What is the real cost of renewable energy? (part 2)

Gail Rajgor

Which energy technology really is the most economical, cost-effective solution for the long term? In this second installment, we look at renewable energy cost examples, LCOE and the importance of taking risk into account.

Renewable energy cost examples and the importance of risk

To take its place in the world as a mainstream energy source and to silence critics, the Holy Grail for any renewable energy technology is to achieve (perceived) grid parity with its traditional gas, coal and nuclear counterparts.

This is basically when it produces power at a levelised energy cost (LEC) that is equal to or less than the price of purchasing power from the grid. Onshore wind is often cited as the renewable energy technology closest to doing this, with solar PV some way behind it, although it is important to note that under some scenarios – and in some locations – both are claimed to have already attained that goal.

The levelised cost of electricity (LCOE), another term for LEC, is “an important metric to compare the generation technologies”, according to the European Wind Energy Association. It is defined as the actualised kWh cost over the complete lifetime of the project, taking into account the present value of all the cost components. So to determine LEC a full economic assessment of projects is required factoring in:

  • Capital costs (including planning, site work and initial investment);
  • Operation and maintenance (O&M) cost;
  • Fuel cost;
  • Cost of capital and return on investment;
  • And, notes EWEA, any CO2 emissions cost, as given by the European Trading System for CO2 (ETS) for example.

“The levelised cost of energy has therefore to take into account the different cost components which correspond to the different technologies,” says EWEA.

The issue of risk is an important one that is often not included in calculations. Take windpower for example: according to EWEA, “the main advantage of wind energy is that no fuel is needed in the electricity generation and no carbon emissions are involved. In order to form a fair basis of comparison of the levelised cost of electricity from various sources, this difference has to be taken into account and treated accordingly”. And the same can of course be said for solar PV.

Meantime, EWEA continues, LCOE calculations do not usually take into consideration the possible risks associated with some cost components, for example, volatility of fuel and carbon emission costs. “Differentiating the cost components and treating them separately helps in the identification of the associated risks. Therefore, using different discount rates that account for these risks, the calculation of the levelised cost is performed, resulting in a fair basis of comparison between generation technologies,” it argues.

When this is done, the cost of conventional technologies (gas and coal) as well as nuclear is increased”, it concludes.

EWEA concedes that when looking at LCOE costs, gas comes out the clear winner in just about every analysis you see. For electricity generation from gas power plants, the cost would be around €36/MWh (without taking into account any risk), it says. Including the risk, however, the cost jumps to €46/MWh, increasing by 29%.

For coal-fired generation the cost with risk included increases from €51/MWh to €72/MWh – by 40%. “The impact of taking into account the risk associated with the volatility of fuel and CO2 is expected to be higher in a more CO2 intensive power generation technology such as coal.”

For nuclear power, the demonstrated high capital costs which are incurred because of the long construction period result in a high levelised cost of around €100/MWh. “The effect of the volatility of fuel cost has a small impact on the LCOE of nuclear because the fuel cost is expected to be rather constant. Additionally, nuclear power is not subject to CO2 emissions,” EWEA adds. “Therefore the increase taking into account the risk is in the order of 2%.”

Onshore wind, it continues, already appears competitive with coal and nuclear power, coming in at around €60/MWh. Offshore wind energy, as a more expensive technology, has a levelised cost of electricity around €90/MWh, mainly due to the high capital cost. It is worth noting here, that LCOE costs do not include wider system costs, such as long distance transmission lines and grid connections required for new plant, balancing and reserve costs, or externalities such as decommissioning costs or health related damage.

PV-related cost metrics

Similarly, caution is always advised when looking at general LEC/LCOE comparisons (including EWEA's figures) because there is no single LEC/LCOE calculation assessment tool or standard which all apply equally:

“Unfortunately, the LCOE method is deceptively straightforward and there is a lack of clarity of reporting assumptions, justifications and degree of completeness in LCOE calculations, which produces widely varying and contradictory results,” stress the authors (Branker, Pathak, Pearce) of a recent paper, A review of Solar Photovoltaic Levelised Cost of Electricity, Renewable & Sustainable Energy reviews 15, which looks at the North American market.

Its review found that the LCOE results vary by more than a factor of four, and many do not fully cover assumptions. In fact, the lowest estimated LCOE for PV it found from its review of studies going back to 2004 was US$0.122/kWh with the highest coming in at US$0.86/kWh, clearly illustrating the problem.

“Different levels of cost inclusion and sweeping assumptions across different technologies result in different costs estimated for even the same location,” it says. “In addition, the trend of eliminating avoidable costs for consumers and folding them into customer charges can mask the real cost of conventional technologies…it is clear that better reporting of LCOE assumptions and justification is required.”

A key recommendation for reporting LCOE for solar PV for example, is the inclusion of assumptions and specifications which make each calculation unique, including:

  • The solar PV technology and degradation rate (i.e. type of technology and related factors – such as % degradation rate per year etc);
  • Scale, size and cost of the PV project, including cost breakdown;
  • Indication of solar resource: capacity factor, solar installation, geographic location, and shading losses;
  • Lifetime of the project and term of financing (these are not necessarily equal, it stresses);
  • Financial terms: financing (interest rate, term, equity/debt ratio, cost of capital), discount rate;
  • Additional terms: inflation, incentives, credits, taxes, depreciation, carbon credits etc (although it says these need not be in the analysis, but it should be clearly stated whether they are included or not).

Overall, the authors (all from Canada's Queen's University) stress that since the inputs for LCOE are highly variable, there is a need for using sensitivity analysis “to represent actual variable distributions so that there is no unreasonable confidence in a single set of assumptions”.

The most important assumptions, it adds, are system costs, financing, lifetime and loan term, but these must be accurate and on a project-by-project basis. At least the need for better and more transparent cost calculations and comparison is being increasingly recognised. Moreover, there are some stand-out studies which enable a reasonably good picture for comparison to be made. In the next part of this series, some hard and fast figures will be analysed, looking at the most up to date installed and generation costs figures available across the energy technologies.

About the author: Gail Rajgor is a writer working across the energy & environment sector. She is the former publisher of Sustainable Energy Developments magazine.

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