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Levelized Cost of New Electricity Generating Technologies

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The Energy Information Administration (EIA) produces forecasts of energy supply and demand for the next 20 years using the National Energy Modeling System (NEMS)[1]. These forecasts are updated annually and published in the Annual Energy Outlook (AEO).[2] All sectors of the energy system are represented in NEMS, including the electric power generation, transmission, and distribution system.

To meet electricity demand, the EIA represents existing generating plants, retires those that have come to the end of their economic life, and builds additional plants to meet projected demand from the residential, commercial, industrial, and transportation sectors. As a result, EIA must represent a slate of technologies, their capital and operating costs, their availability and capacity factors, the financial structure and subsidies, the time to construct the plant, the utilization of the plant, and expected future cost changes, including fuel input for fossil and nuclear plants.

To determine the most economic technology for the type of demand (base, intermediate, or peaking load) for which new capacity is needed, NEMS competes the technologies using their levelized costs as one measure of competitiveness. Levelized costs represent the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation from an assumed duty cycle.

The first table below provides the average national levelized costs for the generating technologies represented in the AEO2013 reference case.[3] The values shown in the table do not include financial incentives such as state or federal tax credits, which impact the cost and the competitiveness of the technology. These incentives, however, are incorporated in the evaluation of the technologies in NEMS based on current laws and regulations in effect at the time of the modeling exercise, as well as regional differences in the cost and performance of the technology, such as labor rates and availability of wind or sun resources. Due to the regional differences in the cost of labor, fuel, and other factors that affect the levelized generation cost, a second table is provided below that gives the range of levelized costs based on these differences.

The levelized cost for each generation technology are calculated based on a 30-year cost recovery period, using a real after tax weighted average cost of capital of 6.6 percent. In the AEO2013 reference case, a 3-percentage point increase in the cost of capital is added when evaluating investments in greenhouse gas intensive technologies such as coal-fired power plants without carbon capture and sequestration (CCS) technology and coal-to-liquids plants. The 3-percentage point adjustment is similar to a $15 per ton carbon dioxide emissions fee when investing in a new coal plant without CCS technology. This adjustment represents the implicit hurdle being added to greenhouse gas intensive projects to account for the possibility that they may need to purchase allowances or invest in other greenhouse gas emission-reducing projects that offset their emissions in the future. Thus, the levelized capital costs of coal-fired plants without CCS are likely higher than most current coal project costs.

The levelized cost for each technology is evaluated based on the capacity factor indicated, which generally corresponds to the maximum availability of each technology. However, some technologies, such as a conventional combined cycle turbine, that may look relatively expensive at its maximum capacity factor may be the most economic option when evaluated at a lower capacity factor associated with an intermediate load rather than base load facility.[4]

Simple combustion turbines (conventional or advanced technology) are typically used for peak load, and are thus evaluated at a 30 percent capacity factor. Intermittent renewable resources, e.g. wind and solar, are not operator controlled, but dependent on the weather or the sun shining. Since the availability of wind or solar is dependent on forces outside of the operator’s control, their levelized costs are not directly comparable to those for other technologies although the average annual capacity factor may be similar. Because intermittent technologies do not provide the same contribution to system reliability as technologies that are operator controlled and dispatched, they may require additional system investment as back-up power that are not included in the levelized costs shown below.

EIA warns against the direct comparison of the levelized costs across technologies as the sole measure of economic competitiveness because of differences in resource mix, capacity values, and utilization rates across regions. Rather, the agency suggests that the levelized avoided cost, which measures the cost to the grid to generate the electricity that is being displaced by the new generation project, also be used, but is not provided. According to EIA, “The economic decisions regarding capacity additions in EIA’s long-term projections reflect these concepts rather than simple comparisons of levelized project costs across technologies.”

What EIA is expressing is that dispatchable technology costs should not be compared to non-dispatchable technology costs because the latter technologies only supply electricity generation when the resource (e.g. wind or sun) is available, but they do not supply capacity that can be relied on to provide electricity. IER reported on one analysis that attempts to measure the “levelized avoided cost” of wind, for example. In this paper, the hidden costs of wind (e.g. the cost of back-up power) added to the levelized cost of wind totals 15.1 cents per kilowatt-hour if natural gas is used as the back-up power and 19.2 cents per kilowatt-hour if coal is used as the back-up power.

