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MIT - PSFC

05 OCT 2010

Introduction

We need a consistent way to calculate energy costs

This helps to make fair comparisons

Good news: most energy costs are quantifiable

Bad news: lots of uncertainties in the input data

Cost of natural gas over the next 40 years

Will there be a carbon tax?

Goal: Show how to calculate the cost of energy in

cents/kWhr for any given option

Discuss briefly the importance of energy gain

3

Use a simplified analysis

Discuss return on investment and

inflation

Discuss net present value

Discuss levelized cost

4

The value of money changes with time

40 years ago a car cost $2,500

Today a similar car may cost $25,000

A key question How much is a dollar n years

from now worth to you today?

To answer this we need to take into account

Potential from investment income while

waiting

Inflation while waiting

Present Value

Should we invest in a power plant?

What is total outflow of cash during the plant

lifetime?

What is the total revenue income during the

plant lifetime

Take into account inflation

Take into account rate of return

Convert these into todays dollars

Calculate the present value of cash outflow

Calculate the present value of revenue

6

Present value of cash outflow: PVcost

Present value of revenue: PVrev

Net present value is the difference

For an investment to make sense

NPV > 0

7

How much is $100 in 1 year worth to you today?

Say you start off today with $Pi

Invest it at a yearly rate of iR%=10%

One year from now you have $(1+ iR)Pi=$1.1Pi

Set this equal to $100

Then

$100

$100

=

= $90.91

Pi =

1 + iR

1.1

This is the present value of $100 a year from now

8

Generalize to n years

$P n years from now has a present value to

you today of

P

PV (P ) =

n

1

+

i

(

R)

This is true if you are spending $P n years from

now

This is true for revenue $P you receive n years

from now

Caution: Take taxes into account iR=(1-iTax)iTot

9

Assume you buy equipment n years from now that costs

$Pn

Its present value is

PV (Pn ) =

Pn

n

(1 + iR )

equipment is higher than todays price

If iI is the inflation rate then

n

Pn = (1 + iI ) Pi

10

Include return on investment and inflation

$Pi n years from now has a present value to

you today of

1 + iI

PV =

1 + i

Pi

iR > iI

11

Use NPV to cost a new nuclear power plant

Goal: Determine the price of electricity that

Sets the NPV = 0

Gives investors a good return

The answer will have the units cents/kWhr

12

Cost Components

The cost is divided into 3 main parts

Capital: Calculated in terms of hypothetical

overnight cost

O&M: Operation and maintenance

Fuel: Uranium delivered to your door

Busbar costs: Costs at the plant

No transmission and distribution costs

13

Plant produces Pe = 1 GWe

Takes TC = 5 years to build

Operates for TP = 40 years

Inflation rate iI = 3%

Desired return on investment iR = 12%

14

Capital Cost

Start of project: Now = 2000 year n = 0

Overnight cost: Pover = $2500M

No revenue during construction

Money invested at iR = 12%

Optimistic but simple

Cost inflates by iI = 3% per year

15

Year

Construction

Dollars

Present

Value

2000

500 M

500 M

2001

515 M

460 M

2002

530 M

423 M

2003

546 M

389 M

2004

563 M

358 M

16

Mathematical Formula

Table results can be written as

PVCAP

Pover

=

TC

1 + iI

n=0 1 + i

Tc -1

Pover 1 BTC

PVCAP =

= $2129M

TC 1 B

1 + iI

B=

= 0.9196

1 + iR

17

O&M covers many ongoing expenses

Salaries of workers

Insurance costs

Replacement of equipment

Repair of equipment

Does not include fuel costs

18

O&M costs are calculated similar to capital cost

One wrinkle: Costs do not occur until operation

starts in 2005

Nuclear plant data shows that O&M costs in

2000 are about

POM = $95M / yr

O&M work the same every year

19

During any given year the PV of the O&M costs

are

n

1 + iI

(n )

PVOM = POM

1 + iR

The PV of the total O&M costs are

PVOM =

TC +TP -1

(n )

PVOM

n=TC

= POM

TC +TP 1

n =TC

1 + iI

1 + i

1 BTP

= POM B

= $750M

1 B

TC

20

Fuel Costs

Plant capacity factor fc = 0.85

Thermal conversion efficiency I = 0.33

Thermal energy per year

(0.85)(106 kWe ) (8760hr )

fcPeT

Wth =

=

= 2.26 1010 kWhr

(0.33)

