Levelised Cost of Electricity – a Few Thoughts

Following on from the previous article regarding the misuse of metrics, this article is a guest post by Keith Pickering. More of his analysis and commentary can be found at Daily Kos.

A few thoughts on LCOE, Levelized Cost Of Electricity.

The first thing to realize that LCOE is, and always has been, an investment tool, designed for investors, to aid investors in energy markets make investment decisions. And when LCOE is used for that purpose, it is (usually) appropriate.

The problem comes when we want to use LCOE to make public policy decisions, which can (and usually do) have a different set of decision parameters than financial investment. One obvious difference is in asset lifetime.

For example, the US Energy Information Agency publishes LCOE estimates every year, and while they do a pretty bad job of explaining how they compute things, one thing they do say is that for all energy types they use a lifetime of 30 years. Why? Because banks don’t make loans for longer than 30 years, that’s why. Now if you’re considering whether to loan money to an energy project, that 30 year lifetime makes perfect sense. But if you’re planning an energy infrastructure for half a century or more, the 30-year lifetime in your LCOE calculation will systematically undervalue long-lifetime assets (like nuclear and hydro) and systematically overvalue short-lifetime assets (like wind.) Using a 30-year lifetime implies, essentially, that generating assets with a lifetime of more than 30 years will have zero asset costs during their lifetimes beyond loan payoff. Essentially that pretends that the electricity cost would *drop like a stone* to extremely low levels at the 30 year point. But those really low future electricity costs are *never reported* in LCOE; the assumption is just left out there, unmentioned.

Another thing to realize is that a key component in all LCOE calculations is the “discount rate.” Basically, the discount rate is the annual rate of return investors would expect to get on a properly valued asset. If the discount rate is high, investors want their money back right away. High discount rates value the present highly, while discounting the future strongly. High discount rates therefore penalize technologies that rely heavily on long-term fixed assets (once again, hydro and nuclear.)

Discount rates are used elsewhere too, for example in computing the Social Cost of Carbon (SCC). If you’re taking the long view, a low discount rate values the future more highly. For that reason, climate hawks like to use low discount rates when computing SCC, because that computation raises carbon cost. The carbon we emit today will continue warming the earth for centuries, and will continue to cause damage for that entire time. The lowest possible discount rate will capture (some of) that future damage and value it when computing SCC. The US government currently uses a 3% discount rate when computing SCC. And even that may be too high, when you consider the entire lifetime of CO2 in the air.

To be consistent, then, us cliamte hawks should also press for an equally low discount rate when computing LCOE; that is the socially responsible way to value the future in the face of long-term climate change. But EIA uses a Weighted Average Cost of Capital (which is the discount rate by another name) of 5.5%, nearly twice the rate used in computing SCC. That doesn’t mean it’s wrong; for an investment tool, it’s appropriate. But again, if you want to use LCOE for policy purposes, there are other things to consider.

The investment management company Lazard publishes their own LCOE results every year, and every year the low-low LCOE of wind is caressed and trumpeted by certain wind-loving types. It’s no coincidence that Lazard is heavily involved in wind energy stocks, and has skin in the game as far as wind energy is concerned. The Finnish blogger Jani-Petri Martikainen has already cataloged some of the many thumbs Lazard puts on their scale to favor wind, and it’s no surprise that jacking up the discount rate is one of them: Lazard’s rate is a whopping 9.6%, which immediately rockets high-asset technologies (like hydro and wind) way up in price. Then they lower their LCOE (for wind only) by assuming hugely unrealistic (55% !!) capacity factors for wind. The net result is that Lazard’s bottom-line wind numbers look about like EIA’s (so they can reassure their customers that they’re doing it right) while all other technologies are way too high. It’s utterly deceptive, but they apparently hook the investors they’re trolling for.

Another good LCOE resource is the OpenEI Transparent Cost Database, which is a meta-analysis of everybody else’s LCOE, but with homogenized parameters for tax rate, discount rate, and capacity factors for the various technologies. Unfortunately it looks like it hasn’t been updated in more than a year now, but it does have everything spreadsheeted out, which lets you examine the calculations and play around with the assumptions. With OpenEI’s standard parameters, nuclear already looks appropriately cheap, even in the first thirty years. And if you count the second thirty years of expected plant life, it’s no contest.

