UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
OEC Z i 1979
SUBJECT: Staff Paper on Displacing Oil Powerplants
with Coal
FROM:	Martin Wagner ^vyMjvT"
Chief, Energy Policy Branch
TO:	All Those Interested
Attached is our office's economic analysis of displacing
electric utility oil use with coal; we hope this paper will
prove useful to you.
The analysis looks at the plant level costs of generating
electricity, comparing the costs of using oil in existing
plants, on the one hand, with the costs of using coal in new
or converted plants, on the other. The essential conclusion
is that coal, including the costs of necessary pollution
controls, is generally cheaper.
In the case of conversions, this conclusion holds for a
range of conversion costs, for both baseload and intermediate
operation, and with and without the installation of scrubbers
for pollutant removal.
New coal plants will be cheaper than existing oil plants
in most oil-reliant regions of the country by 1990, the
President's target date for a 50% reduction in electric
utility oil use. We expect the rising cost of oil to outweigh
the capital costs of constructing new coal facilities (recent
oil price increases already make the oil cost used in our study
look quite conservative).
The United States relies heavily on expensive imported
oil. Electric utilities can displace a substantial portion
of this oil by turning to domestically produced coal, while
complying with applicable environmental standards and realizing
substantial economic benefits for consumers.


Attachments

-------
DISPLACING OIL POWERPLANTS WITH COAL: AN ECONOMIC ANALYSIS
EPA analysis indicates that utilities can convert
many oil-fired powerplants to coal - or eyen replace
existing oil plants with new coal plants - and reap
savings for their customers while complying with
applicable environmental standards. The price of oil
is so high, and increasing so rapidly, that it outweighs
the capital costs of converting plants or building
new plants, including necessary pollution controls.
We can generate electricity more cheaply with clean
coal than with oil.
The comparison between coal and oil is complex,
varying with factors such as type of coal and its
sulfur content, region of the country, and.the capacity
factor at which a plant operates. The following tables
present a plant-level analysis of representative cases.
This analysis is conservative, in the sense that it
allows for projected increases in the cost of coal
over the life of a plant, but only considers oil costs
at a point in time. Since oil costs will probably
continue to increase, the analysis understates the
economic benefits from switching to coal.
Table I compares a 500 megawatt oil-fired plant
with a 500 megawatt plant converted to coal under
different assumptions. All of the conversions are
presently economic for a 20 or 15 year remaining
plant life, and all but one are economic with only
a 10 year remaining life. In the 20 year case, the
savings range from 4.8 to 15.7 mills per kilowatthour
(a mill is a tenth of a cent), or from 12 to 40%
of the oil-fired plant's cost of electricity generation.
The analysis uses the delivered cost of coal to
the Northeastern U.S., because this is the region
where many of the coal-capable plants are located.
The different cost assumptions reflect the varying
degrees of conversion work which are necessary in
practice; whether or not a plant needs a scrubber
to remove sulfur dioxide depends largely on the air
quality in its location (plants with scrubbers can
burn higher sulfur coal, which is cheaper). The
capacity factor will vary with the composition by
fuel of the area's powerplants, though coal plants
will generally operate at a higher capacity than
oil plants, due to coal's lower cost.

-------
2
Conversion costs are very plant-specific, and
the figures for any particular plant will probably
differ from those given here; these cases, however,
should prove representative of the actual range of
experience.
Table II compares the costs of an existing oil
plant in 1990 with those of a new coal plant coming
on line at that time (it takes approximately 8 years
to site and construct a new coal-fired powerplant),
broken down by location. The areas chosen are those
whose utilities currently rely heavily on oil. With
plausible assumptions about the future prices of
oil and coal, new coal plants are economic in all
of the regions shown. Rising oil prices make coal
economic, unless its price also goes up exorbitantly.
The capital cost estimates have been escalated
to reflect real increases between the present and actual
construction. Fuel price differences reflect regional
variation in type of coal and transportation cost.
The pollution controls are those required by EPA's
New Source Performance Standards (USPS) for utility
boilers (Southern California requires additional
NOx controls to deal with particularly severe air
quality problems). The calculations are for baseload
operation, since this is the role new coal plants
would play.
Oil plants are costed at both the present and the
projected future price of oil. While oil would be
economic in all of the cases except Texas if its
price remained constant in real terms (all numbers
in the tables are in contstant 1979 dollars), the
comparison flips when the "middle" oil price forecast
of the Administration's Import Reduction Task Force
is used. Coal thus appears economic, even with
conservative assumptions - the analysis has not even
considered increases in oil prices after 1990, and
coal plants will last for 40 years.
Some observers assert that coal and oil prices
will move in lockstep. This, however, seem unlikely,
given OPEC's control of the oil market and the excess
supply prevailing in the coal market. As long as
coal prices increase less rapidly than oil, coal
becomes more and more economic.

