Renewabh,Eneryy Vol. 3, No. 8, pp. 891--896, 1993 096~|481/93 $6.00+.

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Printed in Great Britain. ,]" 1993 Pergamon Press Ltd

ECONOMICS OF OCEAN THERMAL ENERGY

CONVERSION (OTEC)

D. E. CAVROT
Institute of Marine Studies, University of Plymouth, Plymouth, PL8 4AA, U.K.

(Received 26 November 1992 ~accepted 27 January 1993)

Abstract--Ocean thermal energy conversion (OTEC) has for many years been recognised as a possible
energy of the future. Recently, the emphasis has changed towards combination plants offering not only
power, but also freshwater, mariculture and other deep ocean water applications (DOWA).
The models used in this modified cost-benefit analysis indicate under what economic circumstances
OTEC, which is presently only competitive in a few remote islands, may become more widelycompetitive
in the near future. Among the model variables are the plants' capital cost, operation and maintenance
costs, the price of oil and desalinated water as well as a hypothetical carbon tax.

1. INTRODUCTION U.S. Gulf Coast and Caribbean regions, and Africa

Ocean thermal energy conversion (OTEC) consists of
extracting energy from the relatively high temperature
difference found in some tropical seas between the
warm surface water and cold 'deep' water, and con-
verting it into electricity. The emphasis used to be on
the production of power alone. Recently, desalinated
water, a by-product of the open-cycle (OC) and hy-
brid-cycle (HC) OTEC, has changed this trend.
Today, because the sites where OTEC may first be
used are often short of potable water, as well as power,
the 'water' option is receiving growing attention. The
perspective of using the cool and nutrient rich deep
water for deep ocean water applications (DOWA)
such as mariculture, drip irrigation and air con-
ditioning further enhances the chances of OTEC
becoming economically viable. The technology is con-
tinuously improving due to specific research and tech-
nology transfer from other fields such as the offshore
oil and gas industry.
In this paper, the economic viability of OTEC is
assessed and compared with that of conventional oil-
powered stations.
Asia are expected to develop later.
2.2. Type o f OTEC plants
Market surveys show that there is a need for both
floating and land-based variants, indicating that
about half of the present locations for pure OTEC
plants are suitable only for the floating version [1].
However, initially, the preference for smaller size
plants, and the demand for fresh water should favour
the land-based versions in the OC- or HC-con-
figuration. The first commercial OTEC plants will
have electrical outputs ranging from 1 to 10 MWe [2].
In the long term, the Pacific and Asian islands offer a
market for 1-100 MW~, OTEC plants.
2.3. Time scale
It is estimated that continued R&D could open
markets to OTEC in the Asia Pacific region in the
mid-1990s, and that globally, at least 350 MWe could
be provided by OTEC by the year 2005, and 2100
MW~ by 2010. Later, the production of methanol and
hydrogen as transportation fuels may prove to be
economically feasible and could raise this potential by
a factor of five to the 10 GW~ range [3].

2. OTEC MARKET
2.1. Location
The market for OTEC will be greatest where elec-
tricity produced from fossil fuels is most expensive
such as island communities which have to rely upon
imported oil. For that reason, and because of their
need for desalinated water, the Pacific islands are
expected to be the initial market for OC-OTEC. The
3. E C O N O M I C VARIABLES
3.1. Cost components
Capital cost. Since OTEC technology requires no
fuel for plant operation, its major cost component
is the very substantial capital investment. At over
$10,000/kW, the capital cost of OTEC plants is almost
one order of magnitude higher than that of oil-fired