It is important that readers, especially policy makers, understand this aspect of non-dispatchable power.  Since non-dispatchable power cannot be counted on to produce power when the consumer needs it, it is, in a sense, an unconventional electricity source.  Because our electrical system must respond to consumer demand instantaneously, non-dispatchable power is in essence superfluous to our needs. The requirement that dispatchable power back-up non-dispatchable power to make sure electricity is there when needed is not a luxury, but a necessity.   The more that non-dispatchable power is used, the more the electrical system requires investments in dispatchable generation forms to back up its increased use.  Government policies that promote the use of non-dispatchable power are equivalent to requiring consumers to buy and care for two vehicles: one that works when you need it and another that works when it feels like it.  The hidden costs of non-dispatchable power are substantial and should not be overlooked as part of the public policy discussion.

2.15.13-IER-Web-LevelizedCost-MKM

Source: Energy Information Administration, Annual Energy Outlook 2013,

http://www.eia.gov/forecasts/aeo/er/electricity_generation.cfm

2.15.13-IER-Web-LevelizedCostDis-MKM

 

2.15.13-IER-Web-LevelizedCostNonDis-MKM

2.15.13-IER-Web-RegVarDis-MKM

2.15.13-IER-Web-RegVarNonDis-MKM

 

 


[1] Energy Information Administration, NEMS documentation, http://www.eia.doe.gov/oiaf/aeo/overview/index.html

[2] Energy Information Administration, Annual Energy Outlook 2013, http://www.eia.doe.gov/oiaf/aeo/index.html

[3] Energy Information Administration, Annual Energy Outlook 2013, http://www.eia.gov/forecasts/aeo/er/electricity_generation.cfm

[4] Base load plants are facilities that operate almost continuously, generally at annual utilization rates of 70 percent or higher. Intermediate load plants are facilities that operate less frequently than base load plants, generally at annual utilization rates between 25 and 70 percent. Peaking plants are facilities that only run when the demand for electricity is very high, generally at annual utilization rates less than 25 percent.

 

 


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41 Responses to “Levelized Cost of New Electricity Generating Technologies”

  1. Victor Goldschmidt on

    Very relevant data; our thanks and appreciation!

    Two questions:
    1) what was the number of years (lifetime) used for the various generating systems in the cost analysis?
    2) what is the “energy pay back ratio” for the various systems (i.e. years after the total potential energy generated – since day one – is equal to the total energy used to manufacture, install and operate up to that year)

    Reply
  2. admin on

    The financial life of the units are assumed to be 20 years, i.e. planning decisions to build a new unit are based on a life cycle cost analysis over a 20-year period. The actual life of a generating unit, however, far exceeds the 20-year financial life. The analysis retires units based on planned retirements by utility companies and past operating experience.

    Reply
  3. admin on

    The financial life of the units are assumed to be 20 years, i.e. planning decisions to build a new unit are based on a life cycle cost analysis over a 20-year period. The actual life of a generating unit, however, far exceeds the 20-year financial life. The analysis retires units based on planned retirements by utility companies and past operating experience.

    Reply
  4. Karthik Muniasamy on

    Dear Administrator,
    Is that possible to find the LEC cost for the systems which dont generate electricty,but produce only steam.If so,which are the factors considered?

    Thanking you in advance

    K.Muniasamy

    Reply
    • admin on

      Those costs are embedded in the National Energy Modeling System that the Energy Information Administration (EIA) uses. You can see some of the cost components that go into calculating them at: http://www.eia.doe.gov/oiaf/aeo/assumption/index.html.

      Select the residential, commercial, transportation, and/or industrial model components, depending on what technologies you are interested in. For combined heat and power systems, for example, see Table 6.7 in the industrial sector.

      Reply
  5. admin on

    Those costs are embedded in the National Energy Modeling System that the Energy Information Administration (EIA) uses. You can see some of the cost components that go into calculating them at: http://www.eia.doe.gov/oiaf/aeo/assumption/index.html.