-------
3
Table III calculates the annual and total savings
from coal conversions in the different cases. The
total savings from the conversion of a single plant
range from 80.5 to 338.1 million dollars.
Although, as this analysis shows, clean coal is
economic, much of the potential use of coal by electric
utii'. ties has not occurred. This is due in part to
uncertainties (regarding the reliability of supplies
and the costs of extracting and transporting them),
in part to the slowness with which competitive market
forces affect behavior in a regulated industry, and
occasionally to inappropriate rate-making procedures.
Figure I illustrates two methods through which
electricity rates can recover a capital investment.
The declining rate method can make an investment
which is cheaper in the long run seem more expensive
in the short run, and thereby prevent it (for
example, assume that the alternative to the $1000
investment described in the figure had an annual
cost of $130).
A number of energy options will contribute to
meeting the nation's needs, including conservation,
solar, hydro, coal, and perhaps others. Clean
coal can play a substantially greater role that
it has to date.

-------
Table I
Comparison of Operating Costs of Existing Oil Powerplant with Annualized
and Operating Costs of Existing Oil Plant Converted to Coal 1/
(Mills/Kwh)
(Mid-year 1979$)
Existing	Low Cost 3/	High Cost 5/
Oil, Current	Low Cost	Conversion	High Cost £/ Conversion
Price of Oil Conversion 2/ with Scrubber Conversion with Scrubber
Capacity Factor
65%
45%
65%
45%
65% 45%
65%
45%-
65%
45%
Boiler & ESP*
Scrubber
0
0
0
0
1.
0_
8 2.5
0
1.8 2.5
2.6 3.8
5.
3 7.6
0
5.3
2.6
7.6
3.8
Total Annualized
Capital Costs
0
0
1.8
2.5
4.4 6.3
5.3
7.6
7.9
11.4
Fuel Cost
6"/
36.8
7/
38.3
8/
19.0
9/
19.7
10/ 11/
16.6 17.2
8/
19.0
9/
19.7
10/
16.6
11/
17.2
O&M
0.5
0.7
2.5
2.8
5.0 5.6
2.5
2.8
5.0
5.6
Total
(mills/Kwh)
37.3
39.0
23.3
25.0
26.0 29.1
26.8
30.1
29.5
34.2
Total, amortized
over 15 yrs. 12/


23.6
25.5
26.9 30.4
27.8
31.6
31.1
36.5
Total, amortized
over 10 yrs. 13/


24.3
26.6
28.6 32.9
29.9
34.7
34.3
41.1
* electrostatic precipitator

-------
Notes for Table I
Assumes a 10% capital charge in real terms
and a 20 year amortization period (due to
special tax advantages for expenditures on
pollution controls, the actual capital charges
will vary slightly with the portion of expenditure
composed of pollution controls).
Based on a capital cost estimate of $100/kw for boiler
conversion and precipitator upgrade.
Based on a capital cost estimate of $100/kw for boiler
conversion and precipitator upgrade and $150/kw for
retrofitted scrubber.
Based on a capital cost estimate of $300/kw for boiler
conversion and precipitator upgrade.
Based on a capital cost estimate of $300/kw for boilers
conversion and precipitator upgrade and $150/kw for
retrofitted scrubber.
Assumes the current delivered residual oil cost of
$24.40/bbl (1% sulfur oil), heat content of 6.2 million
Btu/bbl, and oil plant baseload heat rate of 9,340 Btu/kwh.
Same as 6/, except for oil plant intermediate load heat
rate of 9,732 Btu/kwh.
Assumes delivered steam coal cost of $1.90/million Btu
(medium sulfur coal in the Northeastern U.S.) and baseload
heat rate for conversion without scrubber of 10,000
Btu/kwh. This figure ($1.90) is a levelized projected
cost for coal delivered over a 30 year period, starting
in 1985. (Source: ICF, Inc. Coal and Electric Utilities
Model).
Same as 8/, except for intermediate load heat rate for
conversion without scrubber of 10,345 Btu/kwh.
Assumes delivered steam coal cost of $1.60/million Btu
(high sulfur coal in the Northeastern U.S. ) and baseload
heat rate for conversion with scjrubber of 10,380 Btu/kwh.
$1.60 is a levelized projected cost for coal delivered
over a 30 year period, starting in 1985. (Source:
ICF, Inc. Coal and Electric Utilities Model).
Same as 10/, except for intermediate load heat rate for
conversion with scrubber of 10,738 Btu/kwh.
Assumes a 12% capital charge.
Assumes a 16% capital charge.

