Costs of Coal-fired Electricity

Ecoal, January 2011, Vol. 73

Over the past 30 years, the amount of electricity produced from coal globally has more than tripled. This is mainly due to the relatively low cost of building and running coal-fired power plants. Climate change policies and environmental regulations do not necessarily have to put an end to coal's competitiveness.

With the ongoing development of CCS technology, coal also has good prospects for maintaining its competitiveness in a carbon constrained future. In this article, the World Coal Association examines the costs of generating electricity from coal, alongside other fuels.

Estimating Electricity Costs

The overall cost of generating electricity is one of the most important factors determining the choice of technology for new power generation. This is not only true in developing countries where universal access to energy services is still a challenge, but also in the established economies where electricity prices are an important variable for the standard of living of many households.

According to studies by the European Commission, MIT, and the US Congressional Budget Office, coal power plants provide electricity at a lower cost than nuclear or gas plants. This is also confirmed by levelised generation cost studies, such as the one carried out regularly by the International Energy Agency (IEA), which takes account of all the costs over the power plant lifetime. According to IEA statistics, coal-based electricity is, on average, 7% cheaper than gas and around 19% cheaper than nuclear.

The advantage of coal is even greater in comparison to renewable energy. IEA and European Commission studies show that onshore wind costs between US$50 and US$156 per MWh and solar photovoltaics between US$226 to US$2031. In certain locations hydro resources can produce electricity at a cost comparable to coal, however estimates vary greatly according to geographic conditions and the final price can be as high as US$240 and US$262 per MWh. In comparison, electricity from coal costs between US$56 to US$82 per MWh.

Yet, assessing the real costs of producing electricity is not always straightforward and statistics can lead to confusion. In the IEA publication on levelised costs of electricity, regional costs of nuclear vary between US$30 per MWh in China and US$60 in Europe. This is much lower than the average cost for nuclear quoted by other international studies, such as those by MIT and the European Commission. These variations come from differences in accounting for costs related to nuclear waste disposal and to the decommissioning of ageing power plants.

Cost estimates and relative competitiveness of other energy resources can also vary depending on whether the associated infrastructure spending needs are taken on board. As an example, according to IEA statistics, capital intensity of investment in the entire natural gas chain is six times higher than for coal. This also means that there is a cost associated with fuel switching which is not visible in simple, power plant level cost estimates. In the case of the USA, an additional US$348 billion investment in pipeline capacity, and further US$12.5 billion investment in storage capacity would be required if the USA was to switch from coal to natural gas. These cost sensibilities need to be taken into account by policy makers if informed choices are to be made about the future energy mix.

Comparison of Electricity Generation Costs - International Studies (US$)

Source: IEA, Projected Costs of Generating Electricity, 2010

Coal's Competitiveness

Pricing of CO₂ emissions is expected to affect coal more than gas or nuclear power. However, with the recent failure of the US cap-andtrade bill, carbon pricing policies seem to have significantly lost momentum. On the other hand, there are also other variables, such as commodity prices and interests rates, which, just like carbon pricing, can affect the competitiveness of energy resources.

Coal & Natural Gas

According to a report on the future role of coal in Europe by Prognos, a Swiss-based consultancy, coal can compete with gas at carbon prices of up to US$30 and the competitiveness of coal power goes up as the price of natural gas increases. At the moment natural gas prices are lower than in the past. Recent increases in shale gas extraction in the USA have led to a global oversupply of natural gas and a sudden plummeting of gas prices. However, there is no certainty as to how long the situation will continue. On the other hand, if both coal and gas prices were to double, coal would be over 35% less expensive than gas for electricity production, even with a carbon price of US$30 per tonne of CO₂.

Coal & Nuclear

Nuclear power is more competitive than coal and gas in a number of countries, however IEA statistics show that the cost of nuclear power varies greatly with changes in interest rates. A hike from 5 to 10% produces an increase in the cost of nuclear power of 50%. In comparison to this, a similar increase in interest rates for coal would result in 25% of additional costs.

Due to the long lead times and high capital intensity, investments in nuclear power are generally considered a higher risk and, as a result, higher interest rates typically apply to investments in nuclear power. This is not reflected in some of the international cost assessment studies which apply similar interest rates to all energy technologies.

Putting a Cost on Abated Coal

The ongoing global effort to widen deployment of CCS technology is a positive development for the future cost competitiveness of coal in a carbon constrained world. Early cost estimates and the anticipated learning curves for CCS indicate that electricity can be produced from abated coal at a cost which competes with other low-carbon technologies. The first CCS demonstration projects generate electricity at half the price of solar PVs. An independent report for the Global CCS Institute estimates that the current cost of producing electricity from abated coal is US$127 per MWh. This is comparable to the average price of US$125 paid by the European governments for wind energy through the feed-in tariffs.

In the future, abated coal has the potential to become more competitive as the IEA expects the additional cost of CCS to go down from US$40 to US$30 per MWh before 2030. CO₂ could also follow the same path as other coal combustion products and become a commercial product with a market value. There seems to be considerable interest in this idea among policy makers and companies. In July last year, the US Department of Energy distributed over US$100 million in grants to projects converting captured CO2 emissions from industrial sources into useful products. Similar interest exists in the corporate world, as Peabody Energy has recently purchased a US$15 million stake in Calera, a company whose technology captures CO₂ from industrial processes and converts it into carbonates which can be used as building materials.

Solution for Climate & Development Challenges

The on-going economic stagnation in many developed countries and the enduring challenge of electrification in the developing world, make it necessary to consider clean, but also affordable and reliable electricity generation. IEA analysis suggests that CCS technology can reduce the overall cost of mitigating climate change by 70%. Coal power plants are expected to account for 65% of CCS deployment by 2050. This makes coal one of the few energy sources which can address both the challenge of climate change and development.