Editor’s Note: In this blog, Charles Frank answers five questions on low and no-carbon electricity technologies. For a more detailed look at alternative technologies for reducing emissions, read Frank’s latest paper.
As the science on climate change and its impacts on the global economy become clearer and more urgent, governments are increasingly looking for ways to reduce their greenhouse gas emissions. The largest source of these emissions comes from the combustion of fossil fuels—including coal, oil and natural gas—to produce electricity, an effort that in 2012 made up about 40 percent of emissions globally and 32 percent in the United States. More and more, countries are seeking to lower emissions in the electricity sector by turning to low and no-carbon generation options. However, until now, there has been little thorough, empirical analysis of which of these technologies is most efficient, and which provides the best “bang for our buck” as we seek to reduce emissions.
My new Brookings working paper breaks down the comprehensive costs and benefits of five common low-carbon electricity technologies: wind, solar, hydroelectric, nuclear, and gas combined cycle (an advanced, highly energy efficient type of natural gas plant). Using data from the U.S. Energy Information Administration (EIA), the paper asks the question, “Which of the five low-carbon alternatives is most cost-effective in lowering emissions?” The results are highly policy-relevant, and offer enlightening answers to a number of questions that can help governments aiming for a low-carbon future.
1. What’s it going to cost me?
This is an important question because energy costs are private and owed by everyday consumers, whereas the benefits of reducing carbon use are shared as a global public good. So, what would it cost you and I to move toward a world where we generate electricity through mostly low-carbon technologies? How would the cost per megawatt hour (MWH) and kilowatt hour (KWH) change?
One of the best scenarios for our proposed low-carbon alternatives would be for each of them to replace the use of coal-fired plants when electricity demand is moderate, which is most of the time, and gas simple cycle plants during shorter periods of peak energy use.
The table above compares the cost per kilowatt-hour (KWH) of each of the five low-carbon technologies compared to the cost per KWH of the high-carbon technologies that it replaces. All of the low carbon technologies save on energy costs compared to coal and simple cycle gas plants: wind, solar and hydro because the energy from wind, sun and water is free; nuclear because uranium is cheaper than coal or gas per unit of energy; and gas combined cycle because it is much more energy efficient than coal or gas simple cycle. Four of the five low-carbon technologies, excluding gas combined cycle, have a much higher net capacity cost—that is, the cost of building and maintaining the low-carbon power plants—because all four are much more costly to build and maintain than a new coal or gas simple cycle plant. A gas combined cycle plant saves on capacity costs mainly because it costs about two-thirds less to build than a coal-fired plant.
Adding up the net energy cost and the net capacity cost of the five low-carbon alternatives, far and away the most expensive is solar. It costs almost 19 cents more per KWH than power from the coal or gas plants that it displaces. Wind power is the second most expensive. It costs nearly 6 cents more per KWH. Gas combined cycle is the least expensive. It does not cost more than the cost of power from the coal or less efficient gas plants that it displaces. Indeed, it costs about 3 cents less per KWH.
To place these additional costs in context, the average cost of electricity to U.S. consumers in 2012 was 9.84 cents per KWH, including the cost of transmission and distribution of electricity. This means a new wind plant could at least cost 50 percent more per KWH to produce electricity, and a new solar plant at least 200 percent more per KWH, than using coal and gas technologies.
2. Are the additional costs of wind and solar justified by the benefits of reduced carbon dioxide emissions?
The additional costs of wind and solar could be worthwhile, provided that the value of the emissions they avoid is great enough. However, as the following table shows, if we value the reduced emissions at $50 per ton of carbon dioxide, the benefits of wind and solar, net of their costs, is less than the other three low-carbon alternatives.
The emission benefits of four of the five low-carbon alternatives per KWH are roughly the same, about five cents per KWH. The benefits of wind and solar, minus their additional costs, are negative. The net benefits of the other three alternatives are positive and substantially higher. Gas combined cycle ranks number one in terms of net benefits while hydro and nuclear rank two and three.
A carbon dioxide price of $50 per metric ton places quite a high value on reducing carbon dioxide emissions. For example, the price for carbon dioxide emissions in the European Trading System reached a high of about 30 euros in 2006 and was trading around 5 euros at the end of 2013. Recent prices in trading systems in California have been around $12 and in several eastern U.S. states around $2 per ton.
3. Why are the costs per KWH of wind and solar so much higher, and the benefits not much different, than the other three low-carbon alternatives?
Costs are much higher for three reasons. First, the cost per MW of capacity to build a wind or solar plant is quite high (and much greater than that of a gas-fired plant). The cost per MW of solar capacity is especially high. Reductions in the cost of solar-voltaic panels have reduced the cost of building a solar plant by 22 percent between 2010 and 2012, but further reductions are likely to have a lesser effect because the cost of solar panels is only a fraction of the total cost of a utility-scale solar plant.
