Electricity Pricing for Natural Gas CHP Projects

LECTRICITYElectricity Pricingfor7NaturalGasCHPProjectsThe Higher, theBetter?By Chen Guowei, Guo Xicheng, He ChurJiangsu Electric Power Design InstituteAbstract: Regarding the state's policy that gives a higher on-grid electricity price to natural gas CHP (combined heatand power) projects. this paper studies the effect of it on the operation of those projects by theoretical analysis and acase stud. It concludes that on-grid electricity price on the high side, compared to heat price, will lead power plants toproduce more electricity but less heat, thus causing decrease of the plants'thermal efficiency and harm to energy saingof the whole societyKeywords: combined heat and power /CHP): natural gas power generation: on-grid electricity price. energv savingElectricity pricing for natural gwill objectively cause the high cost of natural gas. AsCHP projectsdetermined by the National Development and ReformCommission(NDRC), in the first phase of the West-EastIntroductionsGas Pipeline project, the ex-factory price is 0.96 yuan/mIt is well known that natural gas is one of the clean and increases to 1.86 yuan/m at Shanghai gate stationfuels, and thermal electric operation is energy efficient plus the pipe transportation fee of 0.90 yuan/m; in theThe development of the natural gas CHP projects has Sichuan-East Gas Pipeline project, the ex-factory price iscaused the benefit of reducing the emission of Co,, So, 1.510 yuan/m, and grows to 2.501 yuan/m at Shanghaiand NO, and the rational cascade use of the primary gate station. Since the prices at Shanghai gate station areenergy. From the aspect of the sustainable development, equivalent to wholesale prices, prices for end users arethe incentive preferential policies on such projects even higher.are recommended, top of which is the higher on-gridelectricity price. The issues on what an on-grid price rateThe gas consumption in China is constantly risingis reasonable for those projects and on whether a higher along with the economic development, and the internalprice is better will be discussed in this papersupply is not enough for this requirement, so the ratio ofgas import is constantly rising despite of the higher pricehe origin of the high on-gridIn the second phase of the Westias Pipeline project,for the gas imported from Turkmenistan, the entry priceHigher price of natural gas1.73 yuan/m exclusive of tax and is 2 yuan/m after tax.In China, natural gas resources are not rich, and most LNG price is 7 dollar/Mbtu, equivalent to 1. 7 yuan/m atof them are distributed in the northwest, or the central the intemational spot market in Dec 2009. Actually theregion. However natural gas markets are concentrated cost of imported Lahnve 2 vman/m including thein the economically well developed east region and cost of LNG中国煤化工the southeast coastal areas. The situation that long-CNMHGdistance gas pipelines are required for gas transportationNatural gas price is completely on the high side2011.3 ELECTRICITY 23compared with coal. In the first phase of the West- use clean energy resources, to promote energy structureEast Gas Pipeline project, the LNG net calorific value optimization, and to price based on qualityis 33. 198 MJ/m roughly, corresponding to a standardcoal equivalent of 1.135 kg and a standard coal price of Theoretical analysis1 763 yuan/t, given a natural gas price of 2 yuan/m. Thehistorically highest price of standard coal was around IModel build-up600 yuan/t in Shanghai, and then went down to 1 000 An assumption is made here that a CHP is builtyuan/t or lower. At the same period, the price of natural The natural gas is bought at a fixed price no matter thegas rose up from 2.1 yuan/mto 2.5 yuan/m, which quantity, and the product is sold at the agreed price noremains constant till nowmatter how the product quantity of the electricity andheat is. The income equation of the power plant can beLower heat pricepresented as follows:The ex-factory heat price of natural gas CHP projectsStatus IP+Q,×Pis set based on the local heating cost and provided costbenefit ratio or the return on net assets approved by theStatus 2: Y, gower 2 xPower+Chet xPhpricing departments under local governmentswhere Y is the total income, g is product quantity, P isproduct price, R is the profit and C is the total cost.Local governments usually do not prefer a high heatingprice, for the purpose of creating a better investment When Status I changes to Status 2, the variation of theenvironment; on the other side, users also do not accept power plant income is as belowthe higher heat price compared to coal-fired projectsAll these result in a fact that the heat price of natural2-1(mw2Q)×Ppe+(.m=)×P(3)gas CHP projects does not reveal the value of clean△y=△ 2powerxPpow+△ga× KPhe(4)energy resources. Generally