Assumptions to the Annual Energy Outlook 2002
Electricity Market Module
The NEMS Electricity Market Module (EMM) represents the capacity planning, dispatching, and pricing of electricity. It is composed of four submodules—electricity capacity planning, electricity fuel dispatching, load and demand-side management, and electricity finance and pricing. It includes nonutility capacity and generation, and electricity transmission and trade. A detailed description of the EMM is provided in the EIA publication, Electricity Market Module of the National Energy Modeling System 2002, DOE/EIA- M068(2002) January 2002.
Based on fuel prices and electricity demands provided by the other modules of the NEMS, the EMM determines the most economical way to supply electricity, within environmental and operational constraints. There are assumptions about the operations of the electricity sector and the costs of various options in each of the EMM submodules. This section describes the model parameters and assumptions used in EMM. It includes a discussion of legislation and regulations that are incorporated in EMM as well as information abut the climate change action plan. The various electricity and technology cases are also described.
EMM Regions
The supply regions used in EMM are based on the North American Electric Reliability Councils shown in Figure 4.
Model Parameters and Assumptions
Generating Capacity Types
The capacity types represented in the EMM are shown in Table 37. Assumptions for the renewable technologies are discussed in a later chapter.
New Generating Plant Characteristics
The cost and performance characteristics of new generating technologies are inputs to the electricity capacity planning submodule (Table 38). These characteristics are used in combination with fuel prices from the NEMS fuel supply modules and foresight on fuel prices, to compare options when new capacity is needed. Heat rates for fossil-fueled technologies decline linearly through 2010.
The overnight costs shown in Table 38 are the cost estimates to build a plant in a typical region of the country (Middletown, U.S.A). Differences in plant costs due to regional distinctions are calculated by applying regional multipliers (Table 39) that represent variations in the cost of labor. The base overnight cost is multiplied by a project contingency factor and a technological optimism factor (described later in this chapter), resulting in the total construction cost used for the capacity choice decision.
Technological Optimism and Learning
Overnight costs for each technology are calculated as a function of regional construction parameters, project contingency, and technological optimism and learning factors. For each generating technology available for new capacity in a region, the overnight cost used by the model is calculated using the base cost, technological optimism and contingency factors for the technology from Table 38, the regional factors from Table 39, and the learning parameters from Table 40.
The technological optimism factor represents the demonstrated tendency to underestimate actual costs for a first-of-a-kind, unproven technology. As experience is gained (after building 4 units) the technological optimism factor is gradually reduced to 1.0.
The learning function has the nonlinear form:
OC(C) = a*C-b,
where C is the cumulative capacity for the technology.
The progress ratio (pr) is defined by speed of learning (e.g., how much costs decline for every doubling of capacity). The reduction in capital cost for every doubling of cumulative capacity (f) is an exogenous parameter input for each technology Table 41. Consequently, the progress ratio and f are related by:
pr = 2-b = (1 - f)
The parameter “b” is calculated by (b =-(ln(1-f)/ln(2)). The parameter “a” can be found from initial conditions. That is,
a =OC(C0)/C0-b
where C0 is the cumulative initial capacity. Thus, once the rates of learning (f) and the cumulative capacity (C0) are known for each interval, the corresponding parameters (a and b) of the nonlinear function are known. Three learning steps were developed, to reflect different stages of learning as a new design is introduced to the market. New designs with a significant amount of untested technology will see high rates of learning initially, while more conventional designs will not have as much learning potential. All technologies receive a minimal amount of learning, even if new capacity additions are not projected. This could represent cost reductions due to future international development or increased research and development.
International Learning. In AEO2002, capital costs for all new electricity generating technologies (fossil, nuclear, and renewable) decrease in response to foreign and domestic experience. Foreign units of new technologies are assumed to contribute to reductions in capital costs for units that are installed in the United States to the extent that (1) the technology characteristics are similar to those used in U.S. markets, (2) the design and construction firms and key personnel compete in the U.S. market, (3) the owning and operating firm competes actively in the U.S. market, and (4) there exists relatively complete information about the status of the associated facility. If the new foreign units do not satisfy one or more of these requirements, they are given a reduced weight or not included in the domestic learning effects calculation.
