Summary
- The operating costs of coal units are complex and depend on many variables. Coal units are complex, long-life assets. The costs associated with operating coal units depend on location, unit type, unit size, environmental regulation and owner strategies.
- Fixed costs combined with lower running hours are devastating for coal power economics. The capital and fixed operations and maintenance (FOM) costs associated with keeping units online or compliant with environmental regulation can only be justified if operating hours are maintained. This reality poses a fundamental problem for coal generators: competition from other fuels and out-of-market incentives are reducing utilisation and thus FOM costs are being spread over a smaller number of operating hours.
- By the early 2020s it could be cheaper to build new renewables than operate US coal units. While the cost profile of coal increases due to investments to maintain performance and comply with environmental regulations, the levelised cost of renewables (LCOE) is expected to decline. In the context of the US, the operating cost of coal could be higher than building new onshore wind by 2020 and solar PV by 2021.
Introduction
There are several costs associated with running coal units. These costs include: fuel, variable operations and maintenance (VOM) costs, fixed operations and maintenance (FOM) costs, annual capital additions and costs associated with installing and operating control technologies to meet environmental regulations. In this blog we breakdown the costs associated with running coal units, by using the US as an example.
Fuel costs
Fuel costs include the cost of buying, transporting and preparing the coal. There are many different types of coal, such as: bituminous, subbituminous, lignite, refined and waste. Typically, the higher the energy content the more expensive the coal. The transportation costs depend on whether the coal is imported from the seaborne market or purchased domestically from a nearby mine. Transport costs vary from region to region and even plant to plant. Hard coal plants often buy their fuel from far away mines, while lignite plants are almost always located close to the mine. Figure 1 details the fuel cost of every operating coal unit in the US.
Figure 1. Fuel costs of US coal units
Source: Carbon Tracker (2017)
Notes: See no country for coal gen for more information.
Cash costs
The marginal or cash cost includes fuel and VOM costs. VOM costs vary with the utilisation of the unit. These costs include, but are not limited to, purchasing water, power and chemicals, lubricants and other supplies, as well as disposing of waste. Figure 2 includes the cash cost of all operating coal units in the US.
Figure 2. Cash costs of US coal units
Source: Carbon Tracker (2017)
Notes: See no country for coal gen for more information.
Operating costs
When analysing the running cost of coal power an important distinction needs to be made between the cash and operating cost. As mentioned above, the cash cost includes fuel and VOM. The operating cost includes the cash cost plus other costs associated with (i) keeping the unit online due to age; (ii) maintaining unit performance due to increased levels of variable renewable energy; and (iii) complying with environmental regulations.
Unit owners who are expecting to close within 2-3 years can take a “sellotape” strategy to operations by only making minimal investments to keep the unit running. However, over the long-term, owners need to make other investments to sustain unit performance and availability, as well as investments in control technologies to meet environmental regulation. Importantly, investments in control technologies have both an initial capital cost and ongoing FOM and VOM costs. Figure 3 includes the operating cost of all operating coal units in the US.
Figure 3. Current operating costs of US coal units
Source: Carbon Tracker (2017)
Notes: See no country for coal gen for more information.
The capital and FOM costs associated with keeping units online or compliant with environmental regulation can only be justified if operating hours are maintained. This reality is detailed in Figure 4. If a US coal unit installs control technologies to meet the most stringent air pollution regulation, it could increase operating costs by 13% when the capacity factor declines from 60% to 40%. Crucially, in the most extreme cases, deployment times for installing control technologies can be as long as 50 months.
Figure 4. Hypothetical operating costs under varying capacity factors
Source: EIA, Carbon Tracker analysis
Notes: For illustrative purposes only. Assumes capital cost of $230/kW for FGD sorbent and $80/kW for selective catalytic reduction.[i]
Power markets throughout the world are oversupplied due to out-of-market renewables and, in the US context, fierce competition from cheap natural gas. As detailed in our 2016 report, end of the load for coal and gas, this situation has driven the capacity factor of coal units down in all major markets, including the US, the EU, China and India. In the US, for example, the average capacity factor of coal units has decreased from 61% in 2014 to 53% in 2016.[ii] As detailed in Figure 5, the anticipated cost of operating coal units in the US increases significantly from the current operating costs in Figure 3.
Figure 5. Anticipated operating costs of US coal units
Source: Carbon Tracker (2017)
Notes: See no country for coal gen for more information.
Why does this matter? Tracking least cost and climate disclosure
Understanding the operating costs of coal power is not the most exciting topic until it is put into context with the relative cost of other power technologies. As the operating cost of coal increases the cost of renewable energy is expected to continue to decline. The implications for the economics of coal power could be devastating. Figure 6 compares the operating cost of coal with the LCOE of new wind and solar PV.[iii] The operating cost of US coal could be higher than the LCOE of onshore wind by 2020 and solar PV by 2021.[iv]
Figure 6. Capacity-weighted operating cost of US coal and LCOE of wind and solar
Source: Carbon Tracker (2017)
Notes: The cash and operating costs of coal are capacity-weighted and based on modelling in no country for coal gen. Onshore wind and solar PV estimates are based on a US average from no country for coal gen. Learning rate of 20% for solar and 12% for wind. Capacity additions based on the IEA’s B2DS.
Utilities should consider a strategy that deploys cheaper power generation technologies to minimise the risk of being caught flat-footed by regulators, should regulation catch up with prevailing economics. Some utilities are currently playing down this reality by not including the all-in costs associated with operating coal units. PPL’s latest climate disclosure is a case in point.
Conclusion
Coal units are complex, long-life assets. The operating costs of coal units vary depending on numerous factors. However, a clear trend is emerging where the operation costs of coal are gradually increasing at the same time the cost of renewable energy is decreasing. In the context of the US, this trend has been magnified by a preponderance of cheap natural gas, which has made coal an increasingly superfluous fuel to generate power.
Matt Gray – Analyst (Power & Utilities)
Laurence Watson – Data Scientist
[i] FGD sorbent is a system used to remove sulfur dioxide from exhaust flue gases of coal units. Selective catalytic reduction is a system for removal of nitrous oxide from the flue gas of coal units.
[ii] https://www.eia.gov/electricity/monthly/epm_table_grapher.php?t=epmt_6_07_a
[iii] LCOE analysis provides one way of comparing the costs of power technologies, although it is widely recognized that other factors, such as system value, are also important.
[iv] It should be noted that industry is already wising up to this reality. For instance, during a Q4 earnings call last month, Jim Robo, CEO of NextEra Energy, predicted that by the early 2020s, it will be cheaper to build new renewables than to continue running existing coal units. https://www.vox.com/energy-and-environment/2018/1/29/16944178/utility-ceo-renewables-cheaper