    Select the residential, commercial, transportation, and/or industrial model components, depending on what technologies you are interested in. For combined heat and power systems, for example, see Table 6.7 in the industrial sector.

    Reply
  6. Power Engineer on

    Someone needs to compute the cost of CO2 replacing anexisting coal unit (~1 tonCO2/MWH) with generation at the above prices. For those technologies that emit zero CO2 then the above cost is the cost of removing a ton of CO2:
    Nuclear $107 per ton CO2
    Wind $141-229 per ton CO2
    Solar $263-396 per ton CO2
    Hydro $114 per ton of CO2

    For technologies that emit CO2 a half ton of CO2/MWH you need to double the above costs:
    Gas turbine combined cycle $160/ton CO2

    These are much higher than the $15/ton on which many of the cost numbers are based. The power pools are calculating $50-100 per ton to fuel switch however the pool needs to have both sufficient coal and GTCC capacity to make it happen( and most don’t in a large scale). Consistent with this the EU had a price of about $50/ton (before overallocation of CO2 credits was discovered) which was based on utility fuel switching.

    All of these are cost numbers and do not reflect market dynamics which could multiply them several fold as we’ve seen in other energy commodity markets in time of shortage or “speculation”.

    THe Waxman studies base $15/ton CO2 on buying international offsets for 50-80% of the reduction. The idea that someone would sell to us at $15 when our marginal cost is $50-400 violates basic common sense. We’ll be at the mercy of a “CO2 OPEC”.

    Reply
  7. Steve Goreham on

    Dear IER:

    Thanks for your “Levelized Costs of New Generating Technologies” analysis. Some questions:

    1. I estimate that you did the analysis from data at EIA, rather than pulling the numbers directly from EIA. Correct?
    2. What accounts for the differences in your table and the EIA Figure 57 in the AEO Outlook 2009: “Least Expensive Technology Options Are Likely Choices for New Capacity”? For example, your numbers for wind power are 142 and 230 per Mw-hour and the AEO Outlook puts this number at about 100.

    Thanks much,

    Steve Goreham

    Reply
    • admin on

      Steve,

      The numbers come directly from EIA. They are available upon request from the Coal and Electric Power Division. The difference between the numbers in the table on the IER website, which are for 2016, and Figure 57 of the Annual Energy Outlook (AEO) 2009 is that the numbers in the table are from the revised AEO 2009 that includes the stimulus, i.e. the American Recovery and Reinvestment Act (ARRA) of February 2009. (See http://www.eia.doe.gov/oiaf/servicerpt/stimulus/index.html for EIA’s service report.) In the case of the revised AEO 2009, more wind capacity is built earlier in the forecast than in the AEO 2009 without the stimulus (10 gigawatts more by 2010 and 33 gigawatts more by 2020). As more wind units are constructed, the better wind sites are used up earlier, and wind becomes more expensive due to access and resource availability issues.

      – Mary Hutzler

      Reply
  8. admin on

    Steve,

    The numbers come directly from EIA. They are available upon request from the Coal and Electric Power Division. The difference between the numbers in the table on the IER website, which are for 2016, and Figure 57 of the Annual Energy Outlook (AEO) 2009 is that the numbers in the table are from the revised AEO 2009 that includes the stimulus, i.e. the American Recovery and Reinvestment Act (ARRA) of February 2009. (See http://www.eia.doe.gov/oiaf/servicerpt/stimulus/index.html for EIA’s service report.) In the case of the revised AEO 2009, more wind capacity is built earlier in the forecast than in the AEO 2009 without the stimulus (10 gigawatts more by 2010 and 33 gigawatts more by 2020). As more wind units are constructed, the better wind sites are used up earlier, and wind becomes more expensive due to access and resource availability issues.

    – Mary Hutzler

    Reply
  9. Ed on

    Dear IER,

    Is the hydro 114.1 number, conventional hydro, hydrokinetic, or combined? I ask because non-conventional hydro might be higher capacity factor.

    thx
    ed

    Reply
  10. Koji on

    Dear IER:

    Thank you for your Cost analysis.
    I have some questions:

    1) What discount rate did you use?
    2) If there is summery of assumptions, please let me know.

