Levelized cost of electricity

Last updated
Average unsubsidized levelized cost of electricity in the United States. With increasingly widespread implementation of sustainable energy sources, costs for sustainable have declined, most notably for energy generated by solar panels. Data source is Lazard. Electricity costs in dollars according to data from Lazard.png
Average unsubsidized levelized cost of electricity in the United States. With increasingly widespread implementation of sustainable energy sources, costs for sustainable have declined, most notably for energy generated by solar panels. Data source is Lazard.

The levelized cost of electricity (LCOE) is a measure of the average net present cost of electricity generation for a generator over its lifetime. It is used for investment planning and to compare different methods of electricity generation on a consistent basis.

Contents

The more general term levelized cost of energy may include the costs of either electricity or heat. The latter is also referred to as levelized cost of heat [2] or levelized cost of heating (LCOH), or levelized cost of thermal energy.

The LCOE "represents the average revenue per unit of electricity generated that would be required to recover the costs of building and operating a generating plant during an assumed financial life and duty cycle", and is calculated as the ratio between all the discounted costs over the lifetime of an electricity generating plant divided by a discounted sum of the actual energy amounts delivered. [3] Inputs to LCOE are chosen by the estimator. They can include the cost of capital, decommissioning, fuel costs, fixed and variable operations and maintenance costs, financing costs, and an assumed utilization rate. [4]

Definition

The cost of energy production depends on costs during the expected lifetime of the plant and the amount of energy it is expected to generate over its lifetime. The levelized cost of electricity (LCOE) is the average cost in currency per energy unit, for example, EUR per kilowatt-hour or AUD per megawatt-hour. [5] The LCOE is an estimation of the cost of production of energy, thus it tells nothing about the price for consumers and is most meaningful from the investor’s point of view.

The LCOE is calculated by adding up all costs of production, divided by the total amount of energy it is expected to generate. In formula: [6] [7] [8]

It :investment expenditures in the year t
Mt : operations and maintenance expenditures in the year t
Ft :fuel expenditures in the year t
Et :electrical energy generated in the year t
r : discount rate
n : expected lifetime of system or power station
Note: caution must be taken when using formulas for the levelized cost, as they often embody unseen assumptions, neglect effects like taxes, and may be specified in real or nominal levelized cost. For example, other versions of the above formula do not discount the electricity stream. The real lifetime may be considerably longer or shorter than expected.

Care should be taken in comparing different LCOE studies and the sources of the information as the LCOE for a given energy source is highly dependent on the assumptions, financing terms and technological deployment analyzed. [9] For any given electricity generation technology, LCOE varies significantly from region to region, depending on factors such as the cost of fuel or energy resources such as wind. [4]

Thus, a key requirement for the analysis is a clear statement of the applicability of the analysis based on justified assumptions. [9] In particular, for LCOE to be usable for rank-ordering energy-generation alternatives, caution must be taken to calculate it in "real" terms, i.e. including adjustment for expected inflation. [10] [11]

Assumptions

Capacity factor

The assumption of the capacity factor has a significant impact on the calculation of LCOE as it determines the actual amount of energy produced by specific installed power. Formulas that output cost per unit of energy ($/MWh) already account for the capacity factor, while formulas that output cost per unit of power ($/MW) do not. [12]

Discount rate

Cost of capital expressed as the discount rate is one of the most controversial inputs into the LCOE equation, as it significantly impacts the outcome and a number of comparisons assume arbitrary discount rate values with little transparency of why a specific value was selected. Comparisons that assume public funding, subsidies, and social cost of capital tend to choose low discount rates (3%), while comparisons prepared by private investment banks tend to assume high discount rates (7–15%) associated with commercial for-profit funding.[ citation needed ] Assuming a low discount rate favours nuclear and sustainable energy projects, which require a high initial investment but then have low operational costs.

In a 2020 analysis by Lazard, [13] sensitivity to discount factor changes in the range of 6–16% results in different LCOE values but the identical ordering of different types of power plants if the discount rates are the same for all technologies.

