Market Briefing: Effective Plant Shutdowns and Turnaround2008/11/13 · Market Briefing: Effective Plant Shutdowns and Turnaround Introduction With an ever increasing demand for electricity,

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Market Briefing: Effective Plant Shutdowns and Turnaround

Introduction

With an ever increasing demand for electricity, it’s almost hard to imagine that plants have to

be decommissioned. With cleaner, more efficient technology being developed every day many

existing power plants around the world are becoming obsolete; replaced by newer, more

technologically advanced versions or forced to adapt to the changing market structures.

Compatible generation technology with the growth of smart-grid technology as well as micro

generation and distribution have their effects on centralized generation plants.

The Influence of Gas

It was not that long ago that natural gas was a waste product of the oil

industry and flared instead of utilised as an energy source. Interest in

natural gas increased as its’ value as a fuel for power generation and

heating was understood. Natural gas is now projected to become the

number two fuel in the global energy mix after oil in many countries

even though on a global level it still ranks number 3 to coal. Not only is

it one of the few viable alternatives in the power generation sector to

back up intermittent renewables for power generation, but also the use

of natural gas in power generation reportedly generates fewer CO2

emissions compared to oil and coal.

A natural gas glut in the North American market caused by excess supply of shale gas is

influencing regional and global gas prices. Therefore, interest in the use of natural gas as an

oil substitute in transportation has increased considerably. Most notably in recent years, the

price of gas has been indexed at lower levels and seems to be decreasingly tied to the price

of oil, as can be seen in the chart below.

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Natural gas is also substituting oil in the chemical sector, specifically ethane produced as a

by-product in natural gas production for naphtha derived from oil. This is notably in the US

where many chemical companies have relocated or announced relocations to sites close to

shale gas plays or pipeline infrastructure. Countries in the Middle East increasingly are

producing petrochemicals domestically in order to increase their revenues from hydrocarbon.

Some Middle Eastern countries also plan to switch from the use of oil to natural gas for

domestic power generation in order to optimise revenue and volume of oil exports.

A similar switch from coal to natural gas for power generation is happening at an accelerated

pace. This is not due to any price advantage for natural gas, as coal is still a cheaper fuel

source. Rather the move towards the use of natural gas is to meet carbon emission reduction

targets, and because natural gas is a more flexible fuel. This switch has been more notable in

the US and Europe to meet energy policy.

With the rapid growth seen in gas generation capacity and it’s low cost per KWh as indicated

by the chart below, low prices and increasing carbon taxation will probably mean a marked

shift away from Coal to gas necessitating shutdown or conversion of older plants.

Natural gas is often touted as a future fuel to continue to replace coal in power generation

projects and oil as a transportation fuel due to its favourable economics, in the case of oil, and

lower carbon footprint.

The renewable energy sector often touts natural gas as a ‘bridge fuel’ to meet power and

heating needs until they believe renewables will meet 100% of energy needs. In Europe the

European Gas Advocacy Forum has outlined an energy transition scenario from 2010 to 2030

from coal to natural gas that meets the target to reduce greenhouse gas emissions by 80% by

2050. It is believed that this would achieve at a low cost with a large percentage of gas in the

mix, due to the following reasons.

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Table 0.1: Benefits of increased gas use in the EU energy transition

Lower cost Lower risks and easier

implementation

Robust, reliable and secure

energy system

Up to EUR 450 to 550 billion less

investment necessary

Focus on mature technologies

reduces reliance on technological

breakthroughs

Security of gas supply through

growth in reserves, surplus

infrastructure and increasing

numbers of suppliers

EUR 150 to 250 lower annual cost

per household

Allows new technologies, such as

Carbon Capture and Storage

(CCS), to mature before

implementing

Robust power system resulting

from a balanced technology mix

with lower reliance on intermittent

supply sources

A 5% to 10% decrease in profit

margins could be avoided in

energy-intensive industries

Less dramatic overhaul of

wholesale pricing required

Reduced country inter-dependence

because of lower need for cross-

border interconnection

Source: European Gas Advocacy Forum, Schlumberger Business Consulting

For over 90 years the consumption of natural gas has been increasing, in part due to fuel

switching from coal to natural gas. With a stabilization of gas prices at a new low level, the

trend of switching is set to continue.

