Navigant Research Blog

Are LCOE Analyses Still Useful?

Roberto Rodriguez Labastida — September 29, 2015

Earlier in September, the International Energy Agency (IEA) published its 2015 edition of the Projected Costs of Generating Electricity report. Not surprisingly, the report shows a dramatic fall in the levelized cost of energy (LCOE) for solar electricity and a minor fall in the LCOE for wind in comparison to the IEA’s 2010 report.

Several media outlets have highlighted that the cost of a kilowatt-hour (kWh) coming from renewables is now similar to—or even lower than—costs coming from fossil fuel technologies, and therefore are citing renewables as the cheaper option. While this may be true in certain scenarios, what the reporters and the LCOE analysis fail to highlight is that, while all kWh are equal, some are more equal than others.

kWh and World Cup Coverage

Take, for example, the Germany versus Argentina game from the 2014 FIFA World Cup. The price of a kWh in Germany at the end of this game rose to the high of €46/MWh, than dropped €15/MWh 2 hours later. In the evening, electricity production from wind turbines reached almost full capacity from the day’s demand. Then the next day, lacking an event interesting enough to keep televisions on, that demand plunged.  Location, like time of production, can also make a significant difference in the quality of a kWh. There is no data to support the following hypothesis, but demand in Argentina had to have dropped after Germany scored, while demand in Germany likely stayed high for at least a few more hours.

Simplifying LCOE

A traditional LCOE analysis would assume a capacity factor for a turbine depending on the local wind resource data, then aggregate the hours that the turbine is expected to operate in its lifetime, and finally divide the overnight (capital expenditures) and operating costs by the expected hours to get the LCOE. This made sense in a world where wind generation was managed primarily to follow demand. It was enough when the costs were multiple that of other options—like Feed-in Tariffs and basic net metering. In those options, energy quality is not the incentive, and the most common policy support mechanism is allocated toward wind and solar.

But in the world we are headed toward—where supply and demand for solar energy may not match—a newer, simpler metric that media outlets could use to educate people would be useful. For example, something like a revenue generation cost analysis (the cost of producing $1 of revenue) that takes into account the cost of delivering a kWh and the time in which it is delivered, could be more interesting to the public—and could even help in moving renewables policy and innovation forward.

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