firebox wind-gas paper

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The Economics of Wind Energy NAPAC May 2011 1 WindGas Hybrid Power Plants Next Generation Power Resources North American Petroleum Accounting Conference | May 2011 Michael Schiller Managing Director Firebox Research & Strategy LLC

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Page 1: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

1

Wind-­‐Gas  Hybrid  Power  Plants  Next Generation Power Resources

North American Petroleum Accounting Conference | May 2011

Michael Schiller Managing Director

Firebox Research & Strategy LLC

Page 2: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

2 Gas-wind relationship: one view…

“Wind and Natural Gas: Frenemies Forever” Wall Street Journal, August 18, 2009

•  Key point: –  Wind displaces gas as a

source for power generation

Page 3: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

3 A different view

“Calpine’s Cartwright Plots Renewable Shop” Power Finance & Risk, July 16, 2010

•  Key point: –  “We think [hybrid facilities] are

going to be the workhorse of the power industry going forward.”

Peter Cartwright

Page 4: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

4 Our discussion today

•  The goal of this presentation is to look at this potential direction for power generation facility development over the next few years –  With the question of do wind-gas hybrid projects make sense?

•  Our Analysis –  Driving factors pushing wind-gas hybrid facilities –  Operating Characteristics –  Benefits –  An opportunity?

Page 5: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

5

DRIVERS TOWARD HYBRID PLANTS

Page 6: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

6 The holy grail of power production

•  Is low cost, stable fuel and generating technology •  That ended with the 1974 Oil Crises

•  After 1974 the power industry moved away from petroleum fuel to first coal, then nuclear and now toward greater diversity in fuel sources

•  Today utilities seek to create diverse fuel portfolios that minimize the risk of being too dependent upon a single or even just two sources of fuel

•  But getting there is difficult…

Page 7: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

7 The primary power fuel

•  Coal is the leading source of fuel for power production in the US

–  It’s cheap, it’s plentiful and getting it from the mine to the power plant is easy and reliable

•  It fuels nearly half of all power in the US

–  And for many states, coal is almost the only power fuel

Fuel  Source  

Coal   Natural  Gas   Nuclear  

Hydro   Renewables   Fuel  Oil  

55%  Coal  or  greater  Primary  fuel  is  Natural  Gas   Primary  fuel  is  Nuclear  

Primary  Fuel  is  Hydro  

Diverse  fuel  mix  

Page 8: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

8 But coal has its challenges

•  Environmental challenges –  SO2 –  NOx –  Mercury –  Arsenic –  Heavy metals –  Ash disposal –  CO2 emissions

•  The EPA is seeking new rules to further reduce coal plant air pollutant emissions and to reduce or constrain disposal of toxic solid wastes

•  Cost challenges –  Rising coal production costs –  Volatile transportation costs

•  The financial investment community believes that smaller coal plants will be forced to retire due to the costs of meeting these challenges beginning in 2014

  Utilities will be forced to build new power production facilities to meet existing demand let alone new demand

Page 9: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

9 Other fuels have their own issues

•  Hydro –  Limited availability –  Habitat impacts impact other industries

•  Oil –  Similar environmental challenges as

coal –  Cost, cost, cost

•  Nuclear –  Got Permit? –  Got Insurance? –  Got PR?

•  Renewables –  Wind – plenty of it, just can’t move it –  Solar – cost and scale –  Biomass - scale

Page 10: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

10 Gas is attractive, but…

•  Natural Gas is a significantly cleaner fuel •  But over the last 10 years price volatility has been very high

  Utilities have long memories and won’t commit to short-term fuel contracts to supply long-term power assets

 $-­‐        

 $1.00    

 $2.00    

 $3.00    

 $4.00    

 $5.00    

 $6.00    

 $7.00    

 $8.00    

 $9.00    

1976  

1978  

1980  

1982  

1984  

1986  

1988  

1990  

1992  

1994  

1996  

1998  

2000  

2002  

2004  

2006  

2008  

2010  

Average  Annual  Price  of  Gas  ($/MMCF  at  the  Wellhead.    Source:    EIA)  

-­‐140%  -­‐120%  -­‐100%  -­‐80%  -­‐60%  -­‐40%  -­‐20%  0%  

20%  40%  60%  

2001  

2002  

2003  

2004  

2005  

2006  

2007  

2008  

2009  

2010  

Percent  Change  from  Previous  Year  (Delta  on  $/MMCF  at  the  Wellhead.    Source:    EIA)  

Page 11: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

11 And electrics are under pressure

•  States are passing Renewable Portfolio Standards and Renewable Electricity Standards in the absence of Federal legislation –  California: 33% by 2020 –  Colorado: 30% by 2020 –  New York: 29% by 2015 –  Illinois: 25% by 2025 –  Ohio: 25% by 2025 –  Minnesota: 25% by 2025

RPS Policies

Renewable portfolio standard

Renewable portfolio goal

www.dsireusa.org / May 2011

Solar water heating eligible !"#""Extra credit for solar or customer-sited renewables

Includes non-renewable alternative resources

WA: 15% x 2020*

CA: 33% x 2020

NV: 25% x 2025*

AZ: 15% x 2025

NM: 20% x 2020 (IOUs) 10% x 2020 (co-ops)

