Firebox Wind-Gas Paper

The Economics of Wind Energy ◆ NAPAC May 2011
1
Wind-‐Gas
Hybrid
Power
Plants

Next Generation Power Resources
North American Petroleum Accounting Conference | May 2011
Michael Schiller
Managing Director
Firebox Research & Strategy LLC

2
Gas-wind relationship: one view…
“Wind and Natural Gas: Frenemies Forever”
Wall Street Journal, August 18, 2009
•  Key point:
–  Wind displaces gas as a
source for power generation

3
A different view
“Calpine’s Cartwright Plots Renewable Shop”
Power Finance & Risk, July 16, 2010
•  Key point:
–  “We think [hybrid facilities] are
going to be the workhorse of the
power industry going forward.”
Peter Cartwright

4
Our discussion today
•  The goal of this presentation is to look at this potential direction for
power generation facility development over the next few years
–  With the question of do wind-gas hybrid projects make sense?
•  Our Analysis
–  Driving factors pushing wind-gas hybrid facilities
–  Operating Characteristics
–  Benefits
–  An opportunity?

5
DRIVERS TOWARD HYBRID PLANTS

6
The holy grail of power production
•  Is low cost, stable fuel and generating technology
•  That ended with the 1974 Oil Crises
•  After 1974 the power industry moved away from petroleum fuel to
first coal, then nuclear and now toward greater diversity in fuel
sources
•  Today utilities seek to create diverse fuel portfolios that minimize the
risk of being too dependent upon a single or even just two sources
of fuel
•  But getting there is difficult…

7
The primary power fuel
•  Coal is the leading source of fuel for
power production in the US
–  It’s cheap, it’s plentiful and getting it
from the mine to the power plant is
easy and reliable
•  It fuels nearly half of all power in the
US
–  And for many states, coal is almost
the only power fuel
Fuel
Source

Coal
Natural
Gas
Nuclear

Hydro
Renewables
Fuel
Oil

55%
Coal
or
greater

Primary
fuel
is
Natural
Gas
Primary
fuel
is
Nuclear

Primary
Fuel
is
Hydro

Diverse
fuel
mix

8
But coal has its challenges
•  Environmental challenges
–  SO2
–  NOx
–  Mercury
–  Arsenic
–  Heavy metals
–  Ash disposal
–  CO2 emissions
•  The EPA is seeking new rules to
further reduce coal plant air
pollutant emissions and to reduce
or constrain disposal of toxic solid
wastes
•  Cost challenges
–  Rising coal production costs
–  Volatile transportation costs
•  The financial investment
community believes that smaller
coal plants will be forced to retire
due to the costs of meeting these
challenges beginning in 2014
  Utilities will be forced to build new
power production facilities to meet
existing demand let alone new
demand

9
Other fuels have their own issues
•  Hydro
–  Limited availability
–  Habitat impacts impact other industries
•  Oil
–  Similar environmental challenges as
coal
–  Cost, cost, cost
•  Nuclear
–  Got Permit?
–  Got Insurance?
–  Got PR?
•  Renewables
–  Wind – plenty of it, just can’t move it
–  Solar – cost and scale
–  Biomass - scale

10
Gas is attractive, but…
•  Natural Gas is a significantly cleaner fuel •  But over the last 10 years price volatility has
been very high
  Utilities have long memories and won’t
commit to short-term fuel contracts to supply
long-term power assets

$-‐

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Average
Annual
Price
of
Gas

($/MMCF
at
the
Wellhead.

Source:

EIA)

-‐140%

-‐120%

-‐100%

-‐80%

-‐60%

-‐40%

-‐20%

0%

20%

40%

60%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Percent
Change
from
Previous
Year

(Delta
on
$/MMCF
at
the
Wellhead.

Source:

EIA)