AEO2002 includes 1,811 megawatts of advanced coal gasification combined-cycle capacity, 5,244 megawatts of advanced combined-cycle natural gas capacity, 47 megawatts of wind capacity and 11 megawatts of biomass capacity to be built outside the United States from 2000 through 2003.
Distributed Generation
Distributed generation is modeled in the end-use sectors as well as in the EMM, which is described in the appropriate chapters. This section describes the representation of distributed generation in the EMM only. Two generic distributed technologies are modeled. The first technology represents peaking capacity (capacity that has relatively high operating costs and is operated when demand levels are at their highest). This includes a generic representation of micro-turbines, frame type combustion turbines operating on natural gas, and three types of reciprocating engines. The cost of the generic technology is the sum of an assumed share of each of the technologies mentioned above multiplied by its respective costs. The lowest costs are for the diesel cycle/compression ignition engines operated with natural gas. This technology represents 40 percent of the generic technology for peaking distributed generators. The second generic technology for distributed generation represents base-load capacity (capacity that is operated on a continuous basis under a variety of demand levels). The technologies in the generic mix include heavy-duty micro-turbines, combustion turbines, compression ignition engines, and fuel cells. The cost of the base-load technology is calculated in the same fashion as is done for the peaking technology. Combustion turbines and engines make up about one-half of the base-load technology.
Table 41 shows the characteristics for the generic technologies for 2000 and 2010. The capital cost for the baseload generator is about 27 percent more expensive than for a peaking generator in 2010. However, the operations and maintenance costs are less for the base-load distributed generator. Because of the small size of distributed generators, it is unlikely that they would obtain the lower natural gas prices available to larger high-volume central generators. In order to account for uncertainty in the delivered costs of natural gas it was assumed that distributed generators would pay a premium of 2 dollars per million Btu above the price incurred by larger-scale electricity producers.
Representation of Electricity Demand
The annual electricity demand projections from the NEMS demand modules are converted into load duration curves for each of the EMM regions (based on North American Electric Reliability Council regions and subregions) using historical hourly load data. However, unlike traditional load duration curves where the demands for an entire period would be ordered from highest to lowest, losing their chronological order, the load duration curves in the EMM are segmented into the 9 time periods shown in Table 42. The summer and winter peak periods are represented in the model by 2 vertical slices each (a peak slice and an off-peak slice) while the remaining 7 periods are represented by 1 vertical slice each, resulting in a total of 11 vertical slices. The time periods shown were chosen to accommodate intermittent generating technologies (i.e., solar and wind facilities) and demand-side management programs.
Reserve margins—the percentage of capacity required in excess of peak demand needed for unforeseeable outages—are also assumed for each regulated EMM region. A 13 percent reserve margin is assumed for MAPP and STV, 9 percent for FL, and 15 percent for NWP. In the other regions where competition has replaced regulation in all or a majority of the region, the EMM determines the reserve margin by equating the marginal cost of capacity and the cost of unserved energy.
Fossil Fuel-Fired and Nuclear Steam Plant Retirement
Fossil-fired steam plant retirements and nuclear retirements are calculated endogenously within the model. Plants are assumed to retire when it is no longer economical to continue running them. Each year, the model determines whether the market price of electricity is sufficient to support the continued operating of existing plants. If the expected revenues from these plants are not sufficient to cover the annual going forward costs, the plant is assumed to retire if the overall cost of producing electricity can be lowered by building new replacement capacity. The going-forward costs include fuel, operations and maintenance costs and annual capital additions, which are plant specific based on historical data. The average capital additions for existing plants are $8 per kilowatt (kW) for oil and gas steam plants, $6/kW for combined-cycle plants, and combustion turbines, $15/kW for coal plants and $30/kW for nuclear plants. These costs are added to existing plants regardless of their age. Beyond 30 years of age an additional $5/KW capital charge for fossil plants, and $50/kW charge for nuclear plants is included in the retirement decision to reflect further investment to address impacts of aging. Age related cost increases are due to capital expenditures for major repairs or retrofits, decreases in plant performance, and/or increased maintenance costs to mitigate the effects of aging.
