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Report Contents Report#:EIA/DOE-0607(99)
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by Data Sources
Background Over the past two decades, U.S. electricity markets have undergone significant change. Historically, for most customers, all the services involved in producing electricity and delivering it to them have been provided by one company. For the most part, that company determined how much generating capacity was needed, designed and built the production facilities (generating plants), designed and built the delivery systems (transmission and distribution lines), and billed the customers for those services. This situation is changing, especially in the generation sector. Where it was once the exclusive domain of integrated power companies,1 there are now many other players emerging in the generation sector. Much of this change has been spurred by legislative and regulatory changes, including the Public Utility Regulatory Policies Act of 1978 (PURPA), the Energy Policy Act of 1992 (EPACT), and the Federal Energy Regulatory Commission (FERC) Orders 888 and 889 in 1996. PURPA, coming in the midst of the energy crises of the 1970s, was implemented to encourage energy efficiency and investment in domestic energy resources. It required that utilities purchase power from qualifying facilities—mainly, small facilities using renewable fuels or burning fossil fuels to produce both electricity and useful thermal energy (heat or steam). While there have been problems with the implementation of PURPA, particularly with the calculation of the appropriate price to pay for power from these facilities, it has succeeded in bringing new players into the generation market. The role of nonutility generators was further stimulated by EPACT. Before its passage, nonutility companies wishing to own and operate power plants were open to regulation as utilities under the Public Utility Holding Company Act of 1935 (PUHCA) and could be required to file extensive information about their company operating costs and performance. This requirement to essentially open their books for examination by regulators, even for those parts of the company not associated with power generation, limited the willingness of nonutility companies to enter into the electricity generating business. To eliminate this problem, EPACT created a new class of generators, referred to as exempt wholesale generators (EWGs), which could be owned and operated by nonutilities or by utilities outside their own service territories and could sell power freely on the wholesale market. EWGs are not subject to the stringent information requirements of PUHCA. The willingness of nonutility companies to enter into the electricity generating business was also limited because of the difficulty of arranging delivery from a new plant to potential customers. Most of the power lines that deliver electricity to customers are owned and operated by the companies that sell the electricity. Those companies have built the lines to meet the needs of their customers, and they have been reluctant to allow others the use of their lines to ship power. Recognizing that all power producers need access to transmission wires— the means for delivering their product—the FERC issued Orders 888 and 889 to create a more competitive generation market. The FERC orders required that transmission system owners post standard rates for use of their lines and make unused capacity available to customers other than their own. The net result of these changes is the emergence of a vibrant market for new generating facilities. When new capacity is needed, project proposals can be expected from a wide variety of sources. In fact, some plants, so-called “merchant plants,” are being built to compete directly with existing plants rather than to meet growing demand. The emergence of these new players means that operators of existing plants must continually look for ways to reduce their costs to remain competitive. While it is impossible to tell to what degree regulatory changes have contributed to changing power plant operational costs to date, the pressure for continued improvements is not expected to lessen.2 The data used in this analysis were compiled by the Utility Data Institute (UDI) from information reported on the FERC Form 1, “Annual Report of Major Electric Utilities, Licensees and Others,” and Form EIA-412, “Annual Report of Public Electric Utilities.” The Form 1 is an annual survey that gathers financial data from investor-owned utilities for formal investigation of electric rates, rate levels, and financial audits. Specific data collected include electric operating revenues, electric maintenance expenses, and generating plant statistics. Most of the data used in this analysis come from Schedule X, “Electric Plant Statistical Data,” which is reported for all steam plants 25 megawatts or larger and for gas turbine or internal combustion plants 10 megawatts or larger. Each year there are approximately 193 respondents to the Form 1. Form EIA-412 collects similar data from approximately 500 municipal and public utilities each year. This analysis examines fossil steam plant operations and maintenance (O&M) costs over the 1981 through 1997 period.3 Between 1981 and 1997, fossil steam plant operating costs have fallen significantly (Figure 1). Total fossil steam plant O&M costs per kilowatthour of