ENERGY COSTS TUTORIAL

COST COMPONENTS

All electricity generation systems have two major cost components.

1. VARIABLE COSTS (Costs which are proportional to the amount of electrical energy that is produced.)

The largest variable cost is the cost of the energy used, such as nuclear fuel, coal, natural gas, garbage gas, geothermal steam, wind power and solar radiant energy.

Of these, wind, solar and geothermal are free - and do not produce any by-product green-house gasses such as CO2 or nitrogen oxides.

2. FIXED COSTS (The cost of capital to construct the generation plants and the cost of staffing to maintain them in readiness.)

It is important to recognize that these costs continue for the plant owner whether or not the plant is producing and selling power.

The capital costs are normally recovered by including an amount in the rate base which will return the investors capital, plus interest, over the plants expected life-time - perhaps 20 to 30 years. (Note that we do not yet have data as to whether or not the useable life of wind turbines and solar-electric panels will be as long as thermal or hydro power systems. A significant difference in the useable lifetime would make a significant difference in the fixed cost of capital per unit of energy produced.)

The cost of capital is also related to the degree of risk that has to be taken by the investor - and whether privately funded or funded by tax free sources. (Of course, any non-payments of taxes must be made up by other taxation if the level of government is to remain constant.)

The maintenance costs are normally less than the capital costs. However, major differences are required for different types of generators.

Hydro-electric plants probably have the lowest maintenance costs per unit of power produced.

All thermal plants (nuclear, coal, gas and geothermal) have costs associated with maintaining high pressure and temperature spinning turbo-generators. However, the dirtier the energy source the greater the complexity of maintenance. Coal fired plants require complex stack gas clean-up facilities, and geothermal turbines have to deal with highly corrosive elements that inherently come up out of the ground along with the hot steam, which also creates a substantial waste stream. Additionally, geothermal wells need frequent cleaning so that they do not become plugged with these impurities. Nuclear plants, due to their complexity, have substantially higher paid operators and face more regulatory controls.

By contrast, wind generators operate at ambient temperatures and relatively slow blade velocities. And electric solar panels only need occasional cleaning. However, neither wind generators nor solar panels have been around long enough for us to make accurate predictions on either their maintenance costs or useful production life.

POWER FACTOR

Even when base-loaded, no power system provides power 100 per cent of the time for all must have down time for maintenance, both planned and unplanned. Additionally, some plants (hydro, solar and wind) are not available all of the time due to a temporary lack of their energy source.

While the plant availability for most thermal power plants is on the order of 85 per cent of the time solar power (without expensive battery storage systems) is obviously less than 50 per cent of the time. Wind power, which also has a high mechanical availability, has only about a 35 per cent power factor due to the variability of the wind. (Note that the combination of small generators with big blades gives a higher power factor, but that the typical best economic designs have larger turbines relative to the size of the blades in order to maximize power output with the available wind. Also, note that the availability would also be greater if there are several wind farms located at substantial distances from each other since the probability of poor wind conditions at all farms at the same time would be less.)

Further, the utility will normally load the power units that have the lowest fuel operating cost and keep on standby those that have higher fuel and operating costs. Thus, solar and wind, having zero energy costs, will normally be given preferential loading to the extent that they are available and that there is a demand. Even so, due to their temporary lack of an energy source they have much lower power factors than most thermal plants.

The total power produced is then the total power Capacity of a unit multiplied by its Useful Life multiplied by its Power Factor.

TOTAL COST PER UNIT OF ELECTRICITY PRODUCED

The total unit cost of electricity from a power generator is the sum of all costs divided by the amount of power generated and sold.

Unit Costs = (Variable Costs + Fixed Costs) / (Plant Capacity x Plant Life x Power Factor)

PG&E and the CCA staff disagree on the varous factors to be used in computing these unit power costs from various different types of power plants. Further, the author of this web site has no current cost data and is not qualified to side with or disagree with either party. However, there are four fundamental principles that this discussion points up.

1. Those plants that have the lowest energy costs will be preferentially used, when available, and a demand exists. (This might be the lowest unit cost system, but this is not likely if the Power Factor is much lower than other systems.)

2. Since Fixed Costs continue whether or not power is being generated, a plant that is being held in standby mode to be able to supply power for a short period during a peak demand will inherently incur a higher unit cost than a similar one which is loaded to operate around the clock.

3. The peak power demand occurs in the summer from mid-day to about 7:00 pm in the evening just as the sun is going low in the sky. Thus, Solar and Wind power can be used to their maximum capacity during heavy summer afternoon loads . However, since solar power fades as the sun goes low in the sky and wind power cannot be fully relied upon since the wind might fail, additional standby power systems must be either available or actually be brought on-line during the latter part of these peak power usage periods.

4. Thus, if the solar and wind power generation capacity were designed to fulfill the total mid-afternoon peak power demand, the total capacity of all plants required to be available during the ending hours of these peak power periods will nearly double that which would be required if only hydro or thermal power systems were providing the power. And of course the Fixed Costs of these normally standing by units must be added to the customers costs - unless they can sell their power to someone else during the time when they are not required for the evening peak demand period.

POWER PURCHASING METHODS

Selling power from plants required to be on standby mode requires introduction of the concept of "spot" power purchases as contrasted with "firm contract" power.

When excess production capacity is available, the price of spot power goes down since any that a producer can sell is better than no sales, and fierce competition forces the unit price down. However, when production capacity is tight, the price of spot power increases dramatically.

In fact, the reason we had rolling blackouts during 2001-2, as is well documented in an Energy Information Administration, U. S. Department of Energy document, was due to the following factors.

1. In the late 1990's a rapid increase in population increased demand significantly.

2. At the same time well meaning, but mis-informed, environmentalists and NIMBYs (Not In My Back Yard) successfully prohibited PG&E from building any new power plants in California - requiring that PG&E buy power from nearby States.

3. Our politicians decided to Deregulate the power utilities. However, in doing so they kept two rules.

a. PG&E was not allowed to enter into long term firm contracts and was required to purchase power on the increasingly expensive Spot market.
b. The rates PG&E could charge its customers was frozen.

4. As other producers saw PG&E potentially entering bankruptcy they would not sell them power due to fear of non-payment. And, ultimately, PG&E went into bankruptcy.

5. At the same time sources like Enron manipulated their power availability (displaying the false political notion that you could rely upon the free market) and caused power shortages - with rolling blackouts.

The bottom line is that it was clearly shown that it was dangerous to purchase lower cost Spot market power as a means to avoid the necessity of entering into long term fixed price contracts since when the excess supply capacity disappeared we were left holding the bag. And that should be the major lesson that any future power manager remembers.

The next factor that occurs when considering the formation of a CCA, with its two suppliers and two user groups using a single distribution system, is how do you know which group is using the more more expensive standby power during peak power demand periods. And which supplier or user group is to blame when the inevitable power shortage occurs and we have rolling blackouts.

Surely, if there is no way to tell which side is to blame, there will be class action law suits suing for damages to the innocent users each time a rolling blackout occurs.

One solution to this problem would be to require all CCA customers to install time-of-day meters so that they could be read to determine whether or not the CCA system had supplied adequate peak power. (Surely, the PG&E customers should not be forced to do the same since it is the creation of the CCA that caused the problem - not PG&E nor those who Opt Out.)