POWER September 2020 - 6

SPEAKING OF POWER
Is LCOE the Best Metric
for Choosing New
Power Resources?
Aaron Larson
C
osts for wind and solar power systems
have been declining for years
thanks to technology improvements,
economies of scale, and fierce
competition in auctions. In the second
half of 2019, the levelized cost of electricity
(LCOE) for solar PV was about
83% lower than a decade earlier, while
costs for onshore and offshore wind
were down 49% and 51%, respectively,
according to Global Trends in Renewable
Energy Investment 2020, a report
commissioned by the United Nations
Environment Programme's (UNEP's)
Economy Division in cooperation with
Frankfurt School-UNEP Collaborating
Centre for Climate & Sustainable Energy
Finance and produced in collaboration
with BloombergNEF (BNEF).
LCOE Tells a Story
LCOE is a common measure used to
evaluate the overall competitiveness of
different generating technologies. It 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.
Key inputs for calculating LCOE include
capital costs, fuel costs, fixed and variable
operations and maintenance costs,
financing costs, and an assumed utilization
rate for each plant type.
BNEF reported in late April that the
global benchmark LCOE for onshore
wind and utility-scale PV had fallen 9%
and 4% since the second half of 2019
to $44/MWh and $50/MWh, respectively.
Meanwhile, it said, the benchmark
LCOE for battery storage had decreased
to $150/MWh-about half of what it was
two years earlier.
Other research suggests costs are
even lower. Lazard, a financial advisory
and asset management firm that has
been publishing LCOE data annually
for many years, said in its most-recent
report (published in November 2019)
that the cost of generating electricity
from onshore wind and utility-scale solar
projects decreased 3.5% and 7.0%,
6
respectively, compared to 12 months
earlier. It said when government subsidies
were included, the cost of building
new onshore wind and utility-scale solar
averaged $28/MWh and $36/MWh, respectively.
Furthermore, Lazard's analysis
showed new onshore wind and utilityscale
solar was competitive with the
marginal cost of existing coal and nuclear
generation, which averaged $34/MWh
and $29/MWh, respectively.
The U.S. Energy Information Administration
(EIA) also published LCOE data
earlier this year. In a paper released on
Feb. 21, 2020, EIA estimated the capacity-weighted
LCOE for new generation
resources entering service in 2025 (in
2019 dollars) would be $34.10/MWh for
onshore wind and $30.39/MWh for solar
PV. Although state and local incentives
were not included in those calculations,
the EIA did include a levelized tax credit
of -$2.41/MWh for solar PV in its figures.
For comparison sake, the average LCOE
for natural gas combined cycle plants
was estimated to be $36.61/MWh.
LCOE May Not Tell the Whole
Story
Based on the numbers, it would seem
wind and solar are the obvious choices
for almost any new-build power project.
In a statement issued with its April report,
BNEF said onshore wind and solar
PV " are now the cheapest sources of
new-build generation for at least twothirds
of the global population. " It also
said " battery storage is now the cheapest
new-build technology for peaking
purposes (up to two-hours of discharge
duration) in gas-importing regions, like
Europe, China or Japan. "
However, the EIA noted in its paper,
" LCOE does not capture all of the factors
that contribute to actual investment
decisions, making the direct comparison
of LCOE across technologies problematic
and misleading as a method to assess
the economic competitiveness of
various generation alternatives. " It suggested
the levelized avoided cost of electricity
(LACE) must also be considered.
LACE represents a power plant's
www.powermag.com
value to the grid. " A generator's avoided
cost reflects the costs that would be
incurred to provide the electricity displaced
by a new generation project as
an estimate of the revenue available
to the plant, " the EIA explained. Like
LCOE, LACE revenues are converted
to a level stream of payments over a
plant's assumed financial lifetime.
The EIA said a power plant is considered
economically attractive when its projected
LACE (value) exceeds its projected
LCOE (cost). These values vary across
the country and around the world, as resource
availability, fuel costs, and other
factors differ by market. LCOE and LACE
values also change over time as technology
improves, tax credits and subsidies
come and go, and fuel costs fluctuate.
As everyone in the power industry
knows, some plants can be dispatched,
while others, such as wind or solar farms,
operate only when the given resources
are available. Thus, certain plants can
provide electricity during parts of the day
or year when power prices are higher,
while others may produce electricity during
times of relatively low prices. Therefore,
the EIA advised that the relative
difference between LCOE and LACE is
a better indicator of economic competitiveness
than either metric alone.
Declining Costs Could Open the
Gap
In other words, deciding what type of
new generation to add to different parts
of the grid is a complicated process. Still,
as costs continue to decrease for wind,
solar, and battery storage technologies,
the difference between LCOE and LACE
will likely shrink and eventually favor renewable
energy resources in more and
more situations.
Tifenn Brandily, lead author of the
BNEF report, said, " On current trends,
the LCOE of best-in-class solar and wind
projects will be pushing below 20 dollars
per megawatt-hour this side of 2030. "
Those are LCOE's that are going to be
hard to beat. ■
-Aaron Larson is POWER's
executive editor.
POWER | September 2020
http://www.powermag.com
POWER September 2020

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