plant is a complex processing plant and it requires a range of expensive materials in its construction. Special steels will be needed for high-temperature components such as the boiler and the steam turbine. Corrosion-resistant steels will be needed elsewhere to resist the effect of high-temperature steam that is often laden with acidic chemicals. Moreover, while some components such as the steam turbines and the generator can be built in a factory and then shipped to the site, much of the construction has to take place on-site. This construction will necessitate a large work-force so labor costs will become an important element of the overall cost.
Labor costs vary widely from country to country and this can make the cost of construction of the same plant quite different depending upon where it is built. The cost will also be affected by commodity prices because of the amount of iron, copper, and other commodities needed in its construction. Today, these are determined by global market forces. This makes the cost of a coal plant sensitive to economic cycles of activity.
Table 8.1 shows figures for the capital cost of a pulverized coal-fired power plant in the USA from the beginning of the twenty-first century until 2014. The figure in the table is called the overnight cost because it does not include any element related to the cost financing any loans needed during the construction of the plant. The capital cost in 2001 was $1011/kW. By 2014 that had risen to $2734/kW. This inflation of the cost of building such a plant is strongly related to commodity prices and the steepest rise in the cost actually took place between 2007 and 2011, a period that saw very high global commodity prices.
Table 8.1
Annual Capital Cost of a Pulverized Coal Power Plant in the USA
| Year | Overnight Capital Cost of a Pulverized Coal Power Plant ($/kW) |
| 2001 | 1021 |
| 2003 | 1079 |
| 2005 | 1134 |
| 2007 | 1206 |
| 2009 | 1923 |
| 2011 | 2625 |
| 2013 | 2694 |
| 2014 | 2734 |
Source: US Energy Information Administration Annual Energy Outlooks 2001–2014.
The prices in Table 8.1 reflect those in a mature developed market. Costs are lower in other parts of the world. In China, for example labor costs are likely to be lower and the cost of local steel may be lower too.
The figures in the table are for plants without any carbon capture measures. When carbon capture is added to the cost of a coal-fired power station, the capital cost is likely to double compared to the cost without carbon capture. Estimates vary for the different types of carbon capture technology discussed earlier but recent figures suggest that post-combustion capture may be the most cost-effective method of adding carbon capture to a coal-fired power station.
Fuel Costs
For a coal-fired power station the cost of the fuel is probably the most important factor affecting its economics. Coal has traditionally been considered a cheap source of electricity and its ready availability has made it popular in many parts of the world. Most coal is consumed locally and so unlike oil or natural gas the price is normally set locally. In addition, the cost of coal has traditionally be quite stable, although the recent global economic cycle saw an unusually dramatic rise in the cost.
As an illustration of coal costs, Figure 8.1 show the cost of a ton of US Central Appalachian coal, a coal suitable for power generation, between 1990 and 2013. In 1990 one ton cost $31.6 and although there were fluctuations, the cost remained relatively stable throughout the succeeding decade. However, from 2000 costs started to rise significantly, reaching a peak of $118.8/ton in 2008 before falling back to around $70/ton in the middle of the second decade of the twenty-first century.
This unusually sharp peak in coal prices was a global phenomenon with prices in Europe and Asia exhibiting a similar trend. However the prices of a ton of coal in different parts of the world still vary significantly with local conditions having an important effect on the overall cost. In general, countries that import coal for power generation pay the highest price, a reflection of the high cost of transporting the fuel.
The LCOE from a Coal-Fired Power Station
The capital cost and the fuel cost are the two most important elements in a LCOE calculation for a coal-fired power station.1 The LCOE in the USA for two types of coal-fired power station, a pulverized coal-fired plant and an IGCC plant, are shown in Table 8.2. Based on these figures, the cost of electricity from a pulverized coal-fired power station is $66/MWh. However, when carbon capture and compression (but not the cost of storage) is added to this plant, the overall cost of electricity rises to $151/MWh. The cost of electricity from an IGCC power plant is $102/MWh before carbon capture but when carbon capture is added, the cost of electricity rises to $171/MWh. Both sets of figures show the premium that will be added by carbon capture.
Table 8.2
The Levelized Cost of Electricity (LCOE) from Coal-Fired Power Plants in the USA
| Type of Power Plant | Levelized Cost of Electricity ($/MWh) |
| Pulverized coal-fired power plant | 66 |
| Pulverized coal-fired power plant with carbon capture and compression | 151 |
| IGCC plant | 102 |
| IGCC plant with carbon capture and compression | 171 |
Source: Lazard’s levelized cost of energy analysis – Version 8.0, Lazard 2014.
These figures should be taken as indicative of the cost. Other estimates for the same US market might provide a different result and the cost will certainly be different in a different country or region. If figures of this sort are to be used to compare different technologies, then they should all be derived using the same base set of assumptions.
What calculations of this sort do reveal is that adding carbon capture to a coal-fired power station has a major effect on the cost of electricity from the plant. This is likely to push the cost of electricity from a coal-fired power station above that of electricity from some of the major renewable competitors such as wind power and solar power. However the availability of coal and the scale at which coal-fired power plants can be built will still make then attractive where large-capacity additions are required. Over time the major renewable technologies will make inroads into the power market, providing more and more power as they become more competitive and as the drive to eliminate carbon dioxide emissions becomes more powerful. However, the elimination of coal as a fuel to generate electricity is unlikely to be completed this century.