    Best regards

    Reply
  11. Andy Bowman on

    What are the prices of natural gas and coal (fuel factors) modeled in the analysis? I went to the link with the assumptions but it only explained the methodology, not the actual prices used. Thanks.

    Reply
  12. Andy Bowman on

    What are the prices of natural gas and coal (fuel factors) modeled in the analysis? I went to the link with the assumptions but it only explained the methodology, not the actual prices used. Thanks.

    Reply
  13. wayne leposavic on

    I like your graph comparing the cost od 20 different sources of energy. It would be even more useful if you provided also info how much CO2 is generated per kw of power, by each. Thank you.

    Wane Leposavic, investor
    Las Vegas

    Reply
  14. wayne leposavic on

    I like your graph comparing the cost od 20 different sources of energy. It would be even more useful if you provided also info how much CO2 is generated per kw of power, by each. Thank you.

    Wane Leposavic, investor
    Las Vegas

    Reply
  15. Ray on

    dear IER,

    thank you for this analysis. I was wondering, with this data in mind, it is possible that for example wind and solar can be profitable compared to other technologies? Even with carbon taxes, nuclear beats them all?
    Thanks!

    Reply
  16. Ray on

    dear IER,

    about my previous question, let me formulate it differently. The average retail sales price for electricity in the US is around 10 cents/kwh ($100 per Mwh). If you draw that $100 line inside the above graph, only 3 technologies go under that $100 line.
    I don’t get how technologies that are more expensive than the average retail price can be profitable.
    Thanks a lot for your answer!
    Ray

    Reply
  17. mike honey on

    On wikipedia the Levelized costs’ denominator ( kwh or other unit of energy production) is discounted as if it were cash. Can anyone explain why that is done? thanks,
    Mike

    Reply
  18. admin on

    @mike honey,

    Basically, you start with the notion that LCOE is the electricity price at the point where the present-value revenue for the electricity (price * quantity) equals the present-value cost (using the notation from wikipedia, where P is the price of electricity in year t):

    sum (Et * P * (1+r)^-t)= sum (It + Mt + Ft) * (1+r)^-t)

    So when you solve for P, the discount factor on the left hand side ofthe equation ends up in the denominator, along with Et.

    So LCOE=P=[ sum (It + Mt + Ft) * (1+r)^-t)]/[sum(Et*(1+r)^-t]

    Reply
  19. admin on

    @mike honey,

    Basically, you start with the notion that LCOE is the electricity price at the point where the present-value revenue for the electricity (price * quantity) equals the present-value cost (using the notation from wikipedia, where P is the price of electricity in year t):

    sum (Et * P * (1+r)^-t)= sum (It + Mt + Ft) * (1+r)^-t)

    So when you solve for P, the discount factor on the left hand side ofthe equation ends up in the denominator, along with Et.

    So LCOE=P=[ sum (It + Mt + Ft) * (1+r)^-t)]/[sum(Et*(1+r)^-t]

    Reply
  20. Gordon on

    EIA makes a critical judgment call when estimating wind energy costs by assuming a capacity factor of 40%. Barring a major future technological breakthrough, actual U.S. wind energy capacity factors bump along at or below 25% (as low as 22%) in recent years, even after the advent of the latest turbine designs. Replace the 40% (fiction) with 24% (reality), and wind levelized costs jump to nearly $250/MW-hr, more than 2x nuclear. Also, biomass looks cheap, but there is not enough of it to matter in the big picture.

    Reply
  21. Stan from Sugar Land on

    Hey Guys, thanks for a great report. I’m in the process of finishing up a review of potential gas supply from the various shale zones in North America and wanted to include a section on the possible efects of this gas supply on electric generation. I anticipated 2-5 days effort to get the information and do the calcs. Got on line this morning to start gathering the info, went to IER first and found your report – basically job done. The report I’m working on is technical and for a for profit company – it will never be seen in public, but IER will be given credit.
    Note, the US energy scene is technically, potentially in very good shape and we could drive energy supplies up and costs done, cleanly, if the politicans, bureaucrats and business that seek advantage through the political and regulatory process got out of the way. Don’t mind arb’ing governmental stupidity but refuse to pimp and whore to use the political process to reach into tax payer’s pockets and transfer money into mine! Examples are available, such as a rich oil/gas guy advertising for wind generation of electric.