891
892 D.E. CAVROT
plants. Thus, on the basis of capital cost alone, OTEC
shows up badly against oil- and coal-fired power gen-
eration [1].
Operation and maintenance costs. Operation and
maintenance (O&M) costs for well developed oil-fired
plants are low (typically 3% of capital cost per
annum), whereas for low-efficiency OTEC plants they
will be relatively high. For floating OTEC plants,
including inspection and crew costs, they will be about
5%, but may be considerably less for land-based
plants [1,4].
Fuel cost. Although OTEC fuel (i.e. sun and water)
is free, the price of fossil (and nuclear) fuel still
inherently determines the competitiveness of OTEC
against conventional power generation. One can pre-
dict that as reserves of fossil fuels dwindle, com-
petition for existing stocks increases, and the cost of
exploitation of remaining stocks rises accordingly. As
a result, the price ofoil is expected to increase 'fin real
terms" (i.e, above inflation rate) at a rate of about
3% per annum [5].
3.2. Economie fiwtors
Size and eeononO' of scale. Depending on the plant
configuration, unit generating costs will increase sig-
nificantly below a critical size. For example, a
reduction in size below 5-8 MW for a land-based
plant, and 2 5 4 0 MW for floating plants, will result
in substantial increases in unit capital and generating
costs.
Economy of replication. In predicting the pro-
duction cost of OTEC hardware, one needs to keep
in mind various cost-reduction measures applied to
industrial processes. For example, industry dis-
tinguishes between the cost of early units of a pro-
duction line and the asymptotic cost after a given
number of units have been produced and learning has
been achieved [4].
Knock-on effbet. In addition to possible direct cost
reduction, technological refinements may also have
indirect effects on the overall design cost. A typical
example is the use of aluminium as a cheaper and
more efficient heat exchanger material. The resulting
size reduction of the heat exchanger will significantly
reduce the mass and size of floating plants, and in
turn. the required strength of the mooring lines.
Capacity fiwtor. The capacity factor may be sep-
arated into two components : ( 1) acaihlbility, which is
the percentage of time the plant is ready to deliver
output (e.g. consider possible plant closure duc to
hurricanes or severe weather); and (2) an enciron-
mentalfiwtor, which is the percentage of full output
based on the seasonal variation of the thermal
resource. The capacity factor for oil- and coal-fired
plants is around "70% [5]. For OTEC plants, with
routine preventive maintenance, an availability factor
of 90% is possible, but initially values near 80% seems
more likely [4, 6].
Operating l~'e. The 30-year design life of OTEC
plants is similar to that of fossil fuel power stations,
and 5 years longer than that of nuclear plants.
Temperature difference, AT. To be able to produce
the design power at all times, the design AT must be
the minimum available at the plant location ["7]. The
reference design AT is normally 20C, which is esti-
mated to provide an overall operating efficiency of
2.5% . The gross output of an OTEC plant depends
on (AT) 2, and a 2 C increase in AT can increase the
efficiency by over 20%. There is also a strong depen-
dence of capital cost on design AT. In fact it has been
shown [4] that
Cost ~c AT k
where 2 < k < 2.5.
Insurance. Potential accidents include accidental
release of hazardous chemicals, possible interference
with shipping and with defence submarines by the
mooring line, the cable and the cold water pipe. An
annual value of 2% of the capital cost is typical [1].
Other considerations. Some of the other key factors
include taxes, interest during construction, rate of
inflation and financial incentives.
3.3. Operatin.q conditions
Early OTEC experiments drew on the deep ocean
water as a key element of the energy system. Now,
applications for the cold water will play a key role in
improving the economic appeal of the total OTEC
system, and in purely economic terms, there is sub-
stantial logic in choosing a 'combination' plant of
OTEC, desalination and aquaculture providing
power, water and a product to sell [1].
Fresh water. In regions where both electric power
and fresh water are valuable, it may be economically
advantageous to produce both because the desali-
nated water will offset the high cost of electricity pro-
duced from the system. However, there is a trade-off
situation between the generation of power and the
production of fresh water, one being produced at the
expense of the other [8].
Aquaculture. To the aquaculture user, OTEC plants
provide a significant supply of electric power to run
his sea-water pumps and other operations. In such
circumstances the costs of the OTEC plant can
become quite competitive [9] and in fact, in Hawaii
many successful commercial ventures have already
resulted from the mariculture development [2].
