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Issues&Positions

Climate Change: Explanatory Paper

Comparison of electricity produced from waste gases and electricity produced from natural gas

The paper compares electricity production from unavoidable waste gases with natural gas based electricity production. It is found that investment costs and costs for personal operation and maintenance are significantly higher for waste gas fired electricity production. Even by assuming zero fuel cost for waste gases the overall cost for the latter is 120% of the former. Market access gives an additional disadvantage to waste gas based electricity production of either reduced profit or opportunity costs incurred to the extent of 25%. Consequently, an artificial equalization of waste gases with natural gas when allocating free allowances in the framework of the ETS Directive will in effect maintain and reinforce the naturally existing disadvantage of electricity production from waste gases and by this disincentivise the efficient energy recovery and substitution of primary fuels.

The disadvantages of waste gas based electricity production compared to the use of natural gas. are investment costs, operating costs and electricity market pricing.

  • Per MWh of electrical production capacity the waste gas fired power plant has nearly three times higher investment costs than a natural gas fired power plant which for the scenario chosen for this paper result in an investment related debt service of 13 € / MWh for natural gas based electricity production and 35 € / MWh for waste gas based electricity production.
  • Costs for personal, maintenance and operation for waste gas fired power plants and the waste gas infrastructure are between three and four times of the ones for natural gas fired power plants. The figures for the example chosen are 6 € / MWh for natural gas based electricity production and 22 € / MWh for waste gas based electricity production.
  • The fuel costs for the example scenario were identified as 30 € / MWh for natural gas based electricity production and roughly 3 € / MWh for waste gas based electricity production.
  • For the typical example chosen, the combination of investment debt service and operating cost show that by using natural gas the overall production costs are around 49 € / MWh and in the case of waste gas they are 59 € / MWh.

  • The inherent inability of waste gas users to produce (heat, steam or electricity) in line with market demand adds a disadvantage which materialises as an opportunity for profit for natural gas (electricity will only be produced when electricity price exceeds the production cost) and a corresponding opportunity cost for waste gas. The absolute amount is depending on the reference market chosen but in relative terms always amounts to a profit/opportunity cost disadvantage for waste gas of roughly 25%. Using by example forward contracts for the Netherlands for 2015 as the reference, the achievable market price is 78 €/MWh for natural gas based electricity production and 60€/MWh for waste gas based electricity production . Using EEX spot market prices for 2010 as the reference, the achievable market price is 57 €/MWh for natural gas based electricity production and 42 €/MWh for waste gas based electricity production.

Data and assumptions used for the scenario: A typical example was chosen, which for the investment costs uses identical depreciation conditions for both plant types (20 years and 8%). The absolute investment cost for the power plant was defined as 550 € / MWh for natural gas firing and 1 100 € / MWh for waste gas firing. There is additional investment for the waste gas processing infrastructure, which was set very conservatively at 600 € / MWh. For the sake of this comparison and in line with the argument that electricity production from waste gas does not produce additional CO2 the fuel costs (which is not in line with usual calculation rules) are set at zero for waste gases. For natural gas a high volume consumer market price of 18 € / MWh is assumed. For the waste gas fired plant it is assumed that natural gas to the extent of 5% of the pure natural gas fired power plant must be purchased with a higher price as a supply security measure. Electricity generation efficiencies were set at 60% for the natural gas fired power plant and 40% for the waste gas fired power plant.

The cost scenario does not include CO2 costs because the paper aims to identify the structural disadvantages introduced by using unavoidable waste gases. If a CO2 price of 30 € / t CO2 would be applied the additional cost for natural gas based electricity would amount to 10 € / MWh. In case of deducting a natural gas equivalent from steel industry allocation the same amount would have to be added to the waste gas based electricity production cost.

An additional restriction on waste gas based electricity production is imposed by the fact that “optimised utilisation of extracted process gases” on EU level is defined as Best Available Technology and therefore (in its extent subject to the integrated environmental assessment of the permitting authorities) a condition for plant operation.

It is important to be aware that the definition of a hypothetic natural gas equivalent -as it is foreseen in the proposals of DG Clima for a benchmarking system under the Emissions Trading Directive- does not correspond to the actual process conditions of the energy production. In reality a waste gas user of course is confronted with the technical disadvantages of waste gases because it is the waste gases he actually uses and not natural gas.

If one would look at the emissions from the stacks of the power plants the disadvantages described above also result in higher CO2 emissions per electricity unit produced from waste gases. However, from a technical point of view the CO2 intensity of electricity produced from waste gases is zero, because electricity production constitutes a second use of the carbon which was already used to produce steel (for assessing the real climate change effect the emission should not be counted twice). This is also the reason why electricity production from waste gases is always beneficial for the environment and resource conservation.