Biomass Co-firing
Coal-fired power plants are allowed to co-fire with biomass fuel if it is economical. Individual plants are assumed to be able to replace up to five percent of their total fuel consumption with biomass, assuming sufficient residue fuel is available within the State where the plant is located.
New Nuclear Plant Orders
A new nuclear technology competes with other fossil-fired and renewable technologies as new generating capacity is needed to meet increasing demand, or replace retiring capacity, throughout the forecast period. The cost and operating assumptions for the advanced nuclear technology represented in the NEMS are based on Westinghouse’s advanced passive reactor design (AP600). It is one of three new designs that have received design certification from the Nuclear Regulatory Commission (NRC), a necessary step to new nuclear construction. The other two designs (General Electric’s Advanced Boiling Water reactor and ABB/Combustion engineering’s System 80+) are not significantly different from current designs; they are based on larger sizes (over 1 gigawatt) and do not include passive safety features. The AP600 design is based on a smaller size (600 megawatts) and includes passive safety features, both of which make it more attractive to investors. Westinghouse is in a pre-application stage for approval of a larger unit of the same design, the AP1000. They expect to gain cost efficiencies from the larger size, lowering the cost per kilowatt. Research and development on more revolutionary designs is continuing, both in the United States and abroad. However, until the designs are approved by the NRC, there are too many uncertainties to be included as a future option within the forecast period.
Interregional Electricity Trade
Both firm and economy electricity transactions among utilities in different regions are represented within the EMM. In general, firm power transactions involve the trading of capacity and energy to help another region satisfy its reserve margin requirement, while economy transactions involve energy transactions motivated by the marginal generation costs of different regions. The flow of power from region to region is constrained by the existing and planned capacity limits as reported in the NERC and WSCC Summer and Winter Assessment of Reliability of Bulk Electricity Supply in North America. Known firm power contracts are obtained from NERC’s Electricity Supply and Demand Database 2000. They are locked in for the term of the contract. Contracts that are scheduled to expire by 2010 are assumed not to be renewed. Because there is no information available about expiration dates for contracts that go beyond 2010, they are assumed to be phased out by 2020. In addition, in certain regions where data show an established commitment to build plants to serve another region, new plants are permitted to be built to serve the other region’s needs. This option is available to compete with other resource options.
Economy transactions are determined in the dispatching submodule by comparing the marginal generating costs of adjacent regions in each time slice. If one region has less expensive generating resources available in a given time period (adjusting for transmission losses and transmission capacity limits) than another region, the regions are allowed to exchange power.
International Electricity Trade
Two components of international firm power trade are represented in the EMM—existing and planned transactions, and unplanned transactions. Existing and planned transactions are obtained from the North American Electric Reliability Council’s Electricity Supply and Demand Database 2000. Unplanned firm power trade is represented by competing Canadian supply with U.S. domestic supply options. Canadian supply is represented via supply curves using cost data from the Department of Energy report Northern Lights: The Economic and Practical Potential of Imported Power from Canada, (DOE/PE-0079).
International economy trade is determined endogenously based on surplus energy expected to be available from Canada by region in each time slice. Canadian surplus energy is determined using Canadian electricity supply and demand projections as reported in the Canadian National Energy Board report Energy Supply and Demand to 2025.
Electricity Pricing
The reference case assumes a transition to full competitive pricing in New York, New England, Mid-Atlantic Area Council, and Texas. California is assumed to return to fully regulated pricing in 2002, after beginning to transition to completition in 1998. In addition electricity prices in the East Central Area Reliability Council, the Mid-American Interconnected Network (Illinois, plus parts of Missouri, Michigan and Wisconsin), the Southwest Power Pool, and the Rocky Mountain Power Area/ Arizona are a weighted average of both competitive and regulated prices. Some of the States in each of these regions have not taken action to deregulate their pricing of electricity, and in those States prices are assumed to continue to be based on traditional cost-of-service pricing. The price for the region will be a weighted average of the competitive price and the regulated price, with the weight based on the percent of the region that has taken action to deregulate. The reference case assumes that State-mandated price freezes or reductions during a specified transition period will occur based on the terms of the legislation. In general, the transition period is assumed to occur over a ten-year period from the effective date of restructuring, with a gradual shift to marginal cost pricing. In regions where none of the states in the region or where states representing less than half of regional electricity sales have introduced competition, electricity prices are assumed to remain regulated. The cost-of-service calculation is used to determine electricity prices in regulated regions.