electricity produced have fallen by 56 percent in real terms. In fact, nominal O&M costs have remained nearly flat over the period, and fuel costs have declined by nearly 9 percent in nominal terms.4 The vast majority of this reduction has come from declining fuel costs, which have fallen by 60 percent on a per-kilowatthour basis. Figure 1. Fossil Steam Plant Operations and Maintenance Costs, 1981-1997 [source] Some of the decline clearly reflects the return of energy markets to historic levels after the fuel price increases of the mid- and late 1970s; between 1970 and 1980, coal and natural gas prices to electric utilities rose by 204 and 783 percent, respectively. By 1990, however, coal prices in real terms had returned to pre-embargo levels, and in 1996 they reached a new historic low, from which they have continued to decline.5 Nonfuel O&M costs have also fallen sharply, declining by 25 percent over the period (Table 1 and Figure 1). Among the fuels, the total decline has been almost the same: 49 percent for coal plants and 52 percent for oil and gas plants.6 The overall decline was sharper than those for the individual fuels because the share of fossil steam generation accounted for by relatively low-cost coal plants increased from 72 to 87 percent. The overall decline was sharper than those for the individual fuels because the share of fossil steam generation accounted for by relatively low-cost coal plants increased from 72 to 87 percent. Table 1. Fossil Steam Plant Operations and Maintenance Costs, 1981-1997 Where once they produced power at an average of over 3.5 cents per kilowatthour, total production costs for coal-fired plants now average less than 1.8 cents per kilowatthour (Figure 2 and Table 2). Declining fuel costs have again been the main factor in the decline. During the period, minemouth coal prices declined by 60 percent, from $45 per short ton ($2.12 per million Btu) in 1981 to $18 per short ton ($0.88 per million Btu) in 1997.7 The decline reflects a shift from eastern subsurface mines to western surface mines, as well as a rapid increase in mining productivity in all types of mines.8 Over the same period, the delivered price of coal to electricity power plants fell from $2.61 to $1.27 per million Btu. Other factors, including increased utilization, reductions in nonfuel expenditures, and fewer employees per plant, have also played a role (Figure 3). Figure 2. Coal Plant Production Costs, 1981-1997 [source] Figure 3. Coal Steam Plant Nonfuel Operations and Maintenance Costs, 1981-1997 [source] Table 2. Coal Steam Plant Operations and Maintenance Costs, 1981-1997 The per-kilowatthour production costs of coal plants were also driven down by their increased utilization. Many of the nonfuel costs associated with the operation of a large steam plant are unaffected by the utilization of the facility. For example, it takes little additional staff to run the plant whether it is operating at half or full load. As a result, as the utilization of a plant rises its average unit operating costs fall. The average capacity factor of coal plants over the 1981 to 1997 period increased from 51 percent to 61 percent (Figure 4), contributing to the improvement in per-kilowatthour O&M costs. Figure 4. Coal Steam Plant Capacity Factors, 1981-1997 [source] The decline in nonfuel O&M costs was due in part to reductions in employment at coal plants (Figure 5). In 1981 an average 300-megawatt coal plant—roughly large enough to meet the power needs of 170,000 homes—had 75 employees. The number increased slightly to 78 in 1985, but since then it has fallen sharply. By 1997 the average had fallen to 53, a decline of 32 percent. Considering that the generation from coal plants increased by 27 percent between 1985 and 1997, the drop in employment per megawatt of plant capacity is even more impressive. In addition, the reduction in employees—and in nonfuel O&M costs in general—did not begin in earnest until 1986-1987, while fuel costs have been dropping over the entire 1981 to 1997 period. Figure 5. Coal Steam Plant Employees (Average for a 300-Megawatt Plant), 1981-1997 [source] Among the specific cost items reported on the Form 1, the greatest reduction, over 46 percent, was for maintenance on the boiler (Figure 6).9 As mentioned previously, a portion of this reduction in per-kilowatthour terms occurred simply because of the increase in utilization of coal plants. Maintenance on the electric plant also declined significantly, by over 46 percent. It is possible that some of the reductions reflect utility efforts to defer maintenance and save money in preparation for competition; however, it is unlikely that this could have been occurring since 1986 while still maintaining plant performance. Figure 6. Coal Steam Plant Nonfuel Production Expenses, 1981-1997 [source] All vintages of coal plants have shown improvements in fuel and nonfuel O&M costs.10 In terms of fuel costs per kilowatthour, only plants built in the 1940s or earlier are significantly different from the average units (Figures 7 and 8). This difference reflects the relative inefficiency of the older plants. Since the 1950s, however, coal plant efficiencies have changed very little. The smaller plants built in the 1940s and earlier have average heat rates near 13,000 (26 percent efficiency), while those built since the 1950s have average heat rates near 10,000 (34 percent efficiency). Figure 7. Coal Steam Plant