HI: 40% x 2030

Minimum solar or customer-sited requirement

TX: 5,880 MW x 2015

UT: 20% by 2025*

CO: 30% by 2020 (IOUs) 10% by 2020 (co-ops & large munis)*

MT: 15% x 2015

ND: 10% x 2015

SD: 10% x 2015

IA: 105 MW

MN: 25% x 2025 (Xcel: 30% x 2020)

MO: 15% x 2021

WI: Varies by utility; 10% x 2015 statewide

MI: 10% & 1,100 MW x 2015*

OH: 25% x 2025†

ME: 30% x 2000 New RE: 10% x 2017

NH: 23.8% x 2025

MA: 22.1% x 2020 New RE: 15% x 2020

(+1% annually thereafter)

RI: 16% x 2020

CT: 23% x 2020 NY: 29% x 2015

NJ: 20.38% RE x 2021 + 5,316 GWh solar x 2026

PA: ~18% x 2021†

MD: 20% x 2022

DE: 25% x 2026*

DC: 20% x 2020

NC: 12.5% x 2021 (IOUs) 10% x 2018 (co-ops & munis)

VT: (1) RE meets any increase in retail sales x 2012;

(2) 20% RE & CHP x 2017

KS: 20% x 2020

OR: 25% x 2025 (large utilities)* 5% - 10% x 2025 (smaller utilities)

IL: 25% x 2025

29 states + DC and PR have

an RPS (7 states have goals)

OK: 15% x 2015

PR: 20% x 2035

WV: 25% x 2025*† VA: 15% x 2025*

DC

  These  are  not  inconsequen/al  targets  and  wind  is  the  only  realis/c  way  to  get  there  

Page 12: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

12

OPERATING CHARACTERISTICS

Page 13: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

13 The electric grid

•  Is a real-time system that balances load (demand) against resource (generation)

•  It is adjusted –  Every few seconds or less for the little changes – a light switch, a small

motor, an oven turning off or on – for “regulation” –  And on an intra-hour to hourly basis for the cumulative changes – for

“load following” •  Plants are scheduled on a daily basis to provide the power required

to meet the forecast

•  Utilities manage this by building a mix of different kinds of power plants – each featuring a different kind of performance and cost profile

Page 14: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

14 Generation resource and cost

•  Baseload Capacity –  High fixed (capital) cost, low variable

cost –  Cost effective only with high

utilization (high capacity factor) –  Operates around 8,500 hours per

year –  Primary fuels are coal or nuclear

energy •  Intermediate Capacity

–  Mid-tier fixed costs, moderate variable cost

–  Cost effective when used over 50% of the year – or 4,000 hours per year

–  Plants are usually fueled by gas (combined cycle, CT’s), but some coal plants are operated as intermediate resources

•  Peaking Resources –  Low fixed cost, high variable cost –  Cost effective when used to meet

peak demand – about 700 hours per year

–  CT’s

  These plants are scheduled to meet the forecast for power and a few are operated to provide load following and regulation – but all are historically dispatchable

Page 15: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

15 Generation portfolio

•  How the different resources match up against the load curve

Demand  

(MW)  

Hours  per  Year   8760  0  

Baseload  Capacity  

Intermediate  Capacity  

Intermediate  Capacity  

Peaking  Capacity  

Annual  Load  Curve  

Demand  

(MW)  

Hour  of  Day  

Daily  Load  Curve  (Summer  Peaking)  

Baseload  Capacity  

Intermediate  Capacity  

Intermediate  Capacity  

24  0   18  12  6  

Peaking  Capacity  

Page 16: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

16 Wind is none of the above

•  Wind is a “variable generation” resource

–  This means that it can’t be dispatched or called upon when needed, it exists only when the wind blows

–  Utilities are having to plan to meet demand with variable generation resources

Hour  of  Day  

Demand  

(MW)  

Baseload  Capacity  

Intermediate  Capacity  

Intermediate  Capacity  

24  0   18  12  6  

Peaking  Capacity  

Wind  can’t  be  scheduled…  

Page 17: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

17 Creating a hybrid solves the problem

•  Gas units are very flexible and can operate to match variable demand – and also variable supply

•  They have been used and tested in multiple locations going back to the early 1980’s

–  Usually in contained areas such as small villages (Bangladesh, 2005) or islands (New South Wales, Australia, 1986)

  The conclusion of these studies is that “the choice of configuration is determined by the characteristics of the load and the wind resource.”

