by Anthony J. Capraro
Austin is in the process of deciding which fuels it will use to generate electricity through 2020. A scenario proposed by Austin Energy (a.k.a. the Staff Recommendation) would make some green progress relative to the current generation fuel mix, but would still continue to utilize coal through 2020.
Another (greener) scenario would eliminate the use of coal by 2015 through improved conservation and greater use of renewable energy sources (wind and solar).[1] According to PACE (the consultants that helped Austin Energy price various generation fuel alternatives) it might cost 5% (about $40 million per year) more (Levelized Net Present Value) to pursue the greener path.
This article is for people who don’t like the idea of Austin owning a coal-powered generator, but feel that 5% is too much to pay to get Austin off coal. It brings good news: the analysis below suggests that it likely won’t cost more to get off coal – in fact it might cost less.
Arriving at a more realistic price to eliminate coal…
PACE’s projections of a 5% differential between continuing vs moving away from coal are based on a series of assumptions. Our analysis found that many assumptions tended to minimize the downside of using coal while undervaluing the potential upside of moving away from coal. For instance…
The trajectory of fuel costs
Coal has historically been a low cost fuel. But what will coal cost in the years ahead? Surprisingly, PACE projects that the price of coal will drop by 30% then stay essentially constant between 2012 and 2020, growing by a mere 1% over that period.
Maybe…
But this would represent a strong reversal of past fuel cost trends. Austin Energy’s (AE’s) fuel charges increased by 165% over the last 10 years. It would also contradict the Energy Information Administration’s 2009 Energy Outlook, which shows prices of western coal rising 1.2% per year between 2012 and 2020.
One thing is certain. If coal prices do not decline as PACE projects, the cost of coal-generated electricity will be higher than projected. Based on the EIA’s numbers, purchasing coal could cost as much as $5 Million per year more than PACE has projected.
Suboptimal Finance choices
The greener scenario offers an incentive program to accelerate adoption of solar –standard practice within the industry. Worthy of some scrutiny, however, is the assumption about how those incentives would be financed.
Options included absorbing the total charge in the year of installation or spreading those charges over a number of years (say, 30). It wouldn’t have taken a financial expert to analyze these choices and conclude that spreading the charges over time would cost substantially less. Surprisingly, however, PACE made the other choice. A quick run of the numbers suggests that getting this one decision right would have reduced the $40 Million per year difference in scenario costs by as much as $10 Million per year.
Harmful emissions: regulation-related risks.
PACE’s projections of what AE will have to pay to reduce/mitigate harmful emissions from coal are likely understated.
Interestingly, the problem is not due to PACE’s projections for carbon allowance prices. Those predictions ($25 per ton in 2020) are in the range of what Point Carbon is currently projecting ($13.70 in 2012; $24 in 2019).
Rather, PACE’s assumptions seem likely to undershoot because they ignore regulations that many see coming to Austin. For instance, no consideration is given to the possibility that AE will have to bear extra costs to mitigate coal waste (coal ash) if EPA decides it is a hazardous waste. Industry experts indicate that this is a substantial risk and that removal of such wastes might cost AE as much as $30 Million more per year – a hefty charge linked to the continued use of coal.
Broader community costs and benefits (externalities)
Finally, the PACE analysis ignores some very substantial pollution-related costs that don’t directly hit AE’s books…but that hit someone. Recently, the National Academies released a study entitled “Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use” (www.nap.edu/catalog/12794.html) that suggests that Austin’s share of the health problems created by AE’s coal plant totals as much as $50 Million per year.
Do we need to keep arguing whether green is more expensive?
Chart 1 below relays the range of assumptions (and their financial impact) that have not been considered in PACE’s projection of the cost of moving from coal. As you can see, the omissions are substantial.
And there are still other areas of unvalued costs and/or benefits. For example:
- How government subsidies for renewable energy projects, which are already available, would reduce the cost of moving from coal to renewable-generated electricity.
- Changes in the value of the coal plant over the planning horizon. As the hazards of relying on coal become more recognized, the value of existing coal plants will fall. Selling the plant earlier (rather than later) could have a substantial effect on how much it ultimately costs to move away from coal.
- Creation of Austin-based green jobs (e.g., energy conservation and solar installation). This is not direct impact on the cost of coal, but rather a benefit for the Austin economy that would come from abandoning coal.
The aggregate potential impact of the assumption areas listed in Chart 1 are graphed on Chart 2.
When we consider only PACE’s analysis, it looks like going green earlier would cost Austin around $40 million per year.
… when we adjust some of the financial assumptions to be more realistic (blue ink), the cost falls to $19 million.
… when we add some regulatory risks (red ink), most of which are high probability, the balance turns against coal.
…when we consider harmful effects of our coal emissions (green ink), the case turns strongly positive for moving away from coal.
…and the potential community benefits to be gained by moving away from coal are the icing on the cake.
What should we do now?
The debate over the financials of Austin’s future electricity generation has led us to a conclusion: when you consider more of the costs and benefits, one finds that it’s cheaper to move away from coal. This demands a change of focus.
We’re not choosing between harmless options here. There certainly are reasons, aside from financials, why one would want Austin to move away from coal. Burning coal harms our kids and environment. CO2 is collecting in the atmosphere, setting the stage for global warming-induced catastrophes. Mercury is concentrating in streams and in our food. Particulates in coal smoke are exacerbating asthma symptoms and leading to increased numbers of asthma sufferers. Burning coal causes humans harm… the more coal burned, the more harm.
There’s a lot of logistic and implementation work to be done before we can eliminate the hazards of coal. Let’s stop focusing on whether we can afford greener electricity and instead turn our focus to developing the programs and infrastructure we’ll need to make the transition to cleaner sources of energy.
[1] Other scenarios were also evaluated – this article focuses on two that bracket the “use coal” vs. “don’t use coal” debate. A third scenario, in which AE’s coal plant is used to generate electricity for sale outside the AE system would cost less than AE’s recommended scenario. This article does not analyze this third scenario because it seems at odds with Austin’s commitment to being a leader in environmental protection and a moral entity that refuses to endanger people with harmful pollution simply for the sake of profits.