Fuel Costs per Kilowatthour by Vintage, 1981-1997 [source] Figure 8. Coal Plant Nonfuel Costs per Kilowatthour by Vintage, 1981-1997 [source] In terms of plant size, all have benefitted from the dramatic fall in coal prices (Figure 9). The smaller plants have slightly higher per-kilowatthour fuel costs, again reflecting the fact that many of them are also quite old and less efficient than other plants. For nonfuel O&M costs there is significant divergence among plants of different sizes (Figure 10). Though all plants sizes have shown improvement, smaller plants still have significantly higher nonfuel O&M costs than do larger plants. Nonfuel O&M costs for plants 200 megawatts and smaller are nearly 3 times those for plants 2,000 megawatts and larger. Figure 9. Coal Plant Fuel Production Costs by Plant Size, 1981-1997 [source] Figure 10. Coal Plant Nonfuel Production Costs by Plant Size, 1981-1997 [source] Like their coal steam counterparts, oil and gas steam plants also saw rapidly declining production costs over the 1981 to 1997 time period.11 From 7.2 cents per kilowatthour in 1981, average production costs for these plants fell to 2.9 cents per kilowatthour by 1995, a 60-percent reduction, before rising to 3.5 cents per kilowatthour in 1997 (Table 3 and Figure 11). Even with the sharp increase in fuel prices in 1996 that drove their production costs up, the overall decline between 1981 and 1997 was 51 percent. Table 3. Oil and Gas Steam Plant Operations and Maintenance Costs, 1981-1997 Figure 11. Oil and Gas Steam Plant Operations and Maintenance Costs, 1981-1997 [source] Fuel price reductions have been key in this trend, declining by 57 percent in per-kilowatthour terms over the period. Most of the reduction occurred between 1985 and 1986, when the average price of natural gas sold to electric utilities fell from $5.05 to $3.37 per thousand cubic feet, a 33-percent drop. As with the coal steam plants, nonfuel O&M costs also fell, though at a different rate and pattern over the years. Nonfuel costs per kilowatthour increased over the first half of the period, between 1981 and 1991, before beginning a steady decline from 0.70 to 0.52 cents per kilowatthour in 1997, a 25-percent reduction. As with coal steam plants, the decline in nonfuel O&M costs at oil and gas steam plants appeared in the later half of the 1980s. In contrast to coal plants, the decline in nonfuel O&M costs at oil and gas steam plants since 1991 occurred even though the output of the plants fell. The utilization of oil and gas steam plants declined from an average rate of 39 percent in 1981 to 24 percent in 1997. Thus, the nonfuel cost reductions per kilowatthour reflect significant operational efficiency improvements rather than the impact of increased utilization. The retirement of older, inefficient oil and gas steam plants has played only a small role in the decline of their average nonfuel operating costs. The group of oil and gas steam plants studied here remained largely intact over the period 1981 to 1997, suggesting that performance improvements represent more than the attrition of poor performers and the survival of efficient plants. In fact, 169 of the plants, comprising 111 gigawatts (about 87 percent of total oil and gas capacity), operated throughout the 1981 through 1997 period. Not surprisingly, the units that have retired were among the oldest; however, a relatively small number, only 5.7 gigawatts, were retired during the years 1990-1996 (Table 4).12 Table 4. Retirement of Oil and Gas Steam Capacity by Plant Vintage, 1990-1996 The observed production cost improvement for oil and gas steam plants completely changed the economics of the facilities. In 1981, only 4.5 percent of total capacity was able to operate at costs below 2 cents per kilowatthour; 51 percent of the capacity, producing nearly 58 percent of the generation, operated at costs in excess of 7 cents per kilowatthour (Figure 12). By 1997, the production cost distribution had changed, with 78 percent of the capacity operating at costs less than 4 cents and 43 percent operating below 3 cents per kilowatthour (Figure 13). Because of their relatively high costs, few oil and gas steam plants were added in the 1980s. However, the introduction of new gas technologies—particularly the very efficient natural-gas-fired combined-cycle plant—over the next decade or so is expected to contribute to a further reduction in natural gas plant operating costs. Figure 12. Distribution of 1981 Oil and Gas Steam Plant Production Costs [source] Figure 13. Distribution of 1997 Oil and Gas Steam Plant Production Costs [source] Examining these plants by vintage shows that the newer plants, about 56 percent of the oil and gas steam capacity and mostly built in the 1970s, generally have the best performance. As would be expected, the oldest plants, those in operation during the 1950s or before (about 9 gigawatts), had both higher fuel costs and significantly higher nonfuel O&M costs.13 However, plants beginning operation any time after 1960 show similar nonfuel O&M costs, with less than a 0.1-cent difference among the vintages by 1997 (Figure 14). (The unusually poor performance for 1980s vintage plants in 1986 is due to high costs at a single plant. Because there are only a few plants in this vintage, one plant's performance can significantly affect the average for all plants.) The generally poor nonfuel O&M performance of the older units