Usage and limitations

LCOE is often cited as a convenient summary measure of the overall competitiveness of different generating technologies, however, it has potential limitations. Investment decisions consider the specific technological and regional characteristics of a project, which involve many other factors not reflected in some instances of LCOE. [4] One of the most important potential limitations of LCOE is that it may not control for time effects associated with matching electricity production to demand. This can happen at two levels:

In particular, if the costs of matching grid energy storage are not included in projects for variable renewable energy sources such as solar and wind, they may produce electricity when it is not needed in the grid without storage. The value of this electricity may be lower than if it was produced at another time, or even negative. At the same time, variable sources can be competitive if they are available to produce when demand and prices are highest, such as solar during summertime mid-day peaks seen in hot countries where air conditioning is a major consumer. [9]

To ensure enough electricity is always available to meet demand, storage or backup generation may be required, which adds costs that are not included in some instances of LCOE. [14] Excess generation when not needed may force curtailments, thus reducing the revenue of an energy provider. Decisions about investments in energy generation technologies may be guided by other measures such as the levelized cost of storage (LCOS) and the levelized avoided cost of energy (LACE), in addition to the LCOE. [4]

Another potential limitation of LCOE is that some analyses may not adequately consider the indirect costs of generation. [15] These can include the social cost of greenhouse gas emissions, other environmental externalities such as air pollution, or grid upgrade requirements.

The LCOE for a given generator tends to be inversely proportional to its capacity. For instance, larger power plants have a lower LCOE than smaller power plants. Therefore, making investment decisions based on insufficiently comprehensive LCOE can lead to a bias towards larger installations while overlooking opportunities for energy efficiency and conservation [16] unless their costs and effects are calculated, and included alongside LCOE numbers for other options such as generation infrastructure for comparison. [17] If this is omitted or incomplete, LCOE may not give a comprehensive picture of potential options available for meeting energy needs.

See also

Related Research Articles

<span class="mw-page-title-main">Renewable energy</span> Energy collected from renewable resources

Renewable energy is energy from renewable natural resources that are replenished on a human timescale. The most widely used renewable energy types are solar energy, wind power, and hydropower. Bioenergy and geothermal power are also significant in some countries. Some also consider nuclear power a renewable power source, although this is controversial. Renewable energy installations can be large or small and are suited for both urban and rural areas. Renewable energy is often deployed together with further electrification. This has several benefits: electricity can move heat and vehicles efficiently and is clean at the point of consumption. Variable renewable energy sources are those that have a fluctuating nature, such as wind power and solar power. In contrast, controllable renewable energy sources include dammed hydroelectricity, bioenergy, or geothermal power.

<span class="mw-page-title-main">Distributed generation</span> Decentralised electricity generation

Distributed generation, also distributed energy, on-site generation (OSG), or district/decentralized energy, is electrical generation and storage performed by a variety of small, grid-connected or distribution system-connected devices referred to as distributed energy resources (DER).

<span class="mw-page-title-main">Photovoltaics</span> Method to produce electricity from solar radiation

Photovoltaics (PV) is the conversion of light into electricity using semiconducting materials that exhibit the photovoltaic effect, a phenomenon studied in physics, photochemistry, and electrochemistry. The photovoltaic effect is commercially used for electricity generation and as photosensors.

In energy economics and ecological energetics, energy return on investment (EROI), also sometimes called energy returned on energy invested (ERoEI), is the ratio of the amount of usable energy delivered from a particular energy resource to the amount of exergy used to obtain that energy resource.

<span class="mw-page-title-main">Grid energy storage</span> Large scale electricity supply management

Grid energy storage is a collection of methods used for energy storage on a large scale within an electrical power grid. Electrical energy is stored during times when electricity is plentiful and inexpensive or when demand is low, and later returned to the grid when demand is high, and electricity prices tend to be higher.

<span class="mw-page-title-main">Microgeneration</span> Small-scale heating and electric power creation

Microgeneration is the small-scale production of heat or electric power from a "low carbon source," as an alternative or supplement to traditional centralized grid-connected power.

<span class="mw-page-title-main">Hybrid power</span> Combinations between different technologies to generate electric power

Hybrid power are combinations between different technologies to produce power.

<span class="mw-page-title-main">Renewable energy commercialization</span> Deployment of technologies harnessing easily replenished natural resources

Renewable energy commercialization involves the deployment of three generations of renewable energy technologies dating back more than 100 years. First-generation technologies, which are already mature and economically competitive, include biomass, hydroelectricity, geothermal power and heat. Second-generation technologies are market-ready and are being deployed at the present time; they include solar heating, photovoltaics, wind power, solar thermal power stations, and modern forms of bioenergy. Third-generation technologies require continued R&D efforts in order to make large contributions on a global scale and include advanced biomass gasification, hot-dry-rock geothermal power, and ocean energy. In 2019, nearly 75% of new installed electricity generation capacity used renewable energy and the International Energy Agency (IEA) has predicted that by 2025, renewable capacity will meet 35% of global power generation.

