Coal versus wind in electricity Investment

Reliability issues aside, in the debate over the flawed Finkel report a vexed issue is that of  costs of coal versus wind/large scale solar.  Queensland’s Kogan Creek coal plant commissioned 10 years ago was offering long term baseload contracts at $38 per MWh.  But the Australian Research Council had new coal at $80 per MWh.

Australian Research Council estimates of coal generating plant costs

The ARC CO2 assessment placed coal as gradually diminishing in competitiveness as illustrated below.  This also assumed the ever-familiar coming reduction in wind and solar with no change in coal power station efficiencies and an unjustifiably stiff premium for new build.  On the estimates below, wind and solar are cheaper than coal so why do they need subsidies?

Australian Research Council estimates of generator costs

AEMO’s data has a new black coal power station on the Queensland Sunshine Coast requiring a capital cost of $3131 per kw. (Latrobe Valley brown coal capital costs are put at $4004 per kw).  These sums are in excess of those incurred elsewhere.  Thus Power Engineering addresses three black coal plants in Vietnam with Australian dollar costs of between 4 and 40 per cent cheaper ($2240 – $3020 per kw).  .

It is implausible that new brown field coal generators in Australia could have doubled in cost since Kogan Creek was commissioned in 2007.  Since 2005 we have seen labour costs for operations and construction increase by 50 per cent.  Labour costs might account for some 30 per cent of the construction outlays.

Other costs have shown no such increase.  Coal costs are similar to 2007 levels.  And most input costs have fallen – the structural steel price in US dollars actually halved.

Compared with other estimates of coal generator costs, the Jacobs 2014 data was rather more realistic, putting costs of new entry coal ranging from around $60 per MWh.  Jacobs which did the modelling for Finkel, put the black coal costs in NSW and Queensland in a report in 2014 respectively at $6.3 and $5.2 per MWh.

Jacobs (2014) estimates of new coal and gas plant costs

A Minerals Council report based on a visit to examine German new brown coal developments concluded a new Latrobe Valley brown coal power station could be deliver electricity at a price of $55-65 per MWh.  And this might be conservative given the low cost of Victorian coal.

The Jacobs work for the Finkel report put far higher costs for new coal power stations, as well as some remarkable wind and solar costs at around $50 per MWh.

Jacobs (Finkel report) cost estimates of new generation

This modelling assumes a pariah nature of coal generation would require a weighted cost of capital (WACC) at 14.9 percent compared with 7.1 per cent for wind (AEMO puts the WACC at 12.9 per cent for coal and 7.1 per cent for wind).  If capital was available at 7 per cent, a black coal plant based on Jacobs 2014 estimates would be as follows:

Costs of new black coal plant in Australia

Black Coal New Plant
Capital Cost $/kW Fuel Cost Finance costs LRMC $/MWh
NSW 2719 6.336 41.07 47.406
Qld Central 2719 5.22 40 45.22

Impediments to building new coal are twofold.  First, there are now many radicalised people bent on opposing any form of coal use and willing to aggressively picket new projects, thereby imposing costs on them.  If governments are unwilling to combat this and to allow legal activities to proceed unhindered then there is little hope of the economy achieving its potential in wealth creation.  Pusillanimity by government in upholding the law should not be an option.

The second problem is that government activity in energy policy has created “sovereign risk” by regulatory favours to coal’s competitor and introducing a discriminatory tax on coal plus, as in Victoria, governments will often seek to exploit sunk investment by raising royalties

Government induced uncertainties on policy actions have reached a point where any new generator would need to have a contractual indemnification against government for any expropriatory measures introduced.

Post script. Trump forces re-write of communique for upcoming G20, removing

  • A call for “the alignment of public expenditure and infrastructure planning with the goals of the Paris Agreement”
  • A push for carbon pricing
  • A commitment to publish mid-century decarbonisation blueprints by next year
  • A pledge to develop a “profound” climate plan for multilateral development banks
  • Seven references to the UN’s 2018 review of nationally-determined contributions
  • 11 references to the 2050 mid-century pathway for net zero emission
  • 16 mentions of infrastructure decarbonisation

This entry was posted in Uncategorized. Bookmark the permalink.

45 Responses to Coal versus wind in electricity Investment

  1. stackja

    Australia needs a PM who will fight for coal.

  2. duncanm

    Terry, you say “Reliability issues aside” – but is cost/MWh against the boilerplate (pun intended) capacity, or real (based on historical data) capacity.

    We all know wind is lucky to get 10-30%.

  3. .

    Australian Research Council estimates of generator costs

    Just bullshit.