The price of electricity to the consumer is comprised of the price of generation, transmission and distribution including applicable taxes. Transmission and distribution are considered to remain regulated in the AEO; that is, the price of transmission and distribution is based on the average cost for each customer class. In the competitive regions, the generation component of price is based on marginal cost, which is defined as the cost of the last (or most expensive) unit dispatched. The marginal cost includes fuel, operating and maintenance, taxes, and a reliability price adjustment, which represents the value of capacity in periods of high demand. Therefore, the price of electricity in the regulated regions consists of the average cost of generation, transmission, and distribution for each customer class. The price of electricity in the four regions with a competitive generation market consists of the marginal cost of generation summed with the average costs of transmission and distribution. In the four partially competitive regions the price is a combination of cost-of-service pricing and marginal pricing weighted by the share of sales.
In recent years, the move towards competition in the electricity business has led utilities to make efforts to reduce costs to improve their market position. These cost reduction efforts are reflected in utility operating data reported to the Federal Energy Regulatory Commission (FERC) and these trends have been incorporated in the AEO2002. The key trends are discussed below:
- Reduced General and Administrative Expenses (G&A) - Over the 1990 through 1999 period, utilities have reduced their employment at fossil steam plants at a rate of 4 percent per year. This trend has been incorporated by reducing total G&A expenditures at a rate of 2.5 percent annually through 2005. No further reductions are assumed to occur after 2005.
- Reduced Fossil Plant Operations Expenditures (O&M) - Again, over the 1990 through 1999 period, utility fossil plant operation and maintenance costs (all operating costs other than fuel) fell at a rate of about 3 percent annually. As with G&A, this trend has been incorporated by reducing fossil O&M expenditures at a rate of 2.5 percent annually through 2005. No further reductions are assumed to occur after 2005.
Demand-Side Management
Improvements in energy efficiency induced by rising energy prices, new appliance standards, and utility demand-side management programs are represented in the end-use demand models. Appliance choice decisions are a function of the relative costs and performance characteristics of a menu of technology options. In 1999, utilities reported spending over $1.4 billion on demand-side management programs.93
Fuel Price Expectations
Capacity planning decisions in the EMM are based on a life cycle cost analysis over a 20-year period. This requires foresight assumptions for fuel prices. Expected prices for coal, natural gas, and oil are derived using adaptive expectations, in which future prices are extrapolated from recent historical trends.94 For each projection year, coal prices are assumed to decrease one percent annually from that year’s projected price until the end of the subsequent 20 year period. For each oil product, future prices are estimated by applying a constant markup to an external forecast of world oil prices. The markups are calculated by taking the differences between the regional product prices and the world oil price for the previous forecast year. For natural gas, expected wellhead prices are based on a nonlinear function that relates the expected price to the expected cumulative domestic gas production. Delivered prices are developed by applying a constant markup, which represents the difference between the delivered and wellhead prices from the prior forecast year.
The approach for natural gas was developed to have the following properties:
1. The natural gas wellhead price should be upward sloping as a function of cumulative gas production.
2. The rate of change in wellhead prices should increase as fewer economical reserves remain to be discovered and produced.
The approach assumes that at some point in the future a given target price, PF, results when cumulative gas production reaches a given level, QF. The target values for PF and QF were assumed to be $7.00 per thousand cubic feet (1995 dollars) and 2000 trillion cubic feet (tcf), respectively. Gas hydrates are included in the resource base at a level of 60 tcf, and geopressurized aquifers are included at 500 tcf. The future annual production is assumed to be constant at the prior year’s level. There is also the flexibility to assume a different path in the short term and longer term by choosing an inflection price at which new competitors would enter the market.