<span class="mw-page-title-main">Economics of nuclear power plants</span>

Nuclear power construction costs have varied significantly across the world and over time. Large and rapid increases in costs occurred during the 1970s, especially in the United States. Recent cost trends in countries such as Japan and Korea have been very different, including periods of stability and decline in construction costs.

<span class="mw-page-title-main">Merit order</span> Ranking of available sources of energy

The merit order is a way of ranking available sources of energy, especially electrical generation, based on ascending order of price and sometimes pollution, together with amount of energy that will be generated. In a centralized management, the ranking is so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line. Dispatching generation in this way, known as economic dispatch, minimizes the cost of production of electricity. Sometimes generating units must be started out of merit order, due to transmission congestion, system reliability or other reasons.

A feed-in tariff is a policy mechanism designed to accelerate investment in renewable energy technologies by offering long-term contracts to renewable energy producers. This means promising renewable energy producers an above-market price and providing price certainty and long-term contracts that help finance renewable energy investments. Typically, FITs award different prices to different sources of renewable energy in order to encourage the development of one technology over another. For example, technologies such as wind power and solar PV are awarded a higher price per kWh than tidal power. FITs often include a "digression": a gradual decrease of the price or tariff in order to follow and encourage technological cost reductions.

<span class="mw-page-title-main">Solar power</span> Conversion of energy from sunlight into electricity

Solar power, also known as solar electricity, is the conversion of energy from sunlight into electricity, either directly using photovoltaics (PV) or indirectly using concentrated solar power. Solar panels use the photovoltaic effect to convert light into an electric current. Concentrated solar power systems use lenses or mirrors and solar tracking systems to focus a large area of sunlight to a hot spot, often to drive a steam turbine.

<span class="mw-page-title-main">Solar power in the United States</span>

Solar power includes solar farms as well as local distributed generation, mostly on rooftops and increasingly from community solar arrays. In 2023, utility-scale solar power generated 164.5 terawatt-hours (TWh), or 3.9% of electricity in the United States. Total solar generation that year, including estimated small-scale photovoltaic generation, was 238 TWh.

A photovoltaic system, also called a PV system or solar power system, is an electric power system designed to supply usable solar power by means of photovoltaics. It consists of an arrangement of several components, including solar panels to absorb and convert sunlight into electricity, a solar inverter to convert the output from direct to alternating current, as well as mounting, cabling, and other electrical accessories to set up a working system. Many utility-scale PV systems use tracking systems that follow the sun's daily path across the sky to generate more electricity than fixed-mounted systems.

<span class="mw-page-title-main">Electricity pricing</span>

Electricity pricing can vary widely by country or by locality within a country. Electricity prices are dependent on many factors, such as the price of power generation, government taxes or subsidies, CO
2 taxes, local weather patterns, transmission and distribution infrastructure, and multi-tiered industry regulation. The pricing or tariffs can also differ depending on the customer-base, typically by residential, commercial, and industrial connections.

<span class="mw-page-title-main">Grid parity</span> Matching the price of the electricity grid

Grid parity occurs when an alternative energy source can generate power at a levelized cost of electricity (LCOE) that is less than or equal to the price of power from the electricity grid. The term is most commonly used when discussing renewable energy sources, notably solar power and wind power. Grid parity depends upon whether you are calculating from the point of view of a utility or of a retail consumer.

Different methods of electricity generation can incur a variety of different costs, which can be divided into three general categories: 1) wholesale costs, or all costs paid by utilities associated with acquiring and distributing electricity to consumers, 2) retail costs paid by consumers, and 3) external costs, or externalities, imposed on society.

<span class="mw-page-title-main">Variable renewable energy</span> Class of renewable energy sources

Variable renewable energy (VRE) or intermittent renewable energy sources (IRES) are renewable energy sources that are not dispatchable due to their fluctuating nature, such as wind power and solar power, as opposed to controllable renewable energy sources, such as dammed hydroelectricity or bioenergy, or relatively constant sources, such as geothermal power.

<span class="mw-page-title-main">Renewable energy in South Africa</span>

Renewable energy in South Africa is energy generated in South Africa from renewable resources, those that naturally replenish themselves—such as sunlight, wind, tides, waves, rain, biomass, and geothermal heat. Renewable energy focuses on four core areas: electricity generation, air and water heating/cooling, transportation, and rural energy services. The energy sector in South Africa is an important component of global energy regimes due to the country's innovation and advances in renewable energy. South Africa's greenhouse gas (GHG) emissions is ranked as moderate and its per capita emission rate is higher than the global average. Energy demand within the country is expected to rise steadily and double by 2025.