can be explained in part by their infrequent use. In 1997, plants in the 1950s and earlier vintage categories were operated at 10-percent utilization, less than half the 24-percent average utilization of all oil and gas steam plants. In a sense these plants are in a "catch-22" situation: they are used infrequently because they have relatively high costs, and their infrequent use drives up their average per-kilowatthour nonfuel O&M costs. The fuel cost distribution by vintage category narrowed considerably over the entire time period. In 1981 the range was 2.6 cents per kilowatthour, but by 1997 it had narrowed to about 0.6 cents per kilowatthour (Figure 15). Figure 14. Oil and Gas Steam Plant Nonfuel Costs per Kilowatthour by Vintage, 1981-1997 [source] Figure 15. Oil and Gas Steam Plant Fuel Costs per Kilowatthour by Vintage, 1981-1997 [source] Looking at oil and gas steam plants by size also showed the expected results—the smaller, older plants tend to be more costly. As mentioned, these older, smaller units typically are used very infrequently. Over the 1981 through 1997 period, capacity factors for oil and gas steam plants declined for all plant sizes, with the largest—those greater than 2,000 megawatts—falling from 43-percent utilization to 24 percent. Mid-sized plants— from 600 to 800 megawatts—declined from 37 percent to 29 percent, and the smallest—200 megawatts and smaller—declined from 29-percent utilization to 10 percent (Figure 16). Figure 16. Oil and Gas Steam Plant Average Capacity Factors by Plant Size, 1981-1997 [source] As with coal plants, employment per megawatt at oil and gas steam plants has also dropped, especially since 1993. After holding steady in a range between 27 and 33 employees per 300 megawatts from 1985 through 1992, plants greater than 600 megawatts reduced their employment by one-third to as much as one-half. By 1997, the largest oil plants were down to about 13 employees per 300 megawatts of capacity, although the smallest plants still had nearly 60 employees per 300 megawatts of capacity (Figure 17). Together, the two supervisory labor components of nonfuel O&M14 declined by about 20 percent. Figure 17. Oil and Gas Steam Plant Employees by Plant Size (Average for a 300-Megawatt Plant), 1981-1997 [source] Most specific nonfuel O&M categories increased over the first 10 years of the 1981-1997 period but have been in decline since 1992 (Figure 18). For example, costs incurred for maintenance on boiler, the single largest nonfuel O&M expense, increased by 36 percent between 1981 and 1991 but have since declined by 35 percent. The story is similar for maintenance on electric plant, the second largest expense, which has fallen on average by 34 percent over the same period. When indexed to 1981 levels, the pattern of change over the entire period emerges. Over the first part of the period, costs other than fuel costs rose; but beginning in the late 1980s and early 1990s, most began to fall. Even with the decline seen in recent years, however, only two categories of nonfuel O&M costs—maintenance on the boiler and the electric plant, the two largest nonfuel cost categories—are below 1981 levels (Figure 19). Figure 18. Oil and Gas Steam Plant Nonfuel Production Costs by O&M Category, 1981-1997 [source] Figure 19. Oil and Gas Steam Plant Production Costs by O&M Category, 1981-1997 [source] Because of the improvements in production costs that have occurred over the past 17 years, existing coal plants are now very economical. Their average production costs—1.8 cents per kilowatthour—make them among the lowest cost plants operating today. In addition, coal prices are expected to continue to fall, although at a somewhat slower rate, in the future. In the Annual Energy Outlook 1999, delivered coal prices to power plants are expected to decline by another 27 percent between 1997 and 2020. Although this is a significant decline, it is smaller than the 51-percent decline that occurred between 1981 and 1997. With respect to nonfuel O&M costs the potential for further declines is less clear. The per-kilowatthour nonfuel O&M costs for coal plants fell by 32 percent between 1981 and 1997, but a good portion of the decrease was due to the 21-percent increase in utilization of the plants rather than to cost improvements. Recent EIA analyses indicate that the trend toward growing utilization of coal plants is expected to continue. In addition, based on the historical improvement, it is assumed that O&M costs will fall by another 25 percent over the next decade.15 There remains considerable dispersion in nonfuel O&M costs among the plants, which could motivate improvements in the higher cost units. Because of the assumed improvements, by 2020, the average production costs of coal steam plants could be as low as 1.3 cents per kilowatthour. With respect to oil and gas steam plants the future is less promising. Although their operating costs fell significantly between 1981 and 1997, they remain uneconomical in comparison with coal plants and other new plant options. Their total per-kilowatthour operating costs in 1997 are nearly twice those for coal plants. The relatively high operating costs of oil and gas plants have led to their declining generation over the 1981 through 1997 period. This decline in utilization is expected to continue as many of these units are retired when they are displaced by more efficient natural gas combined-cycle plants.16 |
