Levelized Cost of Energy - Part 1

LCOE Calculations and Flawed Assumptions

Contents

1. Introduction

2. What is LCOE?

3. LCOE, Capital Costs, and Renewables

4. Example

5. Concluding Remarks

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Bitesize Edition

• Last week I concluded my work on energy efficiency. I ventured into a discussion surrounding cycles, and how underdeveloped, developing, and developed countries can better streamline their energy transitions. If that sounds of interest, go check that out.

• Looking forward, I’m going to begin exploring metrics surrounding energy affordability. The one I’ll start with is the levelized cost of energy or LCOE. There are many figures involved in this calculation and many assumptions. Can these assumptions lead to accurate or misleading analysis of energy generation systems? Find out more below.

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Introduction

When exploring LCOE, we first need to explore the different metrics involved, and the assumptions we must make. For years, renewables have demonstrated low LCOE. Is this a reflection of reality, or is there more to explore in the underlying assumptions? Let’s dive in!

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What Is LCOE?

LCOE is the average minimum price at which generated electricity must be sold to offset the costs of production over the lifetime of a generation source.

\(= \frac{\text{Sum of Costs Over Lifetime}}{\text{Sum of Electrical Energy Produced Over Lifetime}}\)

\(\frac{ \sum_{t=1}^{n} \frac{\text{Investment Expenditures} + \text{Operations and Maintenance Expenditures} + \text{Fuel Expenditures}}{(1+\text{Discount Rate})^t} }{ \sum_{t=1}^{n} \frac{\text{Electrical Energy Generated}}{(1 + \text{Discount Rate})^t} }\)

We seek a low LCOE because a lower cost of production is better for investors in companies that sell electricity. LCOE is measured in $/kWh. LCOE doesn’t consider price to consumers, a flaw of the metric that I’ll later discuss. Before that, let’s dive into research made into LCOE.

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Source 1:

As we can see from 2019 research by Lazard, there are examples of photovoltaics and wind that appear to have the lowest LCOE. Some ranges are larger than others due to fluctuations in discount rate, investment expenditure, operations expenditure, maintenance, and fuel expenditure. A final aspect to consider is lifetime. Since LCOE accounts for all years over the lifetime of a generation, a longer lifetime could see costs rise or fall at a faster pace than electrical energy produced. The trend concerning lifetime needs to be considered.

Note: The above research is in MWh, not KWh. To get from KWh to MWh, multiply by 1000.

Let’s consider a second source.