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Mr. President, How About These Shovel-Ready Projects?

In 2007, U.S. electric power generators had roughly 1 million MW of installed capacity. Almost one third of that capacity was spread over 1,400 coal-fired plants, which in turn generated about half of our electricity.[1] More than 100,000 MW of these coal plants are greater than 30 years old.[2] These plants use about 20–25 percent more fuel and emit even more of the undesirable by-products of coal – sulphur, nitrogen, particulates – than do new plants with state of the art combustion technology and emission control.[3] Replacing these older plants as they are retired from service with newer coal-fired power plants represents the quickest and lowest-cost way to reduce the adverse environmental impacts of current coal-fired power generation. And it does so without government subsidies or any deterioration in the quality of electricity service.

Coal plants are very expensive to build – a large new one (1,000 MW) costs more than $2 billion to construct.[4] In spite of this very high cost more than 60 coal-fired plants have gone through detailed engineering design, at a total cost of many scores of millions of dollars, and construction simply awaits permits from state and federal agencies. Even if half of these projects drop by the wayside (and not counting needed investments in mines and electricity transmission), private investors are willing to spend more than $90 billion on new coal-fired power plants. Such expenditures in design, advanced engineering, heavy equipment and manufacturing sound like a stimulus dream during these dark economic times.

How much would the federal government have to invest to achieve a construction start for these projects? A flip response would be “nothing.” The real answer is “far less than nothing.” If just 45 of the proposed coal-fired plants are put into service over the next ten years, workers in plant construction and operation would pay about $5 billion in federal income taxes through 2030, and the plants would pay about $29 billion in corporate income taxes over that period.[5] At the peak (between 2010 and 2025) more than 60,000 net new jobs will be added annually just in construction and operation, with thousands more in mining, transportation, and engineering.

What we have here is a willing-seller/willing-buyer convergence. So why isn’t this an obvious approach to electricity supply— cleaner air (more on that later), relatively little government involvement, no subsidies, and low rates? The answer is: Using bad science and bad economics, federal and state government have decided that we will be better off—with lots of electricity, less CO2—if we make wind the primary substitute for older and proposed new coal power plants.

In an arithmetic sense, wind can replace the incremental output from new coal power plants, roughly 4 billion kWh through 2030. For about $350 billion in new private investment and at a cost to the federal government of roughly $130 billion for generation only[6] (transmission is another question), enough new wind capacity can be built to generate the missing coal kWh sometime and somewhere. For about half a trillion dollars in private and public funds, we can obtain the disputable benefits of additional wind energy without any appreciable improvement in air quality or reduction in CO2 output.

How can this be? If new coal-fired power plants are denied permits then why won’t air quality improve with additional wind generation? The answer lies in the old power plants. If we rely increasingly on wind generation, and if we do not build new coal-fired plants, then system reliability requirements, not something that plays to wind’s strong suit,[7] will demand that the old coal-fired plants not be retired, but, rather, remain in service. With the lower efficiency (35% for the older ones, 42–44% for newer ones), fuel consumption, and CO2 output, per kWh will be 20-25% higher than with the new plants. And because it is usually infeasible or uneconomic to retrofit these older plants with state of the art emissions controls, emissions of SOX, NOX, particulates, and other noxious compounds will exceed the levels from new plants by more than the simple difference in fuel use per kWh.

Almost everything that was said above about new coal investments is even more true for nuclear plants. They, after all, emit no CO2, SOX, NOX, or particulates. As with the already designed coal-fired plants, the 23 nuclear plants now awaiting approvals will be significant net taxpayers over their lifetimes, while contributing to increased system reliability.

Wind will remain a dubious net contributor to electricity supply, consuming many billions of private and public dollars without compensating improvements in environmental quality. The current coal-fired power plants will need to continue in operation for every minute that wind is or is not contributing some output. Old plants consume more fuel and emit more pollution. If we want to reduce the emissions of older, dirtier, less efficient coal-fired plants, the best way to do that is to shut those plants down. We can only do that if we replace their reliable output with something similar in quality. This would be new coal-fired plants that are cleaner and more efficient. We don’t even have to use any government funds to do this.