In this paper the waste gas related costs are even underestimated because in economic calculation a cost would have to be assigned to the waste gases (which was set at zero here to align with the technical discussion). The economics also highlight that from an accounting perspective depreciation periods need to be set at exceptional and very large values to arrive at positive feasibility conclusions for planned investments.

 

Description of investment cost disadvantages

Due to the need to tailor the layout and technical units of the power plant to the waste gas characteristics and to install waste gas collection, treatment and transfer infrastructure, investment costs are higher for the waste gas fired power plants.

  • Gas holders: At an integrated steel site there are always several sources of waste gases; after capture and cleaning these waste gases have to be distributed and blended. The various gas streams are subject to abrupt fluctuations. In order to establish an energy compound and to smoothen out supply for a power plant as much as possible, these fluctuations have to be buffered for which the gas holders are needed.
  • Waste gas cleaning: Waste gases are process related and therefore depend in their composition and volume at a given moment on the raw materials and production process. Dust, humidity, sulphur and aromatic compounds are examples for substances which have to be removed before the waste gas can be fed into the gas distribution network or combustion units.
  • Specific design of the gas distribution network: While natural gas is delivered to the power producer in the technically necessary pressure range of 20 to 50 bar, due to their emergence as an unavoidable by-product of the steel making process the waste gas pressure generally is only 0.05 - 0.1 bar above ambient air pressure of 1 bar. As a consequence, waste gases need a significantly more expensive distribution network with much larger pipe diameters than would be needed for natural gas in order to transport the same amount of energy per time to the gas users.
  • Power generation technology: There are three basic concepts for electricity production: Steam boilers, gas turbines or combinations thereof called “combined cycle plants”. The characteristics of the waste gases render it impossible to use either gas turbines or the state of the art large scale combined cycle of 400 MWe per unit with 60% efficiency. Gas turbines and consequently also “combined cycle plants” are limited in fuel quality acceptance and load and the waste gases cannot meet respective demands. The actual efficiencies if waste gases were fed into such gas turbine based installations would be low and thus would combine too high operating costs together with no added energy recovery effect. Therefore, steel makers usually rely on conventional boiler installation of maximal 40% efficiency. However, due to the special nature of waste gases, even those boiler installations are specifically designed and much more expensive.

     

Description of operating costs disadvantages

All the additional investment costs presented in the previous chapter are also accompanied by higher and additional operating costs. Thereby, electricity production from waste gases is burdened with the following cost factors:

  • Supply reserve: The supply to the electricity users has to be ensured although the delivery of waste gases for the production of this electricity cannot be ensured because these gases are entirely process-related and not available on demand. Therefore, waste gas based electricity production has to be accompanied by a reserve consisting either in fuels for the electricity generation or electricity purchases for delivery to the electricity users. The related contracts cause additional costs to be bourne by the waste gas user and thus eventually by the waste gas producer. For steel site electricity consumption these cost appear in form of higher operating costs and in case of electricity export in markdowns for the lower supply security. Since there is no systematic electricity export the latter is rarely seen in practice.
  • Personnel intensity: The size of natural gas fired power installations is generally between 400 and 800 MW, the size of waste gas fired installations only between 20 MW and 200 MW. Therefore, the in personnel intensity per installed capacity of waste gas based electricity production is higher.
  • Efficiency factor of electricity production: The by far predominant amount of waste gases used for electricity generation consists of high percentages of non-combustible substances such as nitrogen and primary CO2 from steel making processes. However, all waste gases experience fluctuations of their composition. As a technical consequence, the highest possible efficiency for waste gas is clearly lower than for natural gas. For example, for CHP installations an efficiency of 60% can be achieved with natural gas but only 40%. with waste gases. For further technical explanation also refer to the investment cost part.
  • Waste gas infrastructure: Waste gases must be captured, cleaned, analysed, blended and transported. All these activities are either not needed for natural gas or at lower costs.

 

Description of the electricity pricing disadvantage

A commercial electricity producer operates his equipment only if the market price is above his production costs. This is possible because the use of natural gas is subject to a deliberate decision. An electricity producer relying on waste gases as a fuel does not have this choice. Due to the unavoidability of the waste gases he must produce electricity even if the price on the spot market is lower than his production cost.

As a consequence a natural gas based producer of electricity can generate a profit which has to be subtracted from his production cost and which is impossible to make for the waste gas based producer, because the latter cannot restrict production to peak price times. Instead the waste gas based electricity producer will incur a loss because he has to operate even if market price for electricity is below his production cost. In the standard case that there is no electricity produced for export the waste gas producer incurs this disadvantage in the form of opportunity costs.

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