Deep ocean water applications. Although the con-
 Ocean thermal energy conversion
cepts of temperature control in refrigeration or air-
conditioning systems and irrigation for crop growth
have been proven, their application on a large scale
still has to be demonstrated.
Other options. The remaining options make use of
OTEC electrical power in situ to realize energy inten-
sive products such as hydrogen, ammonia, fertilizers,
produce metals from their ores (e.g. aluminium) and
even, given an international legal regime, manganese
nodule mining operations. However, the economic
viability of these processes is not yet established.
3.4. Risks evaluation
The OTEC technology is now at a point where the
unknowns are limited and their scale can be predicted
with reasonable accuracy, but traditional financial
institutions seldom support new technology, and the
fact that no commercial plants are currently in oper-
ation will continue to preclude financial support [9].
Quantification of the potential risks and problems for
a specific OTEC project would normally be the object
of a risk analysis.
Contin.qeneies. Deployment and possible damage
from adverse weather conditions are relatively high-
risk elements. Unknowns also arise from the assemb-
ling of all the components at a commercial scale as
well as the further development of items such as large
diameter cold water pipes, turbines for OC-OTEC
and tension leg platform moorings.
Phmt reliahilio'. As mentioned earlier, there are
good economic reasons to opt tk~r 'combination'
plants providing power, fresh water, mariculture and
other DOWA activities. However, the extent to which
the added complexity affects the reliability of oper-
ation will require careful consideration.
Mar/,elthtclualions. A combination plant needs to
be flexible enough to cater for the varying demands
I\)r each product. Unstable oil price can also adversely
affect the rates of return expected by OTEC investors.
These doubts suggest the need for a prudent and
progressive approach towards the commercialization
of OTEC: this is the funding, construction and full
operation of "simple' demonstration plants.
3.5. Demon.vtrati(m plant
Thc construction of a demonstration plant will pro-
vide meaningful inl\)rmation on long-term per-
formance and reliability, and experience on oper-
ations and maintenance. Such a facility could also
serve to put to rest any remaining doubts harboured
by tinancial agencies regarding the technical viability
of OTEC [I 0].
Si-_e. The scaling factors between demonstration
and production plants should not exceed a wdue of
approximately 10 [101. Demonstration plants pro-
893
ducing at least 1 MW~ of electricity plus 3500 m 3 of
desalinated water per day, and 10 MW~ have been
proposed for the land-based and floating versions,
respectively.
Cost. Because of the high capital cost of OTEC,
even a demonstration plant would still be pro-
hibitively expensive and therefore difficult to fund.
Dilemma for OTEC. A confusing situation emerges
from the following findings :
( 1) the economics of power generation (i.e. econ-
omy of scale) suggests that a very large leap
forward is needed ;
(2) engineering prudence suggests that an
incremental approach (i.e. demonstration
plant) is the soundest way to proceed :
(3) the problems of financing the incremental
approach are complicated by the fact that,
as small electric power plants, they are
uneconomic :
(4) the problems of financing a large leap foward
are bound to be considerable in view of the
risks of meeting unforeseen problems,
One possible way out of this dilemma is a com-
mercial "combination" system based primarily on
aquaculture supporting the costs of installing sea-
water pipes and pumps, and flexible enough to provide
the basis l\~r the incremental development of the
OTEC concept itself [11]. Again. one must ask if the
added complexity of such a system and resulting
reductions in efficiency and reliability warrant this
approach.
3.6. t')mding and collahoration
Demonstration phase. The first demonstration
plantls) will require non-commercial funding. The
potential economic, social and political benefits to
developing (and developed) nations offered by OTEC
should influence Ihvourably international institutions
regarding loans or grants [7]. Among the possible
international institutions are: the World Bank, the
European Community (currently reasscssing OTEC's
potential), the EUREKA initiative, the International
Energy Agency, the International Finance C o r p o f
ation, the Inter-American Development Bank, and
the Asian Development Bank, etc.
Ultimately. the joint cooperation between diverse
government agencies, private investors and inter-
national bodies will lead not only to improved funding
prospects but also settlements on regulating and
licensing issues.
('ommercial pha,~e. Although developing nations,
where much of the early OTEC market exists, arc in
short supply of capital, their substitution to OTEC-
894 D. E. CAVROT