-------
Table II
Comparison of Operating Costs of Existing Oil Baseload Powerplant with
Annualized Costs of New Coal Baseload Plant in Selected Regions 1/
(Mills/kwh)
(Mid-year 1979$)
New Coal Plant
Existing Oil Plant
Texas
Florida
Current Projected
Northern Southern Price Price of
Northeast California California of Oil Oil
Base Plant
Transmission
Pollution
Controls
16.9 13.1
2.0 2.0
3.7
3.7
16.0
2.0
3.7
16.2
2.0
3.7
15.5
2.0
4.3
Total Annual-
ized Capital
Costs 2/ 22.6 18.8
Fuel Cost 3/ 8.5 19.3
O&M	5.4 5.0
Total
(Mills/Kwh)
36.5 43.1
21.7
18.2
5.4
45.3
21.9
17.0
5.5
44.4
21.8
18.5
7.3
47.6
0
0
36.8 4/
0.5
37.3
0
0
48.2 5/
0.5
48.7

-------
Notes for Table II
Assumes capital charges in real terms of 10%
for base plant and transmission and 12.5% for
pollution controls (due to their shorter amortization
period). Capital cost estimates cited below
were escalated for 5 years at 2.2% to reflect
real cost increases between the present and
actual construction.
Based on the following capital cost estimates
(unescalated 1979$):
base plant
Texas lignite	$841/kw
Florida bituminous	$653/kw
Northeast bituminous	$796/kw
N. Cal. sub-bituminous	$808/kw
S. Cal. bituminous	$772/kw
capacity penalty (derating due to pollution
controls) 2.5%
transmission: $100/kw
pollution controls (including scrubber, electrostatic
precipitator,=and cooling tower): $150/kw
additional NOx controls in S. Cal: $ 25/kw (2 mills/kwh O&M)
Based on the following estimates:
delivered coal cost	heat r
Texas (high-sulfur bit.)	$0.80/million Btu	10,910
Florida (high-sulfur bit.)	$1.95/million Btu	9,884
Northeast (high-sulfur bit.)	$1.85/million Btu	9,832
N. Cal (low-sulfur sub^bit.)	$1.65/million Btu	10,300
S. Cal. (low-sulfur bit.)	$1.85/million Btu	10,016
These costs are levelized projected costs for delivered
over a 30 year period, starting in 1990 (Source: ICF, Inc.
Coal and Electric Utilities Model)
Assumes energy penalty (energy used to operate scrubber)
of 2.5% due to scrubber, ("high-sulfur" means
2-3% by weight).
Assumes the current delivered residual oil cost of
$24.40/bbl (1% sulfur oil), heat content of 6.2 million
Btu/bbl, and oil plant baseload heat rate of 9,340 Btu/kwh.
Assumes delivered residual oil cost of $32.00/bbl (1% sulfur
oil) in 1990 (based on Import Reduction Task Force "middle"
forecast crude price of $30/bbl), heat content of 6.2 million
Btu/bbl, and oil plant baseload heat rate of 9,340 Btu/kwh.

-------
Table III
Low Estimates of Annual and Total Savings Frcm the Conversion
to Coal of a 500 Mw Plant 1/
(million 1979$)
Case	Annual Savings Present Value of Total Savings 2/
baseload operation
low cost; w/o scrubber	$39.9	338.1
low cost; w/scrubber	32.2	272.9
high cost; w/o scrubber	29.9	253.4
high cost; w/scrubber	22.2	188.1
intermediate load operation
low cost; w/o scrubber	27.6	233.9
lew cost; w/scrubber	19.5	165.3
high cost; w/o scrubber	17.5	148.3
high cost; w/scrubber	9.5	80.5
1/ "Lew" because these estimates do not consider increases
in oil prices over time.
2/ Discounted at 10% in real dollars, assuming 20 year
plant life.

-------
FIGURE 1
COMPARISON OF TWO UTILITY COST-
ALLOCATION METHODS FOR A $1000
INVESTMENT WITH A 20 YEAR LIFEl/
*150
a ?o
Ir
Dc
Decli-nino Rate Method
te
inn
re
ptec
st
i.a
la L
Le
tion
:t:
:ity
— Charge
f !L s H y t 7 T 1 # II Ii 11 rl ff "'y&'i n 20
Level•Rate Method

-------