Not your father’s Old Coal
In thinking and responding to posts about the latest EPRI propaganda, a couple questions came to mind. Questions I’m a bit embarrassed I hadn’t thought of before, so I pose them to you now:
- If coal isn’t cheap, is there any reason to build it?
- If we’re willing to pay 12 cents/kWh for baseload power, would you preferentially pay it to coal?
Those may seem odd questions to ask, but follow me through the math.
Today, we don’t deploy as much [fill in your favorite clean technology here] as we might like to, in no small part because the price of electricity is so low. Of course, that’s because we subsidize the dirty stuff. And we don’t price in externalities. And maybe we’d still need some government mandates. Yeah, yeah, yeah. But we can all agree that we would make more ecologically sensible choices if electricity wasn’t so cheap.
And why is power so cheap? In no small part, because so much of it comes from coal. Fifty-eight percent in the U.S. at last count. And Ol’ Dirty Coal is cheap.
Why is Ol’ Dirty Coal cheap? A couple reasons, but the most important one is that, as a practical matter, we haven’t built any new coal plants since the Clean Air Act was passed. Much better to run those old grandfathered ones which have (a) already paid off all their capital, and (b) don’t have all the parasitic loads to run the scrubbers and baghouses mandated by the Clean Air Act. So as a practical matter, that cheap baseload power price is set just by the price of the fuel and a little bit for maintenance.
But here’s the rub. The coal fleet is just about maxed out. (See here, click on “Trends in US Energy Markets”). We’re running all those grandfathered plants about as hard as we can. So as load grows, we’ll now need to build new coal.
And new coal is expensive. Really expensive. North of $2500/kW expensive. Er, as much as $3000/kW expensive. Want carbon sequestration put on the back end? Then add another $2000-$3000/kW (PDF) worth of expensive. The kind of expensive that makes wind look cheap, and solar look competitive. The kind of expensive that makes natural-gas fired power plants, even at today’s gas prices, look like really good investments. The kind of expensive that makes you quit your job because of all the money you’re suddenly saving on your new CFLs.
I should caveat one thing. New coal is still cheap on the margin. Meaning that if you don’t have to pay for the capital cost recovery or owner profit, they are cheap. But no one puts up the capital to build plants if they don’t think they’re going to get their capital back, along with some profit.
So that means that if we build new coal, we’ll only do it if we promise all those new coal investors that they’ll get their money back. Which means massively increasing electric rates (in the name of cheap power, of course). How much? Well, if it takes $3000/kW to build the plant and another $1400/kW to run the power from the plant to our homes (U.S. average), and we lose 10 percent in the system (U.S. average) and require 22 percent reserve margin in the system (U.S. average), then we’ll need 11-12 cents/kWh rates to get an 8 percent return on the capital. Which is hardly the kind of return that makes you cash out your 401k for the Next Big Thing, but maybe high enough to get someone to build the plant on guaranteed returns. (Well above U.S. average 7-8 cents/kWh). If you’d prefer that we add carbon sequestration to that at another $3000/kW, we’ll need to boost those retail rates to a whopping 18 cents/kWh.
All of which would serve to drive up retail rates so high that [your favorite clean technology] can make a ton of money just by displacing retail power. Which of course people would start to do. Which would reduce the demand for power from coal. Which will force coal plant owners to take one or more of the following actions:
- Roll over and take it like a man. Run the plant only in those hours when they can make a little marginal profit, use whatever profit they have to pay off the bank and take a massive loss on their equity.
- Get governments to guarantee their investment through subsidies, tax transfers, or any other means possible.
- Work as hard as possible to keep other power sources that might compete away their profits from coming on line.
Of course, option No. 1 is the most likely. But why should we force such a hardscrabble lifestyle on those poor coal plant investors? What if we choose not to go down this whole path in the first place? Why build coal-fired generators just to create a set of economic conditions that make it possible to not use the coal-fired generators? Why not cut out the middle man and instead reform the regulatory rules to make it easier to build more [your favorite clean technology]? Why not get rid of the existing subsidies to coal to help facilitate that transition? Why not put the coal plant investors’ money in technologies that make money and reduce carbon?