derived electricity will help relieve them of much of adds to the rationality of decision-making. For exam-
their outflow of foreign exchange [12]. Hence, in so ple, the economic cost of resource degradation is con-
far as funds continue to be available to them for ventionally measured in terms of foregone GNP [! 5].
the importation of oil, their provision of capital for Even so, economists differ as to how far quantification
investment in OTEC would be an attractive alter- can reasonably be pushed.
native [t 3].
4.2. Model concept
Appraisal method. An economic model has been
4. ECONOMIC APPRAISAL designed to compare the generating cost of electricity
in S/kWh for both OTEC and oil-fired plants. This
4.1. Framework for modified cost-benefit analysis
cost is derived from the discounted cash flow over the
Background. The first items to be accounted for in
life of the plant (i.e. NPV) rated against the total
a cost-benefit analysis (CBA) are those expressed in
output of the plant. In the case of OC- and HC-OTEC
monetary terms. Standard evaluation techniques
plants, the desalinated water produced is counted as
include Payback Period, Net Present Value (NPV),
a source of revenue. Table 1 lists the model variables
Internal Rate of Return (1RR) and Accounting Rate
for both OTEC and oil-powered stations.
of Return. However, in a comprehensive CBA, too
Externalities. The model allows only one environ-
many factors cannot be valued directly in monetary
mental factor to be "internalized" by applying a
terms at all, or only very speculatively, for the results
"carbon tax" expressed in "S/barrel of oil". As noted
to provide much reliable evidence for a decision. On
earlier, it is important to realize that the OTEC alter-
the other hand, specific economic measurements that
native should not be considered on the monetary
are designed to help investment decisions or appli-
grounds alone. OTEC also has many benefits difficult
cations of policies can be helpful so long as their
or impossible to quantify realistically but which need
intrinsic limitations are understood. Such an exercise
to be incorporated in the decision-making process.
may be described as a 'modified' CBA [14].
Some of these externalities may even far outweigh
Externalities. Much of modern CBA can be seen as
economic factors. Locally or on a larger scale, these
an attempt to deal with the problem of externalities.
benefits include: energy self-sufficiency; minimal
Because of the mostly harmful effects which the uses
environmental impact; improved sanitation and
of modern technology have upon 'free goods' such as
nutrition for inhabitants from desalinated water and
water and air, and upon welfare and social properties
mariculture products; regional development, e.g.
such as the quality of the environment, some econ-
employment; strategic diversity of energy sources;
omists have naturally concerned themselves with the
alternative investment to other energy sources, and
social costs of these processes. Those economists have
insurance against unpredictable increases in primary
a practical problem over where they should place the
energy costs, since the cost of generation is inde-
limits of their investigations and should concede that
pendent of energy prices.
there are cases of welfare loss or gain which simply
cannot be expressed in monetary terms. 4.3. Baseline conditions
Quantification. The use of a common scale of The economic factors not previously quantified are
quantification such as hypothesized money values or given below.
ranking techniques by numerical rating or weighting Operating conditions. Only electricity and water