I

6

Fuel burn rate B = 1.08 10 kWhr /kg

Yearly mass consumption

Wth

MF =

= 2.09 104 kg

B

21

Fuel Formula

Yearly cost of fuel in 2000

PF = K F M F = $41.8M / yr

PV of total fuel costs

TP

1

B

= $330M

PVF = PF BTC

1 B

22

Revenue

Revenue also starts when the plant begins

operation

Assume a return of iR = 12%

Denote the cost of electricity in 2000 by COE

measured in cents/kWhr

Each year a 1GWe plant produces

We = IWth = 74.6 108 kWhr

23

The equivalent sales revenue in 2000 is

PR =

=

= ($74.6M ) COE

100

100

1 BTP

PVR = PR B

= $(74.6M ) (COE ) BTC

1 B

TC

1 BTP

1 B

24

Balance the costs by setting NPV = 0

This gives an equation for the required COE

100

COE =

fcPeT

=

Pover 1 1 BTC

+ POM + PF

T

T

C

P

TC B 1 B

3.61

+ 1.27 + 0.56

25

Preceding analysis shows method

Preceding analysis highly simplified

Some other effects not accounted for

Fuel escalation due to scarcity

A carbon tax

Subsidies (e.g. wind receives 1.5

cents/kWhr)

26

More

More effects not accounted for

Tax implications income tax, depreciation

Site issues transmission and distribution

costs

Cost uncertainties interest, inflation rates

O&M uncertainties mandated new

equipment

Decommissioning costs

By-product credits heat

Different fc base load or peak load?

27

Economy of Scale

Can be quantified

Basic idea bigger is better

Experience has shown that

C cap C ref

=

Pe

Pref

Typically

Pref

Pe

B x 1/ 3

28

Why?

Consider a spherical tank

Cost v Material v Surface area: C r 4QR

Power v Volume: P r (4 / 3)QR

COE scaling:

C / P r 1 / R r 1 / P 1/ 3

Conclusion:

C cap

C ref

1B

P

= e

Pref

29

Another effect not included

The idea build a large number of identical units

Later units will be cheaper than initial units

Why? Experience + improved construction

Empirical evidence cost of nth unit

C n = C 1n C

ln f

C x

ln 2

f = improvement factor / unit: f 0.85 o C = 0.23

30

Build a lot of small solar cells (learning curve)?

Or fewer larger solar cells (economy of scale)?

Produce a total power Pe with N units

Power per unit: pe = Pe/N

Cost of the first unit with respect to a known reference

1B

C 1 = C ref

p

ref

1B

= C ref

N ref

31

Example cont.

Cost of the nth unit

1B

C n = C 1n C

N ref

= C ref

N

n C

N

C cap = C n = C ref

n =1

1B

N

ref

N

n

n =1

1B

C

N

x C ref ref

N

n Cdn

1C

C ref N ref

=

N BC r N BC

1 C

Its a close call need a much more accurate calculation

32

Accurate input data o accurate COE estimate

Uncertain data o error bars on COE

Risk v size of error bars

Quantify risk o calculate COE standard deviation

Several ways to calculate V, the standard deviatiation

Analytic method

33

Assume uncertainties in multiple pieces of data

Goal: Calculate V for the overall COE including

all uncertainties

Plan:

Calculate V for a single uncertainty

Calculate V for multiple uncertainties

34

Function

Assume we estimate the most likely cost for a given COE

contribution.

E.g. we expect the COE for fuel to cost C = 1 cent/kWhr

Assume there is a bell shaped curve around this value

The width of the curve measures the uncertainty

This curve P(C) is the probability distribution function

It is normalized so that its area is equal to unity

d

0

P (C )dC = 1

35

The average value of the cost is just

C =

d

0

CP (C )dC

1/ 2

2

1 d

T = (C C ) P (C )dC

C 0

A Gaussian distribution is a good model for P(C)

C C 2

)

1

(

exp

P (C ) =

2

1/ 2

(2Q ) TC

2 (TC )

36

Uncertainties

Multiple Uncertainties

Assume we know C and for each uncertain cost.

The values of C are what we used to determine COE.

Specically the total average cost is the sum of the separate costs:

C Tot =

Cj Pj (Cj )dCj =

Cj.

j

separate contributions (assuming independence of the Cj ) again

normalized to the mean:

2

j (C j j )

Tot =

j Cj

37

Uncertainties

Nuclear Power

An Example

Example

Low cost entities with a large standard deviation do not have much

eect of the total deviation

Consider the following example

Ccap = 3.61, c = 0.1

CO&M = 1.27, OM = 0.15

Cfuel = 0.56, f = 0.4

38

Uncertainties

Nuclear Power

Example Continued

Continued

=

C cap + C O&M + C fuel

=

= 0.086

5.4

Large f has a relatively small eect.

Why is the total uncertainty less than the individual ones?

(Regression to the mean)

39

MIT OpenCourseWare

http://ocw.mit.edu

Introduction to Sustainable Energy

Fall 2010

For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.

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