11
And electrics are under pressure
•  States are passing Renewable Portfolio Standards and Renewable
Electricity Standards in the absence of Federal legislation
–  California: 33% by 2020
–  Colorado: 30% by 2020
–  New York: 29% by 2015
–  Illinois: 25% by 2025
–  Ohio: 25% by 2025
–  Minnesota: 25% by 2025
RPS Policies
Renewable portfolio standard
Renewable portfolio goal
www.dsireusa.org / May 2011
Solar water heating eligible !"#""
Extra credit for solar or customer-sited renewables
Includes non-renewable alternative resources
WA: 15% x 2020*
CA: 33% x 2020
NV: 25% x 2025*
AZ:15%x2025
NM: 20% x 2020 (IOUs)
10% x 2020 (co-ops)
HI: 40% x 2030
Minimum solar or customer-sited requirement
TX: 5,880 MW x 2015
UT: 20% by 2025*
CO: 30% by 2020 (IOUs)
10% by 2020 (co-ops & large munis)*
MT: 15% x 2015
ND: 10% x 2015
SD: 10% x 2015
IA: 105 MW
MN: 25% x 2025
(Xcel: 30% x 2020)
MO: 15% x 2021
WI: Varies by utility;
10% x 2015 statewide
MI: 10% & 1,100 MW
x 2015*
OH: 25% x 2025†
ME: 30% x 2000
New RE: 10% x 2017
NH: 23.8% x 2025
MA: 22.1% x 2020
New RE: 15% x 2020
(+1% annually thereafter)
RI: 16% x 2020
CT: 23% x 2020
NY: 29% x 2015
NJ: 20.38% RE x 2021
+ 5,316 GWh solar x 2026
PA: ~18% x 2021†
MD: 20% x 2022
DE: 25% x 2026*
DC: 20% x 2020
NC: 12.5% x 2021 (IOUs)
10% x 2018 (co-ops & munis)
VT: (1) RE meets any increase
in retail sales x 2012;
(2) 20% RE & CHP x 2017
KS: 20% x 2020
OR: 25% x 2025 (large utilities)*
5% - 10% x 2025 (smaller utilities)
IL:25%x2025
29 states +
DC and PR have
an RPS
(7 states have goals)
OK: 15% x 2015
PR: 20% x 2035
WV: 25% x 2025*†
VA: 15% x 2025*
DC
  These
are
not

inconsequen/al
targets

and
wind
is
the
only

realis/c
way
to
get
there

12
OPERATING CHARACTERISTICS

13
The electric grid
•  Is a real-time system that balances load (demand) against resource
(generation)
•  It is adjusted
–  Every few seconds or less for the little changes – a light switch, a small
motor, an oven turning off or on – for “regulation”
–  And on an intra-hour to hourly basis for the cumulative changes – for
“load following”
•  Plants are scheduled on a daily basis to provide the power required
to meet the forecast
•  Utilities manage this by building a mix of different kinds of power
plants – each featuring a different kind of performance and cost
profile

14
Generation resource and cost
•  Baseload Capacity
–  High fixed (capital) cost, low variable
cost
–  Cost effective only with high
utilization (high capacity factor)
–  Operates around 8,500 hours per
year
–  Primary fuels are coal or nuclear
energy
•  Intermediate Capacity
–  Mid-tier fixed costs, moderate
variable cost
–  Cost effective when used over 50%
of the year – or 4,000 hours per year
–  Plants are usually fueled by gas
(combined cycle, CT’s), but some
coal plants are operated as
intermediate resources
•  Peaking Resources
–  Low fixed cost, high variable cost
–  Cost effective when used to meet
peak demand – about 700 hours per
year
–  CT’s
  These plants are scheduled to meet
the forecast for power and a few are
operated to provide load following
and regulation – but all are
historically dispatchable

15
Generation portfolio
•  How the different resources match up against the load curve
Demand

(MW)

Hours
per
Year
8760
0

Baseload
Capacity

Intermediate
Capacity

Intermediate
Capacity

Peaking

Capacity

Annual
Load
Curve

Demand

(MW)
Hour
of
Day

Daily
Load
Curve

(Summer
Peaking)

Baseload
Capacity

Intermediate
Capacity

Intermediate

Capacity

24
0
18
12
6

Peaking

Capacity

16
Wind is none of the above
•  Wind is a “variable
generation” resource
–  This means that it can’t
be dispatched or called
upon when needed, it
exists only when the
wind blows
–  Utilities are having to
plan to meet demand
with variable generation
resources
Hour
of
Day

Demand

(MW)

Baseload
Capacity

Intermediate
Capacity

Intermediate

Capacity

24
0
18
12
6

Peaking

Capacity

Wind
can’t
be
scheduled…

17
Creating a hybrid solves the problem
•  Gas units are very flexible and can
operate to match variable demand
– and also variable supply
•  They have been used and tested
in multiple locations going back to
the early 1980’s
–  Usually in contained areas such
as small villages (Bangladesh,
2005) or islands (New South
Wales, Australia, 1986)
  The conclusion of these studies is
that “the choice of configuration is
determined by the characteristics
of the load and the wind
resource.”