The Hornsdale wind farm in South Australia operates under a tariff agreement with the Australian Capital Territory worth $77 per megawatt hour. In the absence of this arrangement, it would derive revenue from selling Large-scale Generating Certificates as the majority of incentivised renewable generators do in Australia. Stage 2 was completed in 2016, adding 100 megawatts for $250 million. For comparison, the cost of the first 100 megawatt stage at Snowtown in the same state in 2008 was $220 million – practically the same, adjusted for inflation. The impact of adding to so much wind capacity on system strength in South Australia, as identified in the Finkel Review, is not accounted for in the tariff. However, Hornsdale stage 2 is trialing a method to supply Frequency Control Ancillary Services to the market.

One final word about cost. You often read about some contracted electricity price for some new installation (typically solar) that is impressively low. These Power Purchase Agreements (PPAs) are common in the industry, but you should be aware that PPA price is always lower than LCOE. That’s because a PPA does more than transfer energy: it also transfers risk, from the seller to the buyer. If you want to build a new generator (of any type), you’re taking different financial risks: the risk that the project will never get built, and the risk that you won’t be able to sell the electricity, or not for the price you need. Banks understand these risks and set the interest rate on the loan accordingly. When a PPA is signed, the first part of that risk (that it won’t get built) has already passed, because as a general rule a PPA isn’t signed until the generator is already built. And when a PPA is signed, the second risk component (not being able to sell it, or for the right price) has also been eliminated. With a newly signed PPA in hand, the generator owner can re-finance his loan to a very, very low rate, because at that point the risk is almost completely gone. The buyer of the electricity (the other party in the PPA) has assumed the risk that the price he’s paying on the PPA will be lower than the price he could have gotten elsewhere on the wholesale spot market. Because the buyer is assuming that risk, he expects a lower price than he otherwise would have gotten; and because the seller is shedding that risk, he’s willing to sell at a lower price too. Generally, a PPA price is about what LCOE would be if the discount rate were close to zero.



Many thanks to Keith for this clarifying commentary. I added the description of Hornsdale wind farm to help illustrate it with real world Australian context.

For the reasons mentioned above, and as it’s so heavily relied on by anti-nuclear campaigners, I avoid using Lazard’s analysis on this blog. But its latest edition included this piece of important guidance which many would be wise to take on board.

Even though alternative energy is increasingly cost-competitive and storage technology holds great promise, alternative energy systems alone will not be capable of meeting the baseload generation needs of a developed economy for the foreseeable future. Therefore, the optimal solution for many regions of the world is to use complementary traditional and alternative energy resources in a diversified generation fleet.


(Mis)use of Metrics & (Ab)use of Arithmetic

Source: REN21

The levelised cost of electricity – LCOE – is defined as the total cost per kilowatt hour of electricity accounting for the installation, operation, maintenance, financing, taxes, decommissioning, and other minor considerations for a given technology over its operating lifetime. LCOEs are routinely presented to compare different sources of electricity – unfortunately often when someone wants solar or wind energy to appear cheaper than nuclear energy.

It’s being increasingly recognised that LCOE doesn’t suit this sort of comparison. Important factors which aren’t accounted for, according to Aurora Energy Research, include market value, realistic generator performance and the value of storage technologies.

Furthermore, as explained by the IEA and NEA:

The LCOE methodology was developed in a period of regulated markets. As electricity markets diverge from this origin, the LCOE should be accompanied by other metrics when choosing among electricity generation technologies.

Probably the most important of these other metrics excluded from LCOE calculations is capacity credit, which is a function of the intermittent nature of the “fuel” for some technologies in the context of the demand on the grid. To take the IEA definition:

The capacity credit is the peak demand less the peak residual demand, expressed as a percentage of the variable renewables installed. For example, if 10 GW [gigawatts] of wind power plants are installed in a region, and their capacity credit is 10%, then there will be a reduction of 1 GW in the amount of other plants required, compared to a situation with no wind capacity. This is due to the weather-influenced output of variable generators (generally wind and solar, and also wave and tidal).

Clearly, if a 1 GW nuclear power plant is installed and operated well in the neighbouring region, it’ll replace 1 GW of, ideally, fossil fuel energy. The extraneous issue of its “waste” – which has no climate impact – will be capably solved through recycling and repositories without burdening our decendants.

Contrast the way the LCOE metric is used (or misused) to a rather different metric, the greenhouse gas lifecycle assessment – LCA:

There are many sources for LCAs of practically every generation technology, but arguably the most authoritative is provided in comprehensive meta-analyses by the US National Renewable Energy Laboratory.

