80% of future energy infrastructure will be built in the developing world. Schalk Cloete has already written for us on the purely economic viability of developed world onshore wind, utility-scale solar PV, nuclear, natural gas and coal. He now presents his detailed cashflow analyses of the major generator technologies applied to the developing world. Because costs tend to be much lower the returns are higher. But gas and coal still easily outperform clean energy. When the integration costs of wind and solar are added, that difference in profitability increases further, even with steady CO2 price increases. Given the numbers, he ends by saying we must force further changes to the economics (e.g. much higher CO2 taxes) and our energy consumption (radical lifestyle changes) to make sure the world stays within its carbon budget.
- Clean energy (wind, solar and nuclear) offer moderate returns in the developing world.
- Thermal power plants (especially coal) remain much more profitable.
- Accounting for wind and solar integration costs can lead to negative returns.
- Rising CO2 prices reduce thermal plant profits, but investment returns remain attractive.
- Clean energy will therefore need continued support to drive investment.
Six earlier articles outlined the risks involved in different power generation technologies with the following conclusions:
- Onshore wind and solar PV face risk from integration costs that will increase strongly over the plant lifetime as more capacity is installed. This risk is mild, however, because the growth leading to rising integration costs will only take place if wind and solar plants remain shielded from these costs.
- Nuclear faces risk from negative public opinion leading to cost overruns, construction delays and early retirements. The economic impacts of these risks were found to be surprisingly small, but nuclear economics remained questionable due to high capital costs.
- Thermal plants (coal and gas) face substantial risk from being held responsible for their CO2 emissions. Increasing value from balancing wind and solar can cancel out this risk for gas, although the high CO2 intensity of coal makes it more susceptible to rising CO2 prices.
- [You can click on the above links to read each detailed article, or a summary here.]
These analyses were done using capital costs representative of the developed world. However, about 80% of future energy infrastructure will be built in the developing world, where costs tend to be much lower.
Despite the lower capital costs, electricity prices are similar, resulting in higher returns on investment. Such attractive returns are needed to incentivise the rapid expansion of electricity supply to support economic growth.
These returns will be quantified in this article under different assumptions about risks facing different power generating technologies.
The reader is referred to the previous articles for details about the methodology. In short, risks are quantified by calculating their impact on the annualised investment return that can be expected over the plant lifetime. Larger risks will cause larger drops in the expected investment returns.
This assessment will keep all the assumptions the same as in the previous articles, except for the capital costs, which are now assumed as follows:
- Onshore wind: $1200/kW
- Solar PV: $900/kW
- Nuclear: $2500/kW
- Gas: $700/kW
- Coal: $900/kW
The average market price for electricity is kept constant at $60/MWh.
The annualised investment return that can be expected from an onshore wind farm in the developing world is shown below. When the wind farm is protected from any integration costs, the annual investment return amounts to about 7%, which is quite low for developing world investments.
As described earlier, wind accrues three important integration costs:
- Value decline: As more wind power is installed, the average value of all wind electricity declines because new wind farms will generate electricity roughly at the same time as existing wind farms. This creates an oversupply (and lower prices) during times when wind output is high.
- Grid costs: These costs arise because of the grid expansions required to transport electricity from regions where wind is plentiful to regions where power demand is high.
- Balancing costs: Additional costs from grid congestion become large when grids are not expanded rapidly enough. Smaller costs also arise from imperfect forecasting of wind output.
The orange bars in the graph above show that accountability for the required grid expansion reduces investment returns by 1.7%. Exposure to true market value would lower returns by 2.8%, while accountability for balancing costs cuts another 1.7%. After all these integration costs, the annual investment return is only 0.7%.
The gray bars show that the rate of wind expansion is the most important factor. Higher expansion rates over the lifetime of a newly installed plant will lead to greater value declines and balancing costs.
Grid expansion also brings substantial costs if wind energy must be imported from distant windy regions. The yellow bars show that increasing the transmission distance from 100 to 500 km will reduce investment returns by 4.7%
Lastly, balancing costs have a somewhat milder impact, causing a drop of 2.5% in investment returns over the range studied.