    Nuclear is the highest per MW. Yeah right. Wind is cheaper than supercritical black coal.

    Utter garbage. This is just deceit artillery pounding enemy (us) positions to soften us up for an insertion of massive graft and sabotage.

    We all know for the time being, coal is the cheapest.

    No consideration at all of hydroelectric, which would also supply secure water without ridiculous white elephants like the Wonthaggi desal plant.

    The proposed dams at Needles Gap, Devil Grip Gorge and Walwa all make more sense than desal (without the cheap and widespread use of coal and nuclear power).

    The more expensive basic utilities are, the stronger the emotional arguments are for centralised control over these resources and services.

    All problems are nails and government is a convenient hammer.

    For all his faults, and too little too late, at least Howard considered nuclear power vis a vis the Switkowski report.

  4. RobK

    There’s all of that plus… Finkel has recommended Variable Renewable Electricity has increased means of frequency control imposed which will add a little bit more to the VREs but that impost is not load shifting storage which is required for high penetration of VREs. The cost of these are slotted under “ancillary services” eligible for the CET subsidies and bidding in the same market as VREs and dispatchables. In my view it is a slight of hand in the accounting of the cost of VREs. Non dispatchables are an inferior product and should not be bidding in the same market as dispatchables. Storage type dispatchables should account for all VREs to bring them upto dispatchable specification of they are to bid in the same market.

  5. jupes

    Great stuff Alan. Keep fighting the good fight.

    Hopefully you send this this stuff to Cory Bernardi and Malcolm Roberts so at least a couple of people in parliament have a clue.

  6. Bruce of Newcastle

    Referring to those Finkel report bar charts.

    There is no way that adding storage only adds about 40% to the cost of solar. The cost of batteries is at least triple the cost of the panels. And that gives only a day of storage. Two days of bad whether and your grid is black.

    And why is there no wind+storage case? Does the wind always blow a steady 20 kts day in day out?

    In short the real cost of wind is actually the sum of the Wind bars and the Gas OCGT bars since the only reason you need OCGT is to cope with the intermittency of wind.

    What a pack of lies!

  7. Roger

    What a pack of lies!

    And people opine that religious folk are gullible.

    Our political class are credulous to the point of idiocy.

    It would be laughable if it weren’t so serious in in its implications for national prosperity.

  8. RobK

    BoN,
    Yes, at the mythical 100% VREs you need about 6 times the nameplate capacity installed (at 30% Av output and sufficient to recharge storage), then pick how much “ride through storage is deemed reliable. My farm is off grid. I have 80kWh storage, about 4-5 days worth but I still use about 200l of diesel per year with 3kW of wind and 3kW of solar pv installed.

  9. incoherent rambler

    By my rough calculations we have reached the point where it would be cheaper for the average SA or VIC household to buy their own generator (gas or diesel) than it is to buy retail electricity.

    I assumed a 5 year lifetime of the generator.

    I would love to see someone (not me) do the hard figures rather than my estimate.

  10. Myrddin Seren

    By my rough calculations we have reached the point where it would be cheaper for the average SA or VIC household to buy their own generator (gas or diesel) than it is to buy retail electricity.

    Will doubtless be banned soon by the various State environmental departs and/or local councils.

  11. Mark A

    incoherent rambler
    #2427871, posted on June 30, 2017 at 2:57 pm

    By my rough calculations we have reached the point where it would be cheaper for the average SA or VIC household to buy their own generator (gas or diesel) than it is to buy retail electricity.

    I assumed a 5 year lifetime of the generator.

    I would love to see someone (not me) do the hard figures rather than my estimate.

    No need to do calcs, due to inability to opt out (of the supply availability charge, same as sewer), you will be paying more.
    By far the greater part of many bills is the supply charge, ie. line connection to your place.
    Many older people use little electricity but still paying the same connection fee month in month out.

  12. H B Bear

    By far the greater part of many bills is the supply charge, ie. line connection to your place. Many older people use little electricity but still paying the same connection fee month in month out.

    And don’t they know it. WA domestic supply charge increasing from 48.6c per day to 94.9c from 1 July 2017 as the Liars attempt to deal with Emperor Barney’s black hole. Not sure how this makes it past the the Economic Regulator as it is basically a tax increase.

  13. Dr Fred Leni

    Right comrade finkel the party needs to create an illusion that our climate scam is true we need you to create the illusion that green energy is best,the results we want are on this document ,scare the shit out of the peasants about what will happen if they dont accept our story . You will be well rewarded for getting the ounters to stop disobeying our otders .we want you to “leak” _to our reliable comrades at fauxfacs the alpbc the socialist broadcasting service and CNN ,they can all be relied upon to make our views dominste .