References

  1. ↑ "2023 Levelized Cost Of Energy+". Lazard. 12 April 2023. p. 9. Archived from the original on 27 August 2023. (Download link labeled "Lazard's LCOE+ (April 2023) (1) PDF—1MB")
  2. ↑ A Comparative Cost Assessment of Energy Production from ... Nian, Energy Procedia, 2016
  3. ↑ Lai, Chun Sing; McCulloch, Malcolm D. (March 2017). "Levelized cost of electricity for solar photovoltaic and electrical energy storage". Applied Energy. 190: 191–203. doi:10.1016/j.apenergy.2016.12.153. S2CID   113623853.
  4. 1 2 3 4 5 U.S. Energy Information Administration (March 2022). "Levelized Costs of New Generation Resources in the Annual Energy Outlook 2022" (PDF).
  5. ↑ K. Branker, M. J.M. Pathak, J. M. Pearce, doi : 10.1016/j.rser.2011.07.104 A Review of Solar Photovoltaic Levelized Cost of Electricity, Renewable and Sustainable Energy Reviews 15, pp.4470–4482 (2011). Open access
  6. ↑ Walter Short; Daniel J. Packey; Thomas Holt (March 1995). "A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies" (PDF). www.nrel.gov. National Renewable Energy Laboratory. pp. 47–50. Retrieved 17 July 2022.
  7. ↑ Lai, Chun Sing; Locatelli, Giorgio; Pimm, Andrew; Tao, Yingshan; Li, Xuecong; Lai, Loi Lei (October 2019). "A financial model for lithium-ion storage in a photovoltaic and biogas energy system". Applied Energy. 251: 113179. doi: 10.1016/j.apenergy.2019.04.175 .
  8. ↑ Lai, Chun Sing; Jia, Youwei; Xu, Zhao; Lai, Loi Lei; Li, Xuecong; Cao, Jun; McCulloch, Malcolm D. (December 2017). "Levelized cost of electricity for photovoltaic/biogas power plant hybrid system with electrical energy storage degradation costs". Energy Conversion and Management. 153: 34–47. doi:10.1016/j.enconman.2017.09.076.
  9. 1 2 3 Branker, K.; Pathak, M.J.M.; Pearce, J.M. (2011). "A Review of Solar Photovoltaic Levelized Cost of Electricity". Renewable and Sustainable Energy Reviews. 15 (9): 4470–4482. doi:10.1016/j.rser.2011.07.104. hdl: 1974/6879 . S2CID   73523633. Open access
  10. ↑ Loewen, James; Gagnon, Peter; Mai, Trieu. "A resolution to LCOE is not the metric you think it is". Utility Dive. Retrieved 7 October 2020.
  11. ↑ Loewen, James (August–September 2020). "Correction to Electricity Journal papers in July 2019 issue and in July 2020 issue by James Loewen". The Electricity Journal. 33 (7): 106815. doi:10.1016/j.tej.2020.106815. S2CID   225344100 . Retrieved 7 October 2020.
  12. ↑ "Analysts' inaccurate cost estimates are creating a trillion-dollar bubble in conventional energy assets". Utility Dive. Retrieved 2021-04-08.
  13. ↑ "Lazard's Levelized Cost of Energy Version 14.0" (PDF). Lazard.com. Lazard. 19 October 2020. Archived (PDF) from the original on 28 January 2021.
  14. ↑ "Comparing the Costs of Intermittent and Dispatchable Electricity-Generating Technologies", by Paul Joskow, Massachusetts Institute of Technology, September 2011" . Retrieved 2019-05-10.
  15. ↑ Hwang, Sung-Hyun; Kim, Mun-Kyeom; Ryu, Ho-Sung (26 June 2019). "Real Levelized Cost of Energy with Indirect Costs and Market Value of Variable Renewables: A Study of the Korean Power Market". Energies. 12 (13): 2459. doi: 10.3390/en12132459 .
  16. ↑ Bronski, Peter (29 May 2014). "You Down With LCOE? Maybe You, But Not Me:Leaving behind the limitations of levelized cost of energy for a better energy metric". RMI Outlet. Rocky Mountain Institute (RMI). Archived from the original on 28 October 2016. Retrieved 28 October 2016.
  17. ↑ "Levelized Cost of Energy Analysis 9.0". 17 November 2015. Retrieved 24 October 2020.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.