Table 1. Model variables for both OTEC and oil-powered stations

OTEC plant Oil-powered plant

Thermodynamic cycle (OC/CC) Nominal size (MWe)

Nominal size (MWe) Capacity factor (%)
Capacity factor (%) Capital cost ($/kW)
Capital cost ($/kWe) O&M cost (% CC/year)
O&M cost (% CC/year) Price of oil (S/barrel)
Price of water ($/m~) real term increase (%/year)
Discount rate (%/year) Carbon tax (S/barrel)
Interest rate (%/year) Discount rate (%/year)
Grant (%/CC) Interest rate (%/year)
Annuity period (year) Grant (% CC)
Annuity period (year)
 Ocean thermal energy conversion
production are considered in this analysis. Other oper-
ations such as mariculture or air-conditioning would
require a more elaborate model and a substantial
amount of data not readily available.
Capital cost. Unfortunately, a great deal of dis-
crepancies exist between estimates of OTEC's capital
cost produced by American and English sources. The
highest estimates (i.e. those derived by R&D carried
out in the U.S.A.) were chosen and are listed in Table
2. The capital cost of oil-fired plants is typically in the
order of $2100/kW [16].
Fresh water price. In the OTEC model, the value of
water is used as a revenue offsetting the cost of OTEC
electricity, and can be changed to cater for different
market conditions. In the Pacific islands, the market
value of this water ranges from $0.40/m 3 to $1.60/m 3
[3].
In the model used for the oil-fired plant, the cost of
desalinated water produced by reverse osmosis or
multi-stage flash is given on the basis of the following
expression used by Vega and Trenka [16]:
Cost ...... = 0.049 CB ($/m3),
where CB = cost of oil per 42 US-gallon barrel ($).
Price of oil. In the baseline conditions, a value of
$18/barrel is chosen (1989 value). It is assumed that
the oil price does not affect the generating cost of
OTEC-derived electricity. With a thermal efficiency of
36%, the heat rate equals 9500 Btu/kWh, and with a
heating value for oil of approximately 144,000 Btu/
gallon, it can be shown [2] that :
Coste~c = 1.571 10 3. CB (S/kWh).
Discount/'actor. Assuming it to be a public sector
project, a relatively low 5% value is chosen for the
baseline conditions [5, 17].
Interest rate. An interest rate of 11%, similar to
that used by Lennard and Johnson [9], was selected.
Financial incentives and loans. Each model allows a
grant (expressed as a percentage of total capital cost)
Table 2. Capital cost estimates in $/kW-net for OTEC plants
[16]
Capital cost
Type of OTEC plants (1989 dollars)
t MW OC-OTEC (land-based) 18,000
1 MW OC-OTEC with 2nd stage 23,000
10 MW OC-OTEC (land-based) 11,000
10 MW OC-OTEC with 2nd stage 15,000
40 MW CC-OTEC (land-based) 6000
40 MW Hybrid-OTEC 9200
40 MW CC-OTEC (plantship) 4500
895
to be deducted. The remaining capital cost, effectively
a loan, is then reimbursed as annuities (equal yearly
payments) over an annuity period of 30 years.
5. RESULTS AND CONCLUSION
5.1. Baseline scenario
Model predictions indicate that OTEC electricity is
not directly competitive with oil-generated electricity,
Even in the 40 MW CC-plantship and 40 MW single-
stage land-based OC-configurations, the generating
costs are $0.078/kWh and $0.104/kWh, respectively.
This does not compare favourably with the
$0.059/kWh value obtained for oil-fired plants (in any
size).
5.2. Competitive scenario
Using the OTEC oil-fired plant models sim-
ultaneously, it is possible to identify a critical oil cost
above which OTEC becomes competitive with oil-
fired plants. For comparison, at the time of writing,
the cost of North Sea oil was $20/barrel. The best
scenarios are for the 40 MW CC-OTEC plantship and
the 10 MW land-based OC-OTEC plant.
OTEC shows its best potential in the 40 MW CC-
OTEC plantship configuration, with a generating cost
of $0.078/kWh which is comparable with electricity
generated from oil at $35/barrel. Such a scenario
could occur in the near future but is precluded at this
stage by the very high capital cost and risks involved
before the demonstration stage. In the land-based
configuration, the 10 MW OC-OTEC equipped with a
second stage requires a fuel cost of at least $45.3/barrel
(against $57/barrel for a 40 MW CC-OTEC plant).
At present, such conditions already exist in certain
less-developed Pacific Island Nations with small
populations such as Western Samoa ($47/barrel) and
the Kingdom of Tonga ($50/barrel) [16]. However,
even a 10 MW plant is probably too big for the needs
of the local economy. In the worst situation, a I MW
single stage OC plant would require an oil cost in the
order of $88/barrel to be competitive. This illustrates
the problem of financing small size and economically
non-viable demonstration plants.
5.3. lnfluence of other parameters
Carbon tax. The study has indicated that to make
OTEC competitive today, a very substantial carbon
tax would need to be applied, i.e. greater than the
$13/barrel tax sometimes quoted before the Earth
Summit (June 1992).
Water revenue. In places where the cost of de-
salinated water is high, the use of a second stage
896 D. E. CAVROT
condenser can improve the economics of O C - O T E C
significantly. It remains to be seen whether maricul-
Iure or other D O W A could further improve O T E C ' s
competitiveness.
Comparison with other studies. Other economic
studies on O T E C generally confirm the findings
above, i.e. that, at present, O T E C is only competitive
in a few remote island locations but that further cost
reductions and/or more favourable economic cir-
cumstances could make O T E C more widely com-
petitive in the near future. However, the generating
costs predicted with this model are slightly higher than
those predicted in other studies [9, 16, 18]. It is thought
that their more optimistic results are due to slightly
different initial assumptions and the use of simpler
models which do not discount the cash flow of the
plant over its 30-year life.
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