Gas is the fallback to meet additional demand and to provide for electricity system reliability if coal plants are not built. More than 90% of new U.S. generation capacity in the past 20 years has consisted of gas-fired units[8] for most of the same reasons that we see today with regard to licensing new coal plants. We may, and if recent history is any guide, very likely will build more gas-fired power plants in place of the older coal units if we fail to replace these with newer coal (and nuclear) units. Unlike coal or nuclear, this means more imports, since almost all of the new capacity will rely on LNG imports.[9] We would need to import roughly 80 million tonnes of LNG annually to provide for electricity system reliability equivalent to what 45 new coal plants could provide,[10] should these new coal plants not be built and if older coal plants are decommissioned. Such a level of imports would be almost five times greater than current total LNG imports. Moreover, the United States pays more for LNG that for either domestically produced gas or imports by pipeline. From an economic standpoint betting the electricity system on a combination of wind and LNG-fired plants will be both economically reckless and logistically challenging.

We have shovel-ready energy projects that can commence tomorrow without any government funds. What we lack is an informed and mature regulatory environment. The results are not likely to be pretty.


[1] Electricity sector data come from US Department of Energy, Energy Information Administration, Annual Energy Outlook, 2009.

[2] Ibid., Table 8.11a.

[3] An accessible and accurate discussion of different power plant technologies for using coal can be found at http://en.wikipedia.org/wiki/Coal_power.

[4] URS, A Study of Equipment Prices in the Energy Sector, Washington, 2008, pages 61-66.

[5] These are undiscounted numbers, the language of federal fiscal policy, and are based on an average wage package per employee of $75,000 per year.

[6] This calculation is derived from figures in a DOE study on subsidies for different energy sources. See http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/subsidy08.pdf, page xv. Cost figures on wind farms in the US from URS, op cit, pages 81–83.

[7] The average plant factor for wind (% of potential generation that is actually achieved on an annual basis) was 26% in 2006. The DOE expects that this figure could go as high as 32% by the middle of the next decade, pending improvements in turbine technology and more offshore wind farms. In contrast, the comparable plant factor for all 1400 coal-fired plants is 73%. For nuclear generation, the plant factor is 90%, and for gas 40%. (all figures computed from DOE-EIA Annual Energy Outlook, 2009, Tables 8.9. 16.

[8] See Annual Energy Outlook, 2009, Table 8.11c.

[9] Based on recent administration rulings on domestic oil and gas production, it is not prudent to assume that domestic sources could provide the requisite volumes of gas. However, the gas volumes necessary to supply all of the incremental generation needs of the United States, roughly 3.3% of current U.S. gas production, could clearly result from even a modest program of offshore and onshore (federal land) production; but that is a story for another day. Using LNG-fueled CCGT power plants to provide baseload electricity will cost at least 1.5¢/kWh more than output from a new coal-fired plant, based on both historic and recent plant cost and fuel price data used in a standard electricity production costing model, GenCalc.

[10] Based on replacing all of the proposed new coal output with LNG-fueled CCGTs using gas at 56% efficiency.

12 comments

1 jae { 02.21.09 at 2:39 pm }

Very good article. It is so obvious and logical that one would think there would be no questions. But then you say:

“What we lack is an informed and mature regulatory environment. The results are not likely to be pretty.”

Ah, there’s the rub! Stupid politicians.

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2 John McNary { 02.21.09 at 5:48 pm }

Several faulty assumptions here, such as on natural gas and LNG. You underestimate the ability of new sources of nat gas to come on line. You neglect to factor in the Alaskan nat gas that could be brought south in the Canawest pipeline materializes. Your entire economic model ignores the inevitable carbon tax that will have to be implemented, or the massive costs of sequestration and scrubbing from coal.

Sorry, Charlie. Only good tasting projects get to be Obama-Kist.

3 Donald Hertzmark { 02.22.09 at 9:56 am }

John,
I am afraid you have not kept up with the news. This administration is not likely to support new oil and gas production and infrastructure, as already evinced by its suspension of both onshore and offshore licensing. You cannot obtain financing for a CCGT project without a fuel supply agreement. You cannot have a fuel supply agreement without new sources of gas, the old ones are all spoken for. This leaves LNG as the only realistic option to supply new gas-fired plants if we are not willing to approve more domestic drilling or license coal and nuclear plants. Wind has to be backed up with something secure, especially as it becomes significant as a proportion of generation.