Page 18: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

18 Operational Control

•  The key will be operational control –  The two plants will be operated as a single system with an integrated

control room •  The wind farm will be backed off to meet power blocks optimized

against the operation of the gas machines when wind output is less than 100%

•  The gas plant needs to consist of a series of units combining larger power blocks – such as smaller turbines (e.g., 66MW LM6000PH units) to provide larger blocks of efficiently produced gas power with a cluster of small reciprocating engines (e.g, 8.55MW Jenbacher units) that can produce power efficiently in small amounts

•  You then operate the plant as an integrated whole

Page 19: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

19 Hybrid plant design

Grid  

Wind  Energy  

NG  Energy  

The  variable  energy  produced  by  wind  is  balanced  by  natural  gas  fired  genera_on  to  produce  a  constant  amount  of  energy  and  capacity  to  be  injected  into  the  grid  

When  the  wind  power  exceeds  “x”    MW,  excess  gas  power  is  available  for  use  as  a  peaking  resource  

•    Where  “x”  MW  is  the  minimum  capacity  of  the  smallest  gas  unit  in  the  gas  plant  array  

Up  to  n  MW  

Up  to  n  MW  

n  MW  Minimum  Output  

Page 20: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

20 Wind Energy Production

0.0  

1.0  

2.0  

3.0  

4.0  

5.0  

6.0  

7.0  

8.0  

9.0  

10.0  

11.0  

12.0  

13.0  

14.0  

1   4   7   10  

13  

16  

19  

22   1   4   7   10  

13  

16  

19  

22   1   4   7   10  

13  

16  

19  

22   1   4   7   10  

13  

16  

19  

22  

Wind  Speed  (in  m/s)  

Power  Produc_on  (in  MW)  

Hour  Ending  April  23  through  April  26  

Energy  Produc_on  based  on  the  sample  turbine  using  a  3MW  power  

curve  for  a  proven  turbine  

Page 21: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

21 Integrated Dispatch vs. Wind Production

Wind  ProducJon  

Gas  ProducJon  Wind  Genera/on  

Line  

Wind  Dispatch  Line  

 -­‐        

 0.500    

 1.000    

 1.500    

 2.000    

 2.500    

 3.000    

1   5   9   13  

17  

21  

25  

29  

33  

37  

41  

45  

49  

53  

57  

61  

65  

69  

73  

77  

81  

85  

89  

93  

Megaw

afs  

(00’s)  

1   8   16   24   8   16   24  

Hour  Ending  April  23  through  April  26  

8   16   24   8   16   24  

Page 22: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

22

BENEFITS

Page 23: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

23 Benefits…

•  The benefits of a hybrid wind-gas power facility are manifold: 1.  Can be scheduled 2.  Provides “ancillary services” – including regulation and load following 3.  Reduces fuel cost to $0.0 when the wind is blowing at full capacity

•  Reduces overall fuel cost 4.  Reduces prescribed emissions significantly due to cleaner than coal

fuels of natural gas and wind 5.  Reduces carbon emissions by greater than the 50% normally captured

by switching from coal to gas – and can increase the reduction by as much as an additional 30% by use of wind

6.  Reduces risk of fuel price volatility associated with gas prices

Page 24: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

24 …with a caveat

•  There is that caveat though… 1.  The plant incurs a higher capital cost than either a wind farm or a gas

plant would incur 2.  It also incurs higher non-fuel operating costs associated with

maintenance and operations •  But it is comparable with the cost of a coal facility in terms of capital

expense and general non-fuel operating expense

Page 25: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

25

THE BIG CAVEAT

Page 26: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

26 Power plant capital costs

•  Baseload power plants –  In 2008, Alliant projected the cost of a 300MW coal plant to be built in

Wisconsin to be over $1 billion – a cost of $3,400/KW installed –  Among the most recently completed coal plants

•  Omaha Public Power District’s Nebraska City 2 unit (682 MW) was completed in May 2009 at $950/KW installed – and it came in on time and under budget

•  SRP in Arizona Springerville 4 (400MW) was completed in March 2010 at ~$2,500/KW installed

–  The NW Resource Planning Council in 2002 estimated the cost of a baseload gas facility (540MW CC design based on 2 GE 7FA CT’s with a steam turbine) at $621/KW installed

•  Today they are estimated at $750/KW installed under the new EPA rules •  Peaking resources – simple cycle turbines – are estimated at $850/KW

Page 27: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

27 Wind farm capital costs

•  The estimated cost for the Flat Water wind farm in Falls City, NE, constructed in 2010, is $165 million for 60MW – about $2,700/KW installed –  Less the 1603 grant the project cost is about $2000/KW installed

•  The Dry Lake wind farm in central Arizona was constructed in 2010 for $100 million for 63MW – about $1500/KW installed –  Less the 1603 grant the project cost is about $1000/KW installed

•  Using today’s turbine prices, the project might run $1200/KW before the grant

Page 28: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

28 Combined plant costs

•  Assuming… –  $1,200/KW for wind capacity –  $850/KW for the gas capacity –  Total capital cost of $2,050/KW installed

•  Significantly lower capital cost than coal but higher than combined cycle baseload

•  However, significantly lower fuel costs offset somewhat higher maintenance costs and improve debt service coverage

Page 29: Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011

29 Conclusion

•  Wind-gas hybrid systems work –  Proven history –  Best use experience is in isolated locations

•  Capital costs are significantly lower than coal – with similar fuel cost profile – while higher than combined cycle

•  Operating costs are lower than both coal and gas due to free fuel for a significant portion of the year •  Which suggests that as wind generation technology matures and costs

drop, wind-gas hybrid plans will become more attractive

•  BTW… Utilities already do this on a portfolio bases