Advocates of nuclear energy as a tool in climate action persistently cite this sort of authoritative metric, and one crucial thing should be recognised: they don’t exclude renewable energy sources by doing so.

Such advocates, exemplified by the 75 leading conservation scientists from around the world, who in 2014 implored environmental groups to reconsider nuclear energy, recognise the importance of not excluding any proven or promising options.

The NREL LCA for nuclear energy – already a very low emissions power source – analysed fast breeder reactors in supplementary material, finding a median value of 0.87 gCO₂-e/kWh, the lowest of all. This is mainly because they wouldn’t require mining for their fuel.

BN-800, an operating fast reactor in Russia. It runs on decommisioned nuclear weapons.

This is why such advocates are determined to include this option. And while the IEA’s example of wind energy may have a tenth of the supply capacity with over 10 times the median LCA emissions (on paper), they certainly don’t want it excluded.

And of course, it’s not just electricity. Take another look at that REN21 chart. Still nearly 80% fossil fuels to meet total energy demand – who exactly wants to limit our tools to just “cheapest” wind? Please be wary of anyone who does.


Speeding Up the Roadmap

*only these, but absolutely loads of them

Energy Networks Australia and the CSIRO have released the final version of their roadmap for transforming Australia’s energy supply, to the usual fanfare that these things receive. If you’re not keeping close track, yes it’s different to the efforts from ClimateWorks and from GetUp, amoung various others. Why do there need to be so many anyway?

Anyway, the headline chart illustrates the phase out of coal, then gas, with build up of solar and wind to simply supply all of the terawatt hours we’ll need in 2050 (a terrawatt hour, TWh, is a billion kilowatt hours). Well it certainly looks simple, and at the very least we can seperate out the wedges of renewable energy and take a closer, more critical look.

Analysed the old fashion way: pixels to TWhs.

Large solar PV

In other words, solar farms like the 102 megawatt (MW) Nyngan plant in NSW, which apparently generates about 230 million kWh per year. Judging by the shape of the dark blue wedge, enough of these need to be built by around 2035 to supply 45.6 billion kWh in that year. So that’s roughly 198 farms of that size. We already have Nyngan and a couple of other large solar farms which add up to at least the same output, so make it 196 solar farms in 18 years, or just about 11 per year. Starting now. Then, towards the end of the 2040s, we’ll need to roll our sleeves up again and start replacing these farms as they reach the ends of their expected service lives.

Wind onshore

Again, at around the 2035 mark the light blue share of wind energy is set to begin expanding fast. How fast? To about 183.3 billion kWh through 2050, supplied by the equivalent of 172 windfarms the size of the 420 MW MacArthur wind farm in Victoria (Australia’s largest) at the national annual capacity factor for wind. With 15 years left to build them, we’ll need the equivalent of eleven and a half per year. This is well over 10 times faster than wind has been built in the last decade. Perhaps we can count some of Australia’s existing windfarms at the start of this period, but the fact is most of them will be reaching or passing the end of their rated lifespans in 2035.

Rooftop PV

By the Australian Photovoltaic Institute‘s upper estimate, there was a total national installed rooftop solar capacity of 5,968.341 MW in March this year. Ignoring the need for replacement by 2050 (let’s face it, nobody’s thinking about that anyway) and at the normal 15% annual capacity factor for Aussie rooftops, this is set to grow to 90,650 megawatts (to account for an annual 119.1 billion kWh supply) within 33 years, representing a monthly addition rate of close to 415.5 MW (it’s presently a bit over 60 MW/month) which would look like this:

The arrow indicates today, when we need to start adding rooftop solar capacity almost three and a half times faster than we have in the last year. And not stop for 33 years. Data: APVI

The APVI also keeps track of the current proportion of Australian dwellings with rooftop solar by state. Simply scaling up these figures to roughly 100% for each state (i.e. tripling Queensland and South Australia, up to 10x for Tasmania and so on) yields 25,857 MW. That’s allAustralian rooftops with solar. Obviously we either need more houses or much bigger rooftop systems (probably both), however the CSIRO/ENA’s document is specific about assuming no further subsidies to incentivise addition, so all else being equal it’s not obvious why an individual household would install any more than the kW capacity that covers its own needs.

