**Palmetto Energy Research**

**Los Altos, California**** **

**August 19, 2013**

To: Kevon Martis, Director, Interstate Informed Citizen’s Coalition

Subject: Marginal cost of reducing CO2 emissions from electricity generation

1. At a delivered natural gas price of $5 per million Btu (which exceeds the actual price over the past 4 years by a small amount):

According to the Energy Information Administration’s 2013 Annual Energy Outlook [www.eia.gov/forecasts/aeo/er/electricity_generation.cfm], the cost of fuel plus operations and maintenance is approximately the same for combined-cycle gas generation as it is for coal generation (after adjusting EIA’s assumption for the price of natural gas price from $6 to $5, but leaving its number for the price of coal, $2.50 per million Btu, unchanged.)

Therefore, at today’s fuel prices, **replacing coal-fired generation with gas-fired generation from a new combined-cycle gas plant costs about $30 per ton of CO2 reduced** ($16/MWh divided by 0.54 tons CO2/MWh).

… where $16/MWh is EIA’s levelized capital cost for new combined-cycle gas capacity and typical values for CO2 emissions from fossil-fired generation equal 0.36 tons/MWh for combined-cycle gas and 0.90 tons/MWh for coal.

2. In contrast, in the absence of subsidies, **adding wind generation to combined-cycle gas generation costs over $300 per ton of CO2 reduced **($120/MWh divided by 0.36 tons CO2/MWh).

… where $120/MWh is the difference between the $150/MWh unsubsidized cost of wind generation plus transmission and transmission losses which we derived in our December 2012 report on “The Hidden Costs of Wind Electricity”

[www.atinstitute.org/wp-content/uploads/2012/12/Hidden-Cost.pdf ] and the $30/MWh upper bound on the cost of natural gas that wind generation could save; while 0.36 tons of CO2/MWh is the value we referred to previously for the CO2 emissions from combined-cycle natural gas.

Even if all transmission costs were excluded, adding wind generation to combined-cycle gas generation would cost $250 per ton of CO2 reduced ($90/MWh divided by 0.36 tons CO2/MWh.

3. Of course, at higher natural gas prices, the discrepancy between the cost of CO2 reductions would be reduced. At a $20 per million Btu delivered price for natural gas, calculations similar to those above would lead to a cost of $215 per ton of CO2 reduced for the case of replacing coal with natural gas (($16 + $100)/MWh divided by 0.54 tons CO2/MWh) versus $83 per ton of CO2 reduced for the case of adding wind to natural gas (($120 – $90)/MWh divided by 0.36 tons CO2/MWh.)

Wind generation would then appear to come out far head.

But that conclusion would be misleading, because in the absence of large-scale energy storage (which no one has proposed to build because of its cost) every MWh of wind generation would likely have to be matched by two or more MWh’s of combined-cycle gas generation. Otherwise, wind generation would have to be curtailed at times of high output.

The blended cost of CO2 reduced by the combination of two MWh of gas generation and one MWh of wind generation would be about $170/MWh, which far exceeds the cost of CO2 reduction from alternatives such as nuclear energy.

Using formulas similar to those above and EIA’s numbers for the levelized cost of generation options, the marginal cost of CO2 reduction from replacing coal with a new nuclear facility is about $80/MWh (($108 – $35)/MWh divided by 0.90 tons CO2/MWh.)

George S. Taylor, Ph.D.

Director, Palmetto Energy Research-an educational nonprofit devoted to energy

650-823-7435