The cost of electricity in the future, the price of renewable energy

The cost of electricity is a complex calculation. Using a number of

assumptions it is possible to calculate the cost of producing

electricity in a fixed situation but there are still external variables,

especially in a lifetime cost calculation, which an owner has to

evaluate with additional risk and sensitivity analysis. These include

political factors such as the impact of the two oil crises on the 1970s

which have had a permanent effect on many countries’ energy

policies, climate considerations, financial trends and many others.

There are many occasions when the cheapest or most convenient

solution is not the best. However, we have to have some cost

estimation as a basis for the decision. Two approaches are most

commonly used, overnight cost and levelized cost.

Overnight cost is the cost of a construction project if no interest was incurred during

construction, as if the project was completed “overnight." An alternate definition is: the present

value cost that would have to be paid as a lump sum up front to pay for a construction project

completely. When describing power plants, the unit of measure typically used when citing the

overnight cost of a power plant is $/kW. For example, the overnight cost of a nuclear plant

might be $1,200/kW, so a 1,000MW plant would have an overnight cost $1.2 billion. Interest

on the $1.2 billion spent during construction would be extra.

Levelized cost (LCOE – levelized cost of electricity) is the cost of generating electricity using

the simple levelized average (unit) lifetime cost method using discounted cash flow (DCF).

This takes into account many factors; construction cost, interest rate, fuel cost, carbon cost,

the rate of replacement for plant, decommissioning cost, fixed O&M costs, load factors and

other cost components. It is quite simply the total cost, discounted to present day values of

every element of foreseeable cost in a plant’s lifetime. It is a useful method of comparing the

cost of generating electricity with different technologies.

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Often overlooked in these figures and cost analyses are the costs of transmission grid

extensions which will be required. These consist of two costs. Taking the UK and Germany as

examples, the national grids will need expansion of the overland transmission network to move

electricity generated by wind turbines in regions distant from load centres, such as from the

northwest of Scotland in the UK and the northwest of Germany. These investments will be in

the order of $2-3 billion. However, much larger investments will be to needed to create subsea

cable transmission networks from connection points in the ocean to link off-shore wind turbines

to land. In the UK private investors are currently tendering for new privately-owned subsea

transmission companies in the North Sea and other locations around Britain. National Grid,

the UK TSO, estimates the cost at around £15 billion ($23 billion).

These figures demonstrate the huge cost burden which renewables are going to put onto the

consumer.

The overnight cost of onshore wind electricity is about the same as for SC coal and 40%

cheaper than for coal with CCS, but it can only replace around 15% of the coal capacity. By

2020 the total overnight cost of the wind and solar energy generating capacity which is planned

will be $2,498 billion at today’s value and $358 billion of coal generating capacity will not need

to be built, on the basis of a capacity credit of 15%. Therefore, the total investment cost of all

this wind and solar capacity will be $2.14 trillion over what would otherwise be spent. Given

that the levelized costs of wind is over 50% higher than coal ($97 versus $65 and $62 at 5%

discount rate) and solar electricity is almost seven times more costly ($411 versus $65 and

$62) the cost to the consumer of the renewable electricity generated will be even higher.

What this means for the existing plants is that there is an increasing need to overhaul systems

or develop them to be compatible with an increasingly complex grid. With raw material prices

going up and margins slimming, combining these compatibility overhauls with refurbishment

and plant upgrades helps create efficiency and lower lifetime operating costs should a plant

not be set for retirement, yet be unable to compete well with newly developed power plants.

Power Generation Capacity

Power generation capacity and a lack of new and planned capacity is a major barrier to the

growth of the energy sector in terms of meeting demand. Another issue is the energy mix of

power capacity and reliability of power technology types. For example, in countries with a high

penetration of hydro capacity, low rainfalls have resulted in power shortages. Also following

the recent earthquake and tsunami in Japan, utilities have introduced rolling blackouts to make

up for shortfalls in generation capacity due to the damage to the Fukushima nuclear power

plant.

Our research indicates that 2032 is a critical year globally when power demand will exceed

supply from existing and planned generation capacity. This may occur earlier if worldwide

adoption of CO2 trading is introduced. The EU Emissions Trading Scheme (EU ETS) requires

power plants to upgrade their equipment to comply with emission standards within six years

of implementation or they will be shut down.