heat price can only feed heatproduction cost and make a slight profit. Sometimes heat where both P and P, are VAT exclusive prices, andprice cannot cover the cost, under which circumstances Y,, Y, are VAT exclusive incomescompensation is applied from electricity production. Themore heat supply, the more profit pressure will be placed The total power plant cost will be changed slightlyon electricity generationaccording to the heat and electricity supply adjustment,when in the full load condition. To simplify the analysiCurrent electricity pricing mechanismthe formulas of power plant profit calculation and changesis The pricing mechanism for natural gas CHP projects are shown below with the assumption of the unchanged"one-factory-one-price"based on the project operation total costperiod, different to the benchmark pricing mechanism for△R=△F△C≈△Ythose firing coal. According to the definition by the statePlanning Commission, the electricity price evaluationmethod based on operation period is, by calculating the△R=△Q×Ppa+△Q=n×Paannual cash flow of a project, to calculate the price onAccording to the CHP process, the heat supply will becondition that the annual net cash flow meets the given down when the electricity supply is up; also the electricityinternal rate of return during the economic life cycle of the supply will be down when the heat supply is up, withproject, in consideration of the variation of the annual cost the condition of full load operation. So Agheat is negativeand debt return requirement within the life cycle. Actually when A2power is positive, Aphea is positive when A@power isthe average on-grid price is determined by the capital and negative which means Aphea Repower should be negativemajor cost within the project operation period. The higherthe cost, the higher the on-grid electricity price will be.△R=△Qx(Pa-1△Q/△ice is high in China, while the The value of Agea /A@ower I is decided by the unitheat price is not reasonably set due to complex reasons. technique performance, and will be changed slightly inTherefore, the average on-grid price of gas-fired CHP most operation conditions. Then it can be simplified as acalculated in the operation period is definitely higher than constant.that of coal-fired units. It is recommended to set a higheron-grid price for natural gas CHP projects, consideringWhen P中国煤化工 the total profitthat natural gas is a kind of clean energy resource, and rises up or lossCNMH GctIcIty supplynatural gas CHP is consonant with the state's policies to rising up, then AnELECTRICITY 2011.3LECTRICITYWhen P4Q/△ Phear, if the total profit△R=△Q0×983%(P|4Q/△Qxgoes down or loss rises up with the electricity supplyrising up, then AP is negative(98.7%983%)×P)We can see from equation(l,when|△/△QModel analysisis a constant, the tax and fees are not the factors affectingThe CHP projects have lower cooling resource loss the analysis.and higher heat efficiency when more heat supply and lesselectricity supply.Case studyWhen Powe> 42 Gower xPhea, the rational A case study on a newly build power plant withpower plant will be in the way of more electricity supply two E-class gas turbine units(GE model) of the aboveand less heat supply on the purpose of higher profit. model is undertaken belowBut this causes the decline of the heat efficiency of thewhole power plant. It means the higher on-grid electricity Project overviewprice compared to the heat price, will be a trigger of the The design scale of this gas turbine project is twooperation policy against energy savingE-class gas turbine units, and major parameters arereferred to the data of new 180-Mw gas turbine, whichWhenP< Ag/Agwe xPat, the rational is guided in"Design Reference Cost Index of Thermalpower plant will be in the way of more heat supply and Power Plant in 2009"(namely, 2009 version): The unitless electricity supply on the purpose of higher profit, cost is 3 116 yuan/kw(static); dynamic investment capitalcausing the heat efficiency goes up. It means lower on- accounted for 20% the loan period(including thegrid electricity price compared to the heat price, will guide construction period) is 15 years; the formation rate ofhe operation policy for energy savingfixed assets is 95% the residual value is 5%. and thedepreciation period is 15 years; the gas price with tax isModel deployment2.05 yuan/m; materials cost is 15 yuan/MWh, other feesThe whole analysis above is based on the assumption are 18 yuan/MWh overhaul repair bills are 3.5%; generalof the unchanged cost, but it actually does not. More house rate is 3% unit operation service life is 20 years,water will be required by the more heat supply which will annual utilization hours is 5 500 h; VAT rate on electricitychange for the power plant are shown as below13%, and VaT rate on the natural gas price is 13%/