Second, a wind or solar plant operates at full capacity only a fraction of the time, when the wind is blowing or the sun is shining. For example, a typical solar plant in the United States operates at only about 15 percent of full capacity and a wind plant only about 25 percent of full capacity, while a coal plant can operate 90 percent of full capacity on a year-round basis. Thus it takes six solar plants and almost four wind plants to produce the same amount of electricity as a single coal-fired plant.
Third, the output of wind and solar plants is highly variable—year by year, month by month, day by day and hour by hour—compared to a coal-fired plant, which can operate at full capacity about 90 percent of the time. Thus more than six solar plants and four wind plants are required to produce the same output with the same degree of reliability as a coal-fired plant of the same capacity. In the paper we estimate that at least 7.3 solar plants and 4.3 wind plants are required to produce the same amount of power with the same reliability as a coal-fired plant.
By way of contrast, a new low-carbon gas combined cycle or nuclear plant can operate also at 90 percent of full capacity and can replace a coal-fired plant on a one-to-one basis. A hydro plant with storage can operate at 100 percent capacity during peak periods and more than 40 percent during non-peak periods. In dollar terms, it takes a $29 million investment in solar capacity, and $10 million in wind capacity, to produce the same amount of electricity with the same reliability as a $1 million investment in gas combined cycle capacity.
The benefits of reduced emissions from wind and solar are limited because they operate at peak capacity only a fraction of the time. A nuclear or gas combined cycle plant avoids far more emissions per MW of capacity than wind or solar because it can operate at 90 percent of full capacity. Limited benefits and higher costs make wind and solar socially less valuable than nuclear, hydro, and combined cycle gas.
4. How can we be sure that a new low-carbon plant will replace a high-carbon coal plant rather than some other low-carbon plant?
We cannot be sure. If electricity producers do not have to pay a price for the carbon dioxide they emit, the likelihood is great than a new low-carbon plant will replace an existing, low-carbon gas combined cycle plant. The cost of running an existing coal plant is typically much less than running an existing combined cycle plant and the combined cycle plant will be shut down before the coal plant. The reduction in emissions will be far less than if the coal plant is shut down because a coal plant emits about three times as much carbon dioxide as a gas combined cycle plant.
However, if electricity producers have to pay a high enough price for the carbon dioxide they emit, then a coal plant will be shut down before a gas combined cycle plant. The price of carbon dioxide emissions required to tip the balance between shutting down coal and shutting down gas depends on the price of gas relative to that of coal. It also depends on whether we are talking about the short-term choice of running an existing gas plant rather than an existing coal plant or the longer term choice of investing in a new combined cycle gas plant rather than a new coal plant.
In the United States, where the price of natural gas is low compared to most other countries, the price for CO2 emissions had to be about $5 or more in 2013 in order to tip the short-term balance in favor of shutting down coal. At current U.S. gas prices, investment in new gas combined cycle is more profitable than an investment in a coal plant even without any price penalty attached to CO2 emissions.
In Europe, where the price of natural gas is much higher than in the United States, a CO2 emission price of $65 to $85 per metric ton is required to tip the short-term balance in favor of shutting down coal, far higher than the current price of CO2 emissions in the European Trading System. However, the price of CO2 emissions need only be about $12 to $22 per metric ton to tip the longer-term balance in favor of investing in a new gas combined cycle plant rather than a new coal plant.
5. What does this paper have for policymakers interested in reducing carbon dioxide emissions at a reasonable cost?
First, renewable incentives that are biased in favor of wind and solar and biased against large-scale hydro, nuclear and gas combined cycle are a very expensive and inefficient way to reduce carbon dioxide emissions.
Second, renewable incentives in the absence of a suitably high carbon dioxide price are even less effective, because without a carbon price renewable energy will replace low-carbon gas plants rather than high-carbon coal plants.
Third, renewable incentives should be based not on output of renewable energy but on the reduction in CO2 emissions by renewable energy. They are not the same thing.
Fourth, a carbon price is far more effective in reducing carbon emissions precisely because it is not biased toward any one technology but rewards any technology that reduces emissions at a reasonable cost.
Fifth, the benefits of a natural gas combined cycle plant are not dependent on the natural gas fracking revolution in the United States. Combined cycle plants are highly beneficial even in Europe, where natural gas prices are higher and fracking more limited. The problem in Europe is that the price of CO2 emissions in the European Trading System is far too low to encourage production of electricity by gas rather than coal.
Sixth, even though the electricity sector accounts for only 40 percent of worldwide carbon emissions, cleaner electricity can reduce CO2 emissions in other sectors, for example by reducing the carbon footprint of electric vehicles and home heating.
Finally, the electricity sector offers one of the simplest and most cost effective ways of reducing carbon dioxide emissions. Simply replacing all high-carbon U.S. coal plants with any of the five low-carbon alternatives can reduce U.S. CO2 emissions in the electricity sector by 50 to 70 percent. The potential reductions in other countries, such as China where coal is more important, are even greater.