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Figure 0-1: Actual and projected world electricity, capacity, generation and consumption, MW,

1990 to 2050

Source; NRG Expert

Of the capacity in operation, we project that the main fuel types will be coal and oil and gas

followed by hydro power. The former will be affected by price fluctuations of the fuel and

environmental legislation on emissions, by-products, waste and water use. The capacity of

hydro plants depends upon the level of rainfall and size of reservoirs.

Figure 0-2: Actual and projected world generation capacity by type, MW, 1990 to 2020

Source; NRG Expert

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

19

90

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95

20

00

20

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20

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20

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MW

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Net Generation Net Consumption Generating Capacity (MW)

Date of predicted Energy Shortfall

0

500

1,000

1,500

2,000

2,500

19

90

19

91

19

92

19

93

19

94

19

95

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96

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Coal Oil / Gas / Multifuel Hydro Nuclear Wind Other Renewables Other Fuel

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Power supply shortages are nothing new, and regular occur following extreme weather

incidents affecting infrastructure, unexpected increases in power demand such as demand for

air conditioning on a very hot summers day and failure of generators, transformers etc.

As a result of a lack of power supply following the recent earthquake and tsunami in Japan,

consumers supplied by Tohoku Electric have been asked to voluntarily reduce their electricity

consumption. Businesses are shifting work schedules to earlier in the day and at weekends

and turning auxiliary energy use off (such as unnecessary lighting and air conditions at 6 pm).

Some of these actions, especially the work pattern shifts, are not sustainable in the long run.

Weather events such as storms and extreme temperatures have caused power cuts. For 3

days in February 2011 a severe cold snap resulted in rolling blackouts affecting 4.4 million

customers in the Southwest of the US. Both

electric and gas shortages were reported,

which could have been prevented by the

weatherisation of power plants and increase in

gas storage capacity. It is also worth noting

that weather events affect fuel production. A

weather event can affect all parts of the energy

supply chain; for example, oil platforms and

refineries were closed of the Gulf of Mexico

coast following Hurricane Katrina.

Another issue is that plans to expand nuclear

power capacity or extend the lifetime of

existing capacity in some countries is now on

hold following the Fukushima nuclear accident

in Japan. Within Japan the country’s Premier

has announced plans to phase out nuclear

power all together. A very ambitious plan as

nuclear accounts for 30% of the country’s

generating capacity, and not too long ago

there were plans for nuclear to account for half

of capacity. Since the accident the country has

been relying on crude and diesel to meet

demand, along with behavioural changes and

planned rolling blackouts.

Environmental policies and legislation has caused the shutdown of power generation capacity

in other parts of the world. In Orissa state in India concerns over fly ash disposal resulted in

the closure of the Talcher power plant. This resulted in unscheduled 10 to 30 minute power

cuts.

Utilities in the US are reporting that they will have potential power shortages in the short-term

unless new capacity comes online. In Maryland, it is reported that the state consumes 30%

more power than it generates. At times of high peak demand, some utilities and other

electricity providers are using energy efficiency measures and load management i.e. reducing

or turning off electricity supply to selected consumers, to reduce load. However, over the past

few years, the cost to the utility of energy savings has been increasing. Therefore, there may

come a point where it may be cheaper to invest in new generation capacity than load reduction,

and these measures are effectively acting as a ‘plaster’ on the problem.

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Figure 0-3: Peak load reduction and utility costs per energy saved, 1989 to 2008

Source; EIA, NRG Expert

According to the E.ON, the power utility, of all the countries in its portfolio, the UK has the

most pressing need for new capacity additions. Ofgem, the UK electricity regulator, expects

that there will be a supply shortage in terms by 2015 unless significant investment in new

capacity is made. A total of GBP 200 billion will need to be spent on ageing nuclear and coal

capacity by 2020 to meet demand. The following issues have been identified concerning

security of energy supply in the UK:

The financial crisis;

Gas import dependency;

Wind intermittency;

The low carbon challenge;

New government intervention;

Accelerated plant closures.

Ofgem has started modelling uncertainty for different scenarios and stress on the grid. The

four used scenarios used include green transition, green stimulus, dash for energy and slow

growth.