The expected wellhead gas price equation is of the following form:
Pk = A * Qkexp + B
where P is the wellhead price for year k, Qk is the cumulative production from 1991 to year k, and A and B are determined each year such that the price equation will intersect the future target point (PF, QF). The exponent, exp, is assumed to be 0.70 as long as Pk is below an assumed inflection price of $3.50. Above this price, the exponent is assumed to be 1.30. The cumulative production calculation assumes that future growth in production will be equal to most recent 3 year average growth rate.
Legislation and Regulations
Clean Air Act Amendments of 1990 (CAAA90)
It is assumed that electricity producers comply with the CAAA90, which mandate a limit of 8.95 million tons by 2010. Utilities are assumed to comply with the limits on sulfur emissions by retrofitting units with flue gas desulfurization (FGD) equipment, transferring or purchasing sulfur emission allowances, operating high-sulfur coal units at a lower capacity utilization rate, or switching to low-sulfur fuels. The costs for FGD equipment average approximately $400 per kilowatt, in 2000 dollars, including cost estimates for very small, possibly uneconomic plants. The average cost for units 500 megawatts or greater is $234/kw, although the costs vary widely across the regions. It is also assumed that the market for trading emission allowances is allowed to operate without regulation and that the States do not further regulate the selection of coal to be used.
As specified in the CAAA90, EPA has developed a two-phase nitrogen oxide (NOx) program, with the first set of standards for existing coal plants applied in 1996 while the second set was implemented in 2000 (Table 43). Dry bottom wall-fired, and tangential fired boilers, the most common boiler types, referred to as Group 1 Boilers, were required to make significant reductions beginning in 1996 and further reductions in 2000. Relative to their uncontrolled emission rates, which range roughly between 0.6 and 1.0 pounds per million Btu, they are required to make reductions between 25 and 50 percent to meet the Phase I limits and further reductions to meet their Phase II limits. The EPA did not impose limits on existing oil and gas plants, but some states have additional NOx regulations. All new fossil units are required to meet standards. In pounds per million Btu, these limits are 0.11 for conventional coal, 0.02 for advanced coal, 0.02 for combined cycle, and 0.08 for combustion turbines. All of these NOx limits are incorporated in EMM.
In addition, the EPA has issued rules to limit the emissions of NOx, specifically calling for capping emissions during the summer season in 22 Eastern and Midwestern states. After an initial challenge, these rules have been upheld, and emissions limits have been finalized for 19 states and the District of Columbia (Table 44). Within EMM, electric generators in these 19 states must comply with the limit either by reducing their own emissions or purchasing allowances from others who have more than they need.
Energy Policy Act of 1992 (EPACT)
The provisions of the EPACT include revised licensing procedures for nuclear plants and the creation of exempt wholesale generators (EWGs).
The Public Utility Holding Company Act of 1935 (PUHCA)
Prior to the passage of EPACT, PUHCA required that utility holding companies register with the Securities and Exchange Commission (SEC) and restricted their business activities and corporate structures.95 Entities that wished to develop facilities in several States were regulated under PUHCA. To avoid the stringent SEC regulation, nonutilities had to limit their development to a single State or limit their ownership share of projects to less than 10 percent. EPACT changed this by creating a class of generators that, under certain conditions, are exempt from PUHCA restrictions. These EWGs can be affiliated with an existing utility (affiliated power producers) or independently owned (independent power producers). In general, subject to State commission approval, these facilities are free to sell their generation to any electric utility, but they cannot sell to a retail consumer. These EWGs are represented in NEMS.
FERC Orders 888 and 889
FERC has issued two related rules (Orders 888 and 889) designed to bring low cost power to consumers through competition, ensure continued reliability in the industry, and provide for open and equitable transmission services by owners of these facilities. Specifically, Order 888 requires open access to the transmission grid currently owned and operated by utilities. The transmission owners must file nondiscriminatory tariffs that offer other suppliers the same services that the owners provide for themselves. Order 888 also allows these utilities to recover stranded costs (investments in generating assets that are unrecoverable due to consumers selecting another supplier). Order 889 requires utilities to implement standards of conduct and a Open Access Same-time Information System (OASIS) through which utilities and non-utilities can receive information regarding the transmission system. Consequently, utilities are expected to functionally or physically unbundle their marketing functions from their transmission functions.