As shown below, the story for solar PV is similar to that of wind. The most important difference is that the value decline effect is larger due to solar’s more pronounced variability and higher correlation between the output of different generators.
The expected investment return under developing world cost assumptions falls from 6.5% to -3.1% when all integration costs are accounted for.
Similar to wind and solar, nuclear offers modest returns in the developing world. Still, nuclear growth lags behind wind and solar, largely due to the size and complexity of nuclear projects.
As shown in the orange bars, parallel wind and solar expansion only has a slight negative effect on nuclear returns. More wind and solar will force nuclear plants to ramp down, but this displacement will only take place at times when the electricity price is lowest, limiting the losses involved.
Early retirement of nuclear plants (gray bars) also has a surprisingly small effect. Retiring the plant after only 20 years of operation instead of the base case assumption of 50 years cuts returns by only 1.8%. The expectation of high returns means that power to be delivered several decades from now is strongly discounted. This is why losing power delivery in the distant future does not have a large impact.
The yellow bars show that cost overruns have the largest effect. Increasing the capital cost from $2500 to $4000/kW decreases annualised investment returns by 4.1%. Construction delays (green bars) have a much smaller impact with an increase in construction time from 5 years to 8 years lowering investment returns by just 1%.
As shown below, the base case natural gas plant investment return is at the level required for free market capital deployment in the developing world. The low capital cost and moderate capacity factor mean that the original investment can be recovered after only 5 years in the base case.
The positive effect of wind/solar expansion is shown by the orange bars. Since natural gas power production will be concentrated in times of high prices, the increased price volatility caused by wind and solar will continuously increase the average value of natural gas fired electricity.
CO2 pricing (gray bars) has a substantial negative effect on profitability. In fact, at a CO2 price increase of $3/ton/year, the plant becomes unprofitable after only 20 years of operation and has to shut down.
Since CO2 price increases will most likely coincide with wind/solar expansion, the higher value of natural gas fired electricity can cancel out this added CO2 cost, as shown in the yellow bars.
The green bars show that natural gas prices have a large effect on profitability at a fixed electricity price. This is especially important for the developing world because few developing nations have access to abundant cheap natural gas. The high value assumed in this study ($9/GJ) will likely be more representative than the central value when natural gas is scaled up to be a major player in countries like China and India.
The graph below shows why coal continues to stick around despite being possibly the most hated commodity on Earth. The investment returns it offers even outperform gas, with the crucial difference that it is highly scalable in most developing nations due to abundant local coal resources.
Overall, the response to wind/solar expansion and CO2 pricing is qualitatively similar to gas, although the value increase from wind/solar expansion is smaller and the cost increase from CO2 pricing is larger. As a result, combined wind/solar expansion and CO2 pricing (yellow bars) still has a significant negative effect on coal investment returns, cutting annualised returns by 3.7% over the range investigated.
Due to the very high investment returns offered by coal (payback after only 4 years), early plant retirement has almost no effect on overall profitability.
Thermal power generation (especially coal) still easily outcompetes clean energy in the developing world on economics alone. When integration costs of wind and solar are accounted for, the difference in profitability increases further, even if steady CO2 price increases are assumed.
Naturally, there are limits to the expansion of coal power. For example, China burns half the world’s coal on about 3% of the world’s surface area, which obviously leads to serious pollution concerns. As the Chinese population becomes richer (powered by coal) they are increasingly willing and able to pay extra for cleaner alternatives.
India and the rest of developing Asia are about one generation behind China in terms of development. At this development level, low cost is more important than clean air. Coal growth in these regions therefore remains likely to offset declines in wealthier regions where fossil fuels have already facilitated the construction of essential productivity-enhancing infrastructure.
In the medium-term, CO2 emissions will therefore continue moving in the wrong direction. Clean energy will continue to grow strongly, but this growth will not even come close to achieving the CO2 trajectories recommended by climate science (below).
As the years tick by, the required CO2 reduction trajectories will only get more and more ridiculous, eventually heaping on enough pressure to implement proper technology-neutral policies to activate the wide range of much more effective CO2 reduction pathways at our disposal. I sincerely hope this technology-neutrality happens sooner rather than later.
Schalk Cloete is a Research Scientist at Sintef.