Table 0-1: Ofgem’s four scenarios for the electricity grid in the UK

Factor Scenario

Green Transition Green Stimulus Dash for Energy Slow Growth

Key supply risk Generation

intermittency*

Generation

intermittency*

Dependent on

natural gas imports

Deferred investment in

generation capacity

0

10

20

30

40

50

60

70

80

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Peak Load Reduction Utility Costs per Energy Savings

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CO2 impact Down 33% by

2020

Down 46% by

2020

Down 14% by 2020 Down 19% by 2020

Impact on

electricity bills

Up by 23% by

2020

Up by 13% by

2020

Down by 14% by

2020

Up by 19% by 2020

Investment

required

GBP 194 billion GBP 190 billion GBP 110 billion GBP 95 billion

*Solar and wind are intermittent and can’t meet peak, intermittent and base load

Source; Ofgem

The regulator has identified the timing of stressing on the UK’s electricity supplies and when

action will need to be taken. Some of these measures will need to be undertaken to meet UK

policy requirements. Specifically the commissioning of new combined cycle gas turbines

(CCGT) will be needed to meet a shortfall in demand following gas plant closures due to the

Large Combustion Plant Directive (LCPD) and the replacement of plants due to close from

2020 under the Industrial Emissions Directive (IED).

Figure 0-4: Key timings for projects to fulfil future shortfalls in the UK’s electricity sector

Source; Ofgem

Even if utilities wanted to it will also be extremely difficult to ramp up generation capacity

quickly through expansions to existing projects and from new projects. The regulatory process

for power projects is quite lengthy in some countries and is causing costly delays.

Furthermore, the permitting process for low impact renewable projects in terms of carbon

emissions is no less lengthy than for a gas or coal plant. In fact a study entitled ‘Project or No

Project, Progress Denied: The Potential Economic Impact of Permitting Challenges Facing

Proposed Energy Projects‘ by the US Chamber of Commerce found that in the United States

it can take just as long for a wind project as a coal plant due ‘NIMBYism’, not in my back yard,

from local residents in an area by the organisation of protests, changing zoning laws, filing

lawsuits and other mechanisms to cause lengthy, costly delays. This study also found that if

all of the studied projects in the approval process were commissioned they would generate

http://www.projectnoproject.com/progress-denied-a-study-on-the-potential-economic-impact-of-permitting-challenges-facing-proposed-energy-projectshttp://www.projectnoproject.com/progress-denied-a-study-on-the-potential-economic-impact-of-permitting-challenges-facing-proposed-energy-projects

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USD 145 billion in economic benefits and involve 791,000 jobs for each year of operation.

Although, it is highly unlikely that all of these projects or even most would be commissioned

any way as not all are likely to be viable.

Another problem for utilities is that the price of capacity for some power plants has actually

increased. For example, the FERC in the US estimates that the overnight costs for a

conventional coal-fired plant and nuclear plant have increased from USD 1,000 to 1,500 per

kW and USD 1,300 to 2,200 per kW respectively in 2004 to USD 1,700 to 4,000 per kW and

USD 4,500 to 7,500 per kW respectively in 208. Therefore, the financial implications of

mismatching supply and demand, and building a coal plant when it is not needed is even

An option that businesses are considering to minimise the potential impact of future energy

shortages and high energy prices is onsite electricity generation. For example, the

supermarket giant Tesco is planning to invest in onsite renewable energy generation capacity

from Combined Heat and Power, biomass, wind and solar projects; and has also introduced

energy efficiency technologies to reduce its overall energy demand. British Telecom has

announced plans to install the ‘world’s largest wind farm project outside of the energy sector’.

Conclusion

This briefing was put together using information from a wide range of sources and presenting

information from a number of NRG Expert products such as:

- NRG Expert’s Energy Security Report

- NRG Expert’s Global Natural Gas Report

- NRG Expert’s Power Generator Databse

- And others

With the energy industry being so dynamic and our growing use of energy, many changes are

taking place at a rapid pace. Many plants in developed countries are reaching the end of their

economic lifespan. With a growing aversion to nuclear, there is going to be a bubble where

decommissioning capability will be highly sought, all while quick new generation projects and

refurbishments are coming online. We are in a transition phase and are seeking out a new

balance that incorporates our high demand with those of ideas for a sustainable future.

For more information, please contact NRG Expert at

+44 (0) 20 8432 3059 or +1 (416) 840-5847

[email protected]

Documents

Market Briefing: Effective Plant Shutdowns and Turnaround2008/11/13 · Market Briefing: Effective Plant Shutdowns and Turnaround Introduction With an ever increasing demand for electricity,