These orders are represented in EMM by assuming that all generators in a given region are able to satisfy load requirements anywhere within the region. Similarly, it is assumed that transactions between regions will occur if the cost differentials between them make it economic to do so.
Electricity and Technology Cases
High Electricity Demand Case
The high electricity demand case assumes that electricity demand grows at 2.5 percent annually between 2000 and 2020. In the reference case, electricity demand is projected to grow 1.8 percent annually between 2000 and 2020. No attempt was made to determine the changes needed in the end-use sectors to result in the stronger demand growth.
The high electricity demand case is a partially integrated run. The end-use demand modules are not operated, but all of the electricity end-use demands from the reference case are multiplied by the same factor to achieve the higher growth rate. Using the higher electricity demand and all other reference case demand projections as inputs, the EMM, Macroeconomic Activity, Petroleum Marketing, International Energy, Oil and Gas, Natural Gas Transmission and Distribution, Coal Market, and Renewable Fuels Modules are allowed to interact.
Low and High Fossil Cases
The low fossil case assumes that the costs of advanced generating technologies (integrated coal- gasification combined-cycle, advanced natural gas combined-cycle and turbines) will remain at current costs during the projection period, that is, no learning reductions are applied to the cost. Operating efficiencies for advanced technologies are assumed to be constant at 2002 levels. Capital costs of conventional generating technologies are the same as those assumed in the reference case (Table 45).
In the high fossil case, efficiencies of advanced fossil generating technologies are higher than the reference case, based on the Department of Energy, Office of Fossil Energy’s Vision 21 program goals, while efficiencies of conventional technologies are the same as used in the reference case. The costs of integrated coal-gasification combined-cycle are also assumed to be lower than in the reference case.
The low and high fossil runs are partially-integrated runs, i.e., the reference case values for the Macroeconomic Activity, Petroleum Market, International Energy, and end-use demand modules are used and are not affected by changes in generating capacity mix. Conversely, the Oil and Gas Supply, Natural Gas Transmission and Distribution, Coal Market, and Renewable Fuels Modules are allowed to interact with the EMM in the low and high fossil cases.
Low and High Nuclear Cases
Two alternative cases were developed to incorporate the effects of uncertainty about the aging process for nuclear power plants. This uncertainty exists because there is currently no information about the costs of 40 or 50-year old nuclear power plants. In the high nuclear capacity case, it was assumed that there would be no age-related costs. The high nuclear case considers the possibility that costs would not increase beyond current levels due to aging and nuclear units are more likely to operate beyond current licenses. In the low nuclear capacity case, the age-related costs after age 30 were assumed to be the same as the reference case ($50/kw), but costs would increase to $100/kw after 40 years. This low nuclear case is intended to address the impacts that degraded performance and/or higher costs of older plants have on their competiti- veness over the next decade.
The low and high nuclear cases are partially-integrated model runs, i.e., the reference case values for the Macroeconomic Activity, Petroleum Market, and International Energy modules are used and are not affected by changes in nuclear capacity. Conversely, the Oil and Gas Supply, Natural Gas Transmission and Distribution, Coal Market, and Renewable Fuels Modules interact with the EMM in the high and low nuclear cases.
Advanced Nuclear Cost Case
An advanced nuclear cost case was used to analyze the sensitivity of the projections to lower costs and construction times for new plants. The cost assumptions are consistent with the goals for “Generation III” nuclear plants endorsed by the Department of Energy’s Office of Nuclear Energy. In this case, the overnight capital cost, without contingencies, of a new advanced nuclear unit is assumed to be $1500/kilowatt initially, and to fall to $1200/kilowatt by 2015. The overnight cost with the ten percent project contingency is shown in Table 46. The case assumed a 3-year lead time, the goal of the Office of Nuclear Energy. The cost and performance characteristics for all other technologies are as assumed in the reference case.
URL: http://www.eia.doe.gov/oiaf/aeo/assumption/electricity.html