More breaking news from the Coal Isn’t Cheap department.

Duke Energy reports that the new 620 MW coal plant they are building in Indiana is now expected to cost $2.9 billion, or 23 percent more than they last estimated in November.

It’s worth always taking the time to do some math whenever these type of numbers get released. No one has invested in new coal assets of any significance in the U.S. in nearly 2 decades, for the simple reason that a coal plant is a lousy investment. Meanwhile, every new coal plant that has been proposed or commenced construction in recent years has proved the lousy investment theory wrong. They’re actually really, really, really lousy investments. And getting lousier.

The math:

$2.9 billion / 620 MW = $4,700/kW. 

They say that the plant will release 4 milllion tons of CO2/year. Given a CO2 emissions rate from a coal plant of about 1 ton/MWh, that implies generation of 4 million MWh/yr, or a 73 percent annual capacity factor on the 620 MW nameplate. That puts the coal plant just about at the capacity factor of the average U.S. fleet, which makes sense.

Now let’s look at what that means for economics:

  1. Capital recovery: Let’s stipulate that Duke’s investors demand a 10 percent return on their investment, and are willing to wait 20 years to get their money back with interest. That’s pretty generous, but not atypical for utility economics. That means that annually, the plant has to generate $341 million dollars after paying fuel and operating costs to recover its capital. At 4 million MWh/yr, that implies that they’ll need to get $85/MWh just to cover their capital costs.
  2. Fuel costs: Let’s assume this plant will operate at 40 percent fuel efficiency. Coal delivered to utilities has averaged $30 – 40/ton in recent years. At ~25 MMBtu/ton, that implies an average fuel cost of $1.40/MMBtu. Let’s assume no upward price pressure on coal over the next 20 years and no added costs associated with CO2 compliance to be as generous as possible to our economics. That works out to a cost of $1.40/40 percent x 3.413 = $12/MWh just to repay their fuel costs.
  3. Non-fuel operating costs: There are additional plant costs associated with labor, fuel and ash handling, insurance, etc. In a coal plant, these costs typically add up to $10 – 20/MWh. Consistent with the prior, let’s take the most generous end of that range and add on another $10/MWh.
  4. Delivery costs: Paying for the fuel, labor, and capital recovery is sufficient to get power to the generator terminals, but still doesn’t get it into anyone’s home or business. For that, we need additional revenue to cover capital recovery for the transmission and distribution infrastructure, line losses and various grid management fees. These costs typicaly add another $25 – 40/MWh onto the price of delivered electricity. Again, let’s take the most generous end of that range at $25/MWh.

This then gives us an all-in, delivered cost of $85 + $12 + $10 + $25 = $132/MWh for the power from this facility. Take a more conservative approach with respect to fuel, CO2, operating costs and another cost-overrun or two and these calculations could break $200/MWh.

Let’s put that in context: In 2009, the average price paid for power by all U.S. consumers was $98.90/MWh. In Indiana, the average price paid was $71.90/MWh. So in order for this plant to deliver a (very modest) return on invested capital, it has to earn a price that is nearly double the current rate paid by Indiana consumers.

Tell me again why we’re building coal? Tell me again why coal is cheap?