As to the carbon business, proposed federal action on CO2 is a wonderful example of sacrificing the good for the perfect. If we fail to build new power plant capacity that maintains system reliability (read: fossil or nuclear plants), then at some point we will decide by default that the older coal plants must remain on line lest we suffer catastrophic loss of load during peak periods. Wind cannot be relied on in this way, as anyone who read this blog should understand. Continued dependence on older coal plants leads inexorably to more fuel consumption from such units, and hence, more pollution. New coal plants represent the quickest and most economical way to reduce CO2 emissions from the US electricity generation system. There is literally nothing else on offer that could reduce emissions of CO2 and its companion emissions as quickly as more efficient high technology coal-fired plants. Think of them as a stepping-stone to a higher technology future in power generation. As EU experience with cap and trade has shown, relying on hopes and wishes does not change the facts on the ground, it only leads to grotesque government-led misallocations of “carbon rights” that put money into the pockets of the well-connected. Would you put Pelosi and Reid in charge of allocating “carbon rights?”

A measured approach to reducing emissions has worked wonders in the automobile and power sectors already (though the process was not always efficient or appropriate). Anyone over the age of 50 knows what the air looked like in the 1960s, before emission controls. Ignoring an opportunity to reduce emissions from the power generation industry by more than 20%, without the use of public funds, seems to me to be derelict in the extreme.

4 Rutherford Moore { 02.22.09 at 10:47 am }

This is a great blog with very good comments. Please keep up the good work.

5 Ed Reid { 02.22.09 at 11:48 am }

I would not believe that this discussion had gotten this far without mention of “80% by 2050″, except that almost every discussion on this topic ignores “80% by 2050″.

In the absence of proven technology for the economical capture and permanent sequestration of CO2, there is absolutely no point in discussion of either new coal- or new natural gas-fueled generation.

Never mind that “80% by 2050″ would accomplish nothing of value with regard to AGW, as long as it is strictly a US effort. There is no such thing as a national “solution” to a global atmospheric issue. Even assuming that halting the increase in atmospheric CO2 concentrations would halt AGW (a very large and questionable assumption), no US effort could accomplish that if: Europe and Canada continue to perform as effectively as they have under Kyoto; and, the developing world continues to observe from the sidelines, while continuing to build new coal-fired generation.

6 bottomofthe9th { 02.22.09 at 2:30 pm }

We don’t have to approve any more domestic drilling to get more gas. In the last six months 35% of gas rigs have been laid off–meaning they were being used in areas where drilling already had been approved. They were laid off because the demand–and therefore price–didn’t sustain continued development. That is, we have significant spare gas-producing capacity in the United States, now and for the foreseeable future.

Building more CCGTs doesn’t need to mean more LNG–more likely, it’d just mean more rigs in Barnett, Marcellus, Piceance, Woodford, etc.

7 Donald Hertzmark { 02.22.09 at 6:31 pm }

Dear BOT9,
I wish I could be as optimistic as you about restarting production activities in the tight gas formations. However, these shales require continuous step out drilling and I have already seen signs of nimbyism rear its ugly head. And don’t forget all those LNG regasification terminals have to go someplace, too. That’s why I think that we will end with old coal as the default.

8 bottomofthe9th { 02.22.09 at 7:13 pm }

Certainly nimbyism is a big issue in domestic production generally, but Texans (Barnett), Oklahomans (Woodford), and Louisianans (Haynesville) are awfully drilling-friendly. Even in Colorado (Piceance) and West Virginia (Marcellus), I’d be shocked if residents turned away producers now that they’ve already gotten a taste of the checks in the mail.

And tight gas and shale are two completely different types of formations.

9 Donald Hertzmark { 02.22.09 at 8:02 pm }

BOT9,
The sane among us hope that you are correct, but we fear that the Barnett and Woodford shales will not be enough to pull us out of a production decline, with so many other areas out of reach. After all, many of the “difficult to site” proposed LNG regasification terminals are in LA, TX, AL, MS.

Point taken on tight gas and shale gas formations.

10 TokyoTom { 02.27.09 at 7:30 am }

Don, thanks for this well-argued piece. However, can you provide support for these premises?

Using bad science and bad economics, federal and state government have decided that we will be better off—with lots of electricity, less CO2—if we make wind the primary substitute for older and proposed new coal power plants

Is the administration really to trying to replace coal baseload with wind? And are the science and economics in favor of introducing some type of carbon pricing really so bad?

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