The source of this 0.01-cent minute of light (60 watt bulb at 10 cents per kilowatt hour) is a blend of coal, nuclear and gas etc. Our national energy policy and local interest have concocted this electric blend over time. Predicting the future blend of sources for electricity could be based on past trends. According to an energy source chart from Shell Hydrogen (below), which includes transportation fuels, the time line has one common element...the carbon reduction in the percentage of energy used. This is why we are getting more BTUs out of a given source unit of energy. We are also getting more kilowatt-hours from each BTU. We are even getting more productivity for every kilowatt-hour used. Energy efficiency has improved and, as suggested by the long-term trend, may continue to improve. This is good news.

According to the U.S. Department of Energy for electricity, we use coal most of the time (52%), then nuclear (19%), gas & fuel oil (18%), hydro (7%) and wood/biomass, wind & solar (4%). I believe the trend away from carbon will continue which may mean the mix of electricity sources will change. I manage an energy-style portfolio of stocks that may reflect my own professional energy policy. I review the cost and efficiency of energy sources, primarily for the generation of electricity. Let's look at each, with the exception of hydro, to see if today's mix will be tomorrow's. Based on the strict analysis below, we should be using wind most of the time with gas meeting peak demand. We could be using some sun too since it's retail (on your roof).

SUN
The capital costs of solar range from around $6 - $10 per watt with a 15% - 20% capacity factor (the percentage of an 8760 hour year that a system operates at full output). No fuel costs, no health costs and no externalities with the exception of low density (photons per square foot) and visual...for some. This makes the capital costs for solar at around 17.12 cents per kilowatt hour with operating and maintenance costs around 1 cent per kilowatt hour. There are few moving parts but inverters are the weak spots in the system with a replacement planned into most life-cycle analyses. At a retail price with externalities added in, solar may be similar to the cost of coal.

COAL
One reason we use so much coal is because we didn't know the environmental, health and other costs of its 55 chemicals released in the atmosphere. The capital cost of producing electricity from coal is fairly minor, around 0.72 cents per kilowatt hour or around $1200.00 per kilowatt of capacity with a 95% capacity factor. When we say kilowatt hours, I mean the actual energy flow in one hour whereas kilowatt is the potential capacity when you turn everything on. The operating and maintenance for coal is around 1 cent per kilowatt hour. The health costs of some of those chemicals have been quantified and if you use the number produced by the Ontario Ministry of Energy, for example, then you add 5.36 cents per kilowatt hour! We might reduce the health costs with scrubbers etc., but we haven't done that yet so we don't know. Right now coal cost around $60 a ton from which we get around 28 million BTUs that can generate about 2800 kilowatts so the fuel costs are around 2.14 cents per kilowatt-hour. The climate issues were quantified also by the Ontario Ministry of Energy at around 1.07 cent per kilowatt hour. This climate number is a guess because few know just what we are dealing with or how to best quantify this. We also do not know where this commodity will be priced when you need it. I have not quantified this risk. Anyway, if you add these numbers, you have to wonder why we are burning so much coal as compared to gas.

GAS
Building a gas plant is cheaper than a coal plant and costs around 0.42 cents per kilowatt hour or $700 per kilowatt with a 95% capacity. With market price of gas at around $7 per million BTUs, we can convert gas to electricity quite efficiently at a 7000 BTUs/kWh heat rate or 1 kilowatt hour for every 7000 BTUs (versus coal at a heat rate of around 10000). This means our fuel costs for natural gas is around 4.90 cents per kilowatt hour. The operating and maintenance for the new combined cycle gas turbines are less than 0.5 cents per kilowatt hour. The health costs have been quantified at around 2 cents per kilowatt hour and climate costs are much lower than coal at 0.27 cents per kilowatt hour. Again, like all fossil fuels, there is a commodity price risk. A risk not concerned with wind.

WIND
Capital costs are around 2.45 cents per kilowatt hour. We are building wind turbines at around $1500 per kilowatt in areas that produce capacity factors around 25% to 35%. Location is critical here because the power from the wind is directly proportional to the cube of its velocity for the production of electricity. There is no fuel cost, no health costs and no externalities with the exception of location, density and visual. Again, like solar, we need ample real estate in the right location and even in remote locations some people are not happy with their new view. None of this is quantified. The operating and maintenance costs are similar to most projects at around 1 cent per kilowatt. These numbers look good, like nuclear.

NUCLEAR
The capital costs are $1500 per kilowatt with a 95% capacity or 0.9 cents per kilowatt hour according to reports from the Uranium Information Centre Ltd. Uranium cost around $25 a pound and can produce around 61 million BTUs with a heat rate around 10000 BTUs/kWh. It can produce 6100 kilowatt hours of electricity at a cost of 0.76 cents per kilowatt hour. Operating and maintenance cost are around 1.4 cents per kilowatt hour according to Constellation Energy's Gina plant. Constellation Energy looked at the waste issue and quantified that at 0.1 cents per kilowatt hour and the decommissioning issue at 0.15 cents per kilowatt hour. There is no climate costs but uranium is a commodity and like fossil fuels there needs to be a quantification of this fact. It takes around 400 pounds of uranium, before enrichment etc, to supply 1 MW for one year versus 7 million pounds of coal. Unlike coal, the health costs of nuclear are not quantified or fully disclosed, which could be a huge problem! I have not seen health data on Chernobyl or Three Mile Island and these issues need to be quantified for its comparison to burning coal. The nuclear industry, with its known costs at around 3.31 cents per kilowatt per hour, needs to quantify the existing health issues to be appropriately compared to other sources of electricity.


Each electricity source has advantages and disadvantages. Wind may be good in the North and solar in the South. The future source of electricity for any region may be driven by local demand and distributed generation. Or we may depend more on large projects possibly placed on military bases away from metropolitan areas. Today's strong electricity demand is straining generation capacity. Solar panels are evidently sold out through 2006. We have tons of coal, but too few trains to move it. We have natural gas and hopefully can bring more from overseas in a liquid form. Wind turbines are going up where there is wind and easy permits. Nuclear has liability issues not quantified and most of the ready uranium is overseas, but the numbers we know look good. If you have a clear vision of energy for electricity then you may not understand the problem. The prudent choice of electricity sources is not easily evident.

About the author...
Robert S. Preston is a Portfolio Manager in the Personal Investment Advisory program at Merrill Lynch. He has 25 years investment experience with senior positions at AXA, Nomura, Rothschild and Paine Webber. BA from Tulane University and MBA University of Edinburgh, Scotland. In 2001, he founded Craigmillar LLC, an investment company managing energy-related portfolios. In 1979, he founded American Solar Design, Inc., a company that financed, designed, built and managed solar thermal micro-utilities in Northern California. He is a current board member of the Darragh Company, Dover Land Trust and the Northeast Sustainable Energy Association. Robert_Preston@ML.com