The Cost of Electricity Generation from Natural Gas-Fired Power Plants
Abstract
The cost of electricity from a gas-fired power plant depends on the cost of the building a power station that burns the fuel and the cost of the fuel itself. Combined cycle power plants, the most common gas-fired plants, are among the cheapest power plants to construct. However, the cost of natural gas has historically been extremely volatile and this can lead to a heightened level of risk associated with gas-fired power generation. The cost of natural gas in the United States has fallen dramatically as a result of shale gas exploitation but elsewhere in the world the cost remains relatively high.
Keywords
Capital cost; overnight cost; levelized cost of electricity; fuel cost; fuel cost volatility; fuel cost risk; shale gas
The cost of electricity from a power plant of any type 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. 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 least cost electricity over its lifetime.
10.1 Levelized Cost of Energy Model
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. 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 maintenance cost of a gas turbine 20 years into the future to be converted into an equivalent cost today. The discount rate can also be applied to the cost of electricity from the wind power plant in 20 years time.
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 economics of new power plants the levelized cost is one factor to consider. Another is the overall capital cost of building the generating facility. 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. This is of particular significance with gas turbine combined cycle plants as their capital cost is among the lowest of all generating technologies. 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, if any, that it uses 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. 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.
10.2 Capital Cost
The capital cost of a natural gas-fired power plant depends on the type of plant. A gas-fired steam raising plant will have costs that are broadly comparable to a coal-fired power plant, although there will be savings on the fuel handling side and the gas-fired plant will not need either a sulfur scrubber or an dust removal unit. The boiler and steam turbine will be the dominant cost items.
The capital cost of gas turbine power plants is determined primarily by the cost of the turbine generator. These are high technology machines and the number of manufacturers is limited but the market is global and competition is fierce. In addition, these are essentially off-the-shelf components that are delivered from a factory virtually ready to install and operate. This means that the time required to build a gas turbine power plant is much shorter than, for example, a coal-fired power plant. These factors have led to gas turbine combined cycle plants becoming the cheapest large capacity power plants to build.
Table 10.11 shows some typical capital cost figures. These are from the US Energy Information Administration (US EIA) and show figures from the organizations Annual Energy Outlooks from 2001 to 2015.2 The cost of a gas turbine depends on the cost of a range of high technology materials and these fluctuate on the global commodities market. Even so, excepting a large jump in costs between 2007 and 2009, when commodity costs peaked, the price changes have been relatively steady.
Table 10.1
Overnight Capital Cost of Gas Turbine and Combined Cycle Plants
| Year | Advanced Combined Cycle Plant ($/kW) | Advanced Combined Cycle Plant With Carbon Sequestration ($/kW) | Advanced Open Cycle Gas Turbine ($/kW) |
| 2001 | 533 | – | 440 |
| 2003 | 563 | – | 439 |
| 2005 | 517 | 992 | 356 |
| 2007 | 550 | 1055 | 379 |
| 2009 | 877 | 1683 | 604 |
| 2011 | 917 | 1813 | 626 |
| 2013 | 931 | 1833 | 632 |
| 2015 | 942 | 1845 | 639 |
Source: US Energy Information Administration.
In 2001 the capital cost of an advanced combined cycle plant was $533/kW. The overnight cost rose slowly to $563/kW in 2003 before falling back to $550/kW in 2007. In 2009 the cost was estimated to be $877/kW and has risen steadily since, reaching $942/kW in 2015. The cost of an advanced open cycle gas turbine has shown a similar trend, with a cost of $440/kW in 2001, rising to $639/kW in 2015. The table also contains estimated costs for an advanced combined cycle plant with carbon sequestration, a configuration that might become mandatory over the next decade. The cost of this plant was put at $992/kW in 2005, 92% higher than a plant without carbon sequestration. In 2015 the estimated cost of this plant was $1845/kW, 96% more expensive than the plant without carbon capture. By way of comparison, US EIA Annual Energy Outlook for 2015 estimates cost of a coal-fired power plant to be $2726/kW and that of an onshore wind farm at $1850/kW.
These figures are all for the United States. Elsewhere in the world the capital cost varies, but not widely. According to the International Energy Agency (IEA), the capital cost of a combined cycle gas turbine plant within the Organization for Economic Co-operation and Development (OECD) ranges from $45/kW in Korea to $1289/kW in New Zealand.3
Microturbine capital costs are similar to those of their larger relatives. The cost of a microturbine without heat recovery is estimated to be $700/kW to $1100/kW. A microturbine cogeneration plant with heat recovery will have costs around 30% to 50% higher.4
10.3 Fuel Costs
Combined cycle power plants are relatively cheap to build. However, the cost of the electricity they produce depends critically on the cost of natural gas. This has shown a historical tendency to fluctuate. When fuel costs are low the cost of electricity from a natural gas-fired plant will be low. However, when the cost rises, it can make gas-fired power plants uneconomical to operate and there are examples in many developed countries of combined cycle plants being shut down because they cannot generate electricity competitively.
The cost of gas depends on availability and in the United States, the advent of shale gas production has led to a fall in gas prices, making gas-fired generation extremely attractive. Fig. 10.1 shows the annual average cost of natural gas to US electric utilities between 2003 and 2015. The cost was between $5/GJ and $6/GJ at the beginning of the period and peaked at close to $9/GJ in 2008. However, by 2015 the cost had fallen to under $4/GJ.
In other parts of the world prices are generally much higher. In 2014 the average cost of natural gas in the United Kingdom was just under twice that in the United States. In Japan, meanwhile the cost of gas including the transportation costs was almost four times the cost in the United States. In these regions, the cost of gas-fired electricity is much higher than in the United States.
10.4 The LCOE from a Natural Gas-Fired Power Station
The LCOE from a natural gas-fired combined cycle power plant in the United States in 2014 was estimated by Lazard to be between $61/MWh and $87/MWh.5 Only wind power was estimated to be consistently cheaper.
The cost of electricity from gas-fired plants is expected to be at its lowest in the United States in consequence of the low cost of natural gas and this is confirmed by the IEA. Its recent study found that, at a 7% discount rate, the LCOE from a US gas-fired plant was $66/MWh while in Japan where the cost of gas is very high it was $138/MWh. In China, in comparison the LCOE at a 7% discount rate was estimated to be $93/MWh.6
Adding carbon capture to a gas-fired combined cycle plant raises the cost of electricity. For the United States, Lazard estimated that the cost would rise to $127/MWh.7 This is roughly double the lowest LCOE for a gas-fired plant without carbon capture.