    Reply
  22. Ziad on

    Dear IER,

    I am actually working on a project on wind power turbine. Is it possible to have a link for a more detailed report on wind levelized energy cost ?

    The estimation you did was only for the US ?

    Reply
  23. Johnson on

    $0.01 per MWh could be possible with aneutronic nuclear fusion reactor fueled with relatively inexpensive fuels such as hydrogen-boron and hydrogen-lithium. It can be a cheap, clean and safe source of electricity without any type of radioactive waste.

    Reply
  24. Nikolaus on

    Hey guys,

    I am currently working on my final thesis for my bachelor-degree in Vienna, Austria. I am comparing several studies which calculate LCOE and try to explain how various studies have vast differences in their results concerning the LCOE per MWh.

    One of the studies examined is the EIA-Outlook. I know this question was already posted, but I couldn’t find an answer in the link provided (see post of Koji on September 16th, 2009): For calculating the LCOE, which discount rate/cost of capital was used? I would be very grateful for an answer!

    Reply
  25. admin on

    Nikolaus,

    The average cost of capital between 2010 and 2035 is 0.115. In 2016, it is 0.114. However, for new coal plants without sequestration, 3 percentage points are added to cost of debt and cost of equity to represent a carbon risk premium. And, for new renewables online by 2015, a 2 percentage point reduction in cost of debt and equity is made to represent loan guarantees in the stimulus.

    Reply
  26. admin on

    Nikolaus,

    The average cost of capital between 2010 and 2035 is 0.115. In 2016, it is 0.114. However, for new coal plants without sequestration, 3 percentage points are added to cost of debt and cost of equity to represent a carbon risk premium. And, for new renewables online by 2015, a 2 percentage point reduction in cost of debt and equity is made to represent loan guarantees in the stimulus.

    Reply
  27. Nikolaus on

    Hey,

    thanks for the information!

    Is there any justification for assuming capital costs of 11,5%? The IEA for example use 5 and 10 percent in two their scenarios…

    Reply
  28. Nikolaus on

    Hey,

    thanks for the information!

    Is there any justification for assuming capital costs of 11,5%? The IEA for example use 5 and 10 percent in two their scenarios…

    Reply
  29. Nikolaus on

    Hey,

    thanks for the information!

    Is there any justification for assuming capital costs of 11,5%? The IEA for example use 5 and 10 percent in two their scenarios…

    Reply
  30. Anonymous on

    As the solar photovoltaic (PV) matures, the economic feasibility of PV projects is increasingly being evaluated using the levelized cost of electricity (LCOE) generation in order to be compared to other electricity
    generation technologies. Unfortunately, there is lack of clarity of reporting assumptions, justifications and degree of completeness in LCOE calculations, which produces widely varying and contradictory results. 

    It is suggested that the degree of applicability of an analysis is clearly stated so that the wrong conclusions are not made. This article have a range of LCOE which is a step in the right direction compared to other sources that cite numbers with no justification.

    Read more: A Review of Solar Photovoltaic Levelized Cost of Electricity, Renewable and Sustainable Energy Reviews, 15, pp.4470-4482 (2011), http://www.appropedia.org/Review_of_Solar_Levelized_Cost

    Reply
  31. Thomas Stacy on

    Hi guys.  To make the point about comparative cost of wind energy to conventionals, note that the full cost of wind energy only displaces the variable costs of other sources, since all the conventional plants and fixed costs remain – no matter how many air current surface mines get built.  So compare the full cost of wind to the olive green portion of the stacked bars for conventional technologies in the chart to arrive at a valid cost comparison. We have been trying to get EIA to report this way, but of course the bureaucracy is a problem!

    Reply
  32. James Carson on

    Levelized cost is pretty much irrelevant. The value of electricity is highly time and location dependent. Analogy: Is an acre of land in Manhatten valued the same as an acre in the Bronx? Any analysis that compares different sources of energy without taking dispatchability into account is useless.

    Reply

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