  14. struth

    Australia’s energy sector and this report is akin to a BMX champion kid having his mountain bike smashed and forced to pay for a new road racing bike for a bully who changed the BMX track to the smooth velodrome, so he is assured a win, while still calling it BMX.

  15. David Brewer

    Finkel may not know it, but he has been conned.

    Levelised Cost of Electricity is a bullshit method of comparing different electricity sources. As Paul Joskow of MIT said years ago here:

    Levelized cost comparisons are meaningless because they ignore variations in the price of electricity at the actual time when supplies are forthcoming from intermittent technologies:
    • 6 cents/kWh cents/kWh levelized levelized cost is not cheap if it is produced at night when the market value is 2 cents/KWh
    9 cents/kWh levelized cost is not expensive if it is produced during peakperiods when the price is 10 cents/kWh.

    More generally, wind and coal technologies produce two different products. Coal produces electricity continuously and reliably. Wind produces electricity intermittently and unpredictably. It’s the difference between owning a car, and going out on the street and just hoping a taxi comes by.

    The other nonsense is the cost of capital. 7%, or even 14%? What planet is Finkel living on? If banks are so cowed by activists that they will only offer money at this sort of rate for supplying an essential service, why doesn’t the government just offer to lend any constructor with a sound business plan all the finance at, say, two per cent over the 10 year bond rate – currently 2.6%. Winners all round!

  16. Bruce of Newcastle

    why doesn’t the government just offer to lend any constructor with a sound business plan all the finance at, say, two per cent over the 10 year bond rate – currently 2.6%.

    I saw that too. A WACC of 14.9%? For a steadily operating plant? Crazy. I do such financials and a typical WACC might be 9% for a risky mining operation. It’s a mad assumption on a par with Stern’s insane 0.1% discount rate.

  17. cohenite

    Reliability issues aside

    Good analysis Alan but really it begins and ends there; you cannot compare wind and coal; there are no levelised costs. Look at wind production at this time:

    http://www.aemo.com.au/Electricity/National-Electricity-Market-NEM/Data-dashboard#nem-dispatch-overview

    3400MW of wind turbines in Victoria and SA, installed at a cost of, with grid connection, about $20 billion, is producing 24MW or 0.7%. That’s it; forget anything else, all the myriad other defects with this ancient energy source. It is incompatible with a modern grid, it doesn’t work.

  18. It’s the difference between owning a car, and going
    out on the street and just hoping a taxi comes by.

    A brilliant analogy, David. The best I’ve heard.
    Consider it stolen – and I won’t be the only one.

  19. Tim Neilson

    an unjustifiably stiff premium for new build

    I agree with everything else that’s been said, but there’s no upper limit to the costs of construction of major projects in CFMEUistan.

  20. Myrddin Seren

    Government induced uncertainties on policy actions have reached a point where any new generator would need to have a contractual indemnification against government measures that introduced.

    Pondering Alan’s fine post some more – I think his final paragraph is the money shot.

    Even if by some miracle the Grange Green-Left ( aka The Coalition ) could be persuaded to offer a Federal mandate to support a baseload coal-fired power station, all that would happen is that Shorten, DiNatale and probably some loopies from the Senate like Hinch would all line up to pledge to cancel the project straight after the next election.

    And given the recent examples from Victoriastan, the sovereign risk that an incoming government would simply tear up any agreements no matter how notionally binding, is very real.

    And that is before the Deep Greens pledge unrelenting protests and legal warfare; the Unions promise to boycott any construction and the States and Local Councils all throw their hands up in horror at such a prospect within their pristine domains.

    Australia will be relying on imported LNG and lining AGL’s coffers before we know it.

  21. bushwalker

    There is no “pariah status” for coal assets. Yesterday Rio Tinto shareholders agreed to sell 25mtpa of coal mine assets in the Hunter Valley to Chinese company, Yancoal, for b$2.7. The valuation by the independent expert was based on a mine life out to at least 2042 and the WACC used was 10.2%, nowhere near 14%. At the last minute Glencore put in a higher offer but Yancoal came back with an even higher one.

  22. Tel

    Government induced uncertainties on policy actions have reached a point where any new generator would need to have a contractual indemnification against government for any expropriatory measures introduced.

    And that’s pretty much where any discussion of new electricity generation comes to an end.

  23. Myrddin Seren
    #2428010, posted on June 30, 2017 at 5:34 pm

    +100 Myrddin.

    The harsh reality is, without bi-partisan support nothing is going to happen, and the current situation is just going to progress from the current “very bad”, to “catastrophic”. Even with bi-partisan support it would still take at least a decade to reverse the disaster we have created.