18
Operational Control
•  The key will be operational control
–  The two plants will be operated as a single system with an integrated
control room
•  The wind farm will be backed off to meet power blocks optimized
against the operation of the gas machines when wind output is less
than 100%
•  The gas plant needs to consist of a series of units combining larger
power blocks – such as smaller turbines (e.g., 66MW LM6000PH
units) to provide larger blocks of efficiently produced gas power with
a cluster of small reciprocating engines (e.g, 8.55MW Jenbacher
units) that can produce power efficiently in small amounts
•  You then operate the plant as an integrated whole

19
Hybrid plant design
Grid

Wind
Energy

NG
Energy

The
variable
energy
produced
by
wind
is

balanced
by
natural
gas
ﬁred
genera_on
to

produce
a
constant
amount
of
energy
and

capacity
to
be
injected
into
the
grid

When
the
wind
power
exceeds
“x”

MW,
excess
gas

power
is
available
for
use
as
a
peaking
resource

• 
Where
“x”
MW
is
the
minimum
capacity
of
the

smallest
gas
unit
in
the
gas
plant
array

Up
to
n
MW

Up
to
n
MW

n
MW
Minimum
Output

20
Wind Energy Production
0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

1

4

7

10

13

16

19

22

1

4

7

10

13

16

19

22

1

4

7

10

13

16

19

22

1

4

7

10

13

16

19

22

Wind
Speed

(in
m/s)

Power
Produc_on

(in
MW)

Hour
Ending

April
23
through
April
26

Energy
Produc_on
based
on
the

sample
turbine
using
a
3MW
power

curve
for
a
proven
turbine

21Integrated Dispatch vs. Wind Production
Wind
ProducJon

Gas
ProducJon

Wind
Genera/on

Line

Wind
Dispatch

Line

-‐

0.500

1.000

1.500

2.000

2.500

3.000

1

5

9

13

17

21

25

29

33

37

41

45

49

53

57

61

65

69

73

77

81

85

89

93

Megawafs

(00’s)

1
8
16
24
8
16
24

Hour
Ending

April
23
through
April
26

8
16
24
8
16
24

22
BENEFITS

23
Benefits…
•  The benefits of a hybrid wind-gas power facility are manifold:
1.  Can be scheduled
2.  Provides “ancillary services” – including regulation and load following
3.  Reduces fuel cost to $0.0 when the wind is blowing at full capacity
•  Reduces overall fuel cost
4.  Reduces prescribed emissions significantly due to cleaner than coal
fuels of natural gas and wind
5.  Reduces carbon emissions by greater than the 50% normally captured
by switching from coal to gas – and can increase the reduction by as
much as an additional 30% by use of wind
6.  Reduces risk of fuel price volatility associated with gas prices

24
…with a caveat
•  There is that caveat though…
1.  The plant incurs a higher capital cost than either a wind farm or a gas
plant would incur
2.  It also incurs higher non-fuel operating costs associated with
maintenance and operations
•  But it is comparable with the cost of a coal facility in terms of capital
expense and general non-fuel operating expense

25
THE BIG CAVEAT

26
Power plant capital costs
•  Baseload power plants
–  In 2008, Alliant projected the cost of a 300MW coal plant to be built in
Wisconsin to be over $1 billion – a cost of $3,400/KW installed
–  Among the most recently completed coal plants
•  Omaha Public Power District’s Nebraska City 2 unit (682 MW) was
completed in May 2009 at $950/KW installed – and it came in on time
and under budget
•  SRP in Arizona Springerville 4 (400MW) was completed in March 2010
at ~$2,500/KW installed
–  The NW Resource Planning Council in 2002 estimated the cost of a
baseload gas facility (540MW CC design based on 2 GE 7FA CT’s with a
steam turbine) at $621/KW installed
•  Today they are estimated at $750/KW installed under the new EPA rules
•  Peaking resources – simple cycle turbines – are estimated at $850/KW

27
Wind farm capital costs
•  The estimated cost for the Flat Water wind farm in Falls City, NE,
constructed in 2010, is $165 million for 60MW – about $2,700/KW
installed
–  Less the 1603 grant the project cost is about $2000/KW installed
•  The Dry Lake wind farm in central Arizona was constructed in 2010
for $100 million for 63MW – about $1500/KW installed
–  Less the 1603 grant the project cost is about $1000/KW installed
•  Using today’s turbine prices, the project might run $1200/KW before
the grant

28
Combined plant costs
•  Assuming…
–  $1,200/KW for wind capacity
–  $850/KW for the gas capacity
–  Total capital cost of $2,050/KW installed
•  Significantly lower capital cost than coal but higher than combined
cycle baseload
•  However, significantly lower fuel costs offset somewhat higher
maintenance costs and improve debt service coverage

29
Conclusion
•  Wind-gas hybrid systems work
–  Proven history
–  Best use experience is in isolated locations
•  Capital costs are significantly lower than coal – with similar fuel cost
profile – while higher than combined cycle
•  Operating costs are lower than both coal and gas due to free fuel for
a significant portion of the year
•  Which suggests that as wind generation technology matures and costs
drop, wind-gas hybrid plans will become more attractive
•  BTW… Utilities already do this on a portfolio bases

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