    We are in deep shyte and it’s only going to get worse.

  24. Tel;

    Government induced uncertainties on policy actions have reached a point where any new generator would need to have a contractual indemnification against government for any expropriatory measures introduced.

    And that’s pretty much where any discussion of new electricity generation comes to an end.

    And there is absolutely no guarantee that any government would not pass a law redefining the terms of the contract.

  25. Myrddin Seren

    Thanks mv – I appreciate the uptwinkles !

  26. Jo Smyth

    A tiny little overcrowded place like the UK runs on between 20 and 25% nuclear power, has done for years and nobody bats an eyelid and yet all the scaredy cats in the vastness of Australia are quite happy to rely on windmills.

  27. Tel

    And there is absolutely no guarantee that any government would not pass a law redefining the terms of the contract.

    Oh of course there’s section 51(xxxi) and the “on just terms” clause. You do trust in the protections offered by our Constitution don’t you?

  28. John constantine

    Yarragrad just signed up for a billion dollar project for a wind farm connected to a council refugee dispersal ate vegetable farm by lithium batteries.

    Ten percent of nameplate through batteries is considered reliable.

    The mass contracting of ten billion dollars of unfunded forward liabilities worth of windmills for western Victoria has the entire electric grid for that part of the state ready to cook off.

    Ten billion here, ten billion there, sooner or later you are signing a contract for real money.

    All vicco cats need at least a bottle gas Barbie .

  29. RobK

    Tel,
    “You do trust in the protections offered by our Constitution don’t you?”
    If land clearing regulation changes are any guide, it would be handballed to the states’ constitutions, which mostly don’t have such provisions (i think SA may be an exception).

  30. Sydney Boy

    Doesn’t “levellised cost of electricity” also include a “social cost” of $10/MWh onto coal and other fossil fuels?

  31. Mr Black

    I don’t believe a word of these propaganda “reports” into the cost of building fossil fuel plants. Markets have been so distorted all over the world with hidden costs, charges and fake payments applied to fossil fuels that are designed to conceal the vast cost of wind and solar being subsidised that nothing can be trusted.

  32. RobK

    “Ten percent of nameplate through batteries is considered reliable.”
    That’s frequency stabilization and is ok provided you have some dispatchable to call on.

  33. RobK

    SB,
    Doesn’t “levellised cost of electricity” also include a “social cost” of $10/MWh onto coal and other fossil fuels?”
    I don’t think so. The present cost of a 1MWh RET certificate is around $80. That cost is variable and a CET is similar but not the same, so take your pick.

  34. OneWorldGovernment

    if f*kingh coal is not destroyed then i will take out the scum anz bank

  35. IDefender of the faith

    I can’t see any return on capital in these calcs?

  36. Return on Capital?!
    Wash your mouth out, sonny.

  37. john constantine

    The frantic cheering for the billion dollar windfarm/refugee plantation/council makework scheme is so groupthink, the media will have nothing to do with anybody asking why the whole thing has to be hooked up to the coal grid when wind is so cheap.

  38. greggg

    ‘Levelised Cost of Electricity is a bullshit method of comparing different electricity sources.’
    It’s not too bad if the LCOE of wind and solar has the cost of backup added onto it. So LCOE of wind = wind LCOE * (whatever % capacity) + OCGT (or diesel) * (whatever % peaking plant runs) + CCGT (or other base load) * (whatever %) + whatever the cost of increased infrastructure is. Ok so maybe it is bullshit.

  39. RobK

    I’d still like to know what Al Gore said to Clive Palmer to get us into this mess.

  40. Dave Wane

    Turnbull recently claimed to not be “of-the-left” and therefore presumably believes in a free market.
    Therefore, given that many of Turnbull’s mates now tell us that renewables are as cheap as coal.
    Surely the simple answer is to declare the Australian electricity industry open for business with all fuels and methods able to be used, and no more subsidies on renewables.
    Of course the RET nonsense and silly deals made in Paris may also need to be abandoned to keep the playing field level.

  41. max

    Energy density

    Energy density is the amount of energy stored in a given system or region of space per unit volume.

    https://en.wikipedia.org/wiki/Energy_density

  42. .

    max – that is why nuke will eventually win. For now, coal.

  43. Leo G

    many of Turnbull’s mates now tell us that renewables are as cheap as coal.

    Renewables are chic, coal is pique.

  44. Walter Plinge

    The old “vexed issue” strikes again. I’d like to see one of those. For me these types of issues are vexing.

Leave a Reply

Your email address will not be published. Required fields are marked *