Two issues are left entirely unaddressed by the headline chart:

  1. A kWh of solar or wind doesn’t serve the same sort of demand as a “conventional” kWh, say from a gas power plant. The hundreds of billions of renewable kWhs appear to more than cover for coal and gas in 2050 at an annual timescale, but week-to-week, day-to-day supply is a different matter. Something more is obviously required when the weather won’t oblige.
  2. Storage of energy is the obvious solution on paper, and CSIRO/ENA foresee a plausible national capacity of 87 million kWh of batteries in 2050. Consider this figure against the 52,000 kWh installed in 2016, and the limited lifespan of these devices (even hoping for 15 years, this would require 5,800,000 kWh worth of battery capacity installed annually till 2050). This is precisely the approach critiqued in the recent review of 100% renewable energy scenarios by Heard and co-workers:

A common assumption is that advances in storage technologies will resolve issues of reliability both at sub-hourly timescales and in situations of low availability of renewable resources that can occur seasonally.

Battery storage is undeniably wrapped in buoyant optimism these days, even though recent large scale operational experience in California points to serious limitations. Additionally, the issue of lifecycle (generally only 10 years for lithium ion) emissions is almost universely neglected in “net zero carbon” scenarios which rely on battery storage. And ultimately, as recently stated by no less than Lazard:

Even though alternative energy is increasingly cost-competitive and storage technology holds great promise, alternative energy systems alone will not be capable of meeting the baseload generation needs of a developed economy for the foreseeable future. Therefore, the optimal solution for many regions of the world is to use complementary traditional and alternative energy resources in a diversified generation fleet.

To be entirely fair to the authors, the document contains some useful assumptions about future energy usage in Australia. It’s certainly worth a flick through. And they do try to account for the required build rate, however it isn’t quite as clear as starting a major new solar farm or wind farm virtually every month for the next three decades, and beyond, like I’ve elucidated here.

Is the future of 2050 sufficiently far from foreseeable? How close do we get before we critically and honestly examine our progress, or lack thereof, and potentially reconsider other energy resources we initially chose to exclude? And how ambitious is 2050 anyway – when including all low carbon resources now may well significantly speed things up?

The Survey Says

I want to preface this article by reiterating that unambiguous call from no less than the Intergovernmental Panel on Climate Change for the dramatic and inclusive expansion of all zero- and low-carbon energy technologies

which was released in April 2014. This’ll be important later.

This chart visualises the results of surveys conducted in Australia on attitudes to nuclear energy as a tool for climate action, before and after the Fukushima nuclear accident.

The open access paper contains valuable context and discussion. It’s worth a read, even though its framing is arguably simplistic: renewable energy is once again the alternative to nuclear energy, and the actual term “renewables” is never expanded. Renewables: solar, wind, geothermal… are biomass and hydroelectric included in this context? The wording of the survey question, revealed in the supplementary data, includes only solar and wind, a tendency that has lately been described as a “subtle form of miscommunication” which will arguably do little to help the climate cause.

However, I see three main questions raised by this research, going forward. First is to do with the fact that it was published several months before the IPCC Fifth Assessment Report was released. Working Group 3 identified nuclear energy, alongside renewables (all of them) and fossil fuels with CCS as essential energy sources requiring marked expansion. What would be the result of a survey of support for nuclear energy, in the context of climate change, which included a primer on the IPCC’s view regarding its necessity?

Second, we have since had no less than a royal commission into the nuclear fuel cycle in South Australia. While limited in some aspects mainly by time, the royal commission welcomed and heard from the full spectrum of stakeholders, from peak professional engineering bodies to groups and individuals who make no secret of distrusting and rejecting all authoritative knowledge to do with nuclear science. This included the persistent objection regarding the full lifecycle carbon emissions of nuclear power plants, which were concluded to be as low as that of wind by the royal commission.

I recommend reading the royal commission’s full conclusions. What would survey results look like after considering them? The closest we can get is the self-selected 2016 “Your state, your say” Sunday Mail poll.

Again, self-selected, so of arguable value. But I would argue that ardent, social media-connected nuclear opponents are overly represented here (if anyone is) thanks to the sorts of efforts made by their thought-leaders in South Australia at the time. (Readers of my blog know I was a vocal supporter of the inqury process, living in that state at the time, but I didn’t see this poll shared in any pro-nuclear discussions or even hear about it till it was finished). However, that is only my opinion.

Recent polling shows high support for the South Australian government’s current bold plans for state energy security. This wasn’t framed with a nuclear alternative, nor were the climate-related issues of reliance on natural gas, or the lifecycle emissions of batteries addressed, which isn’t a criticism but more to highlight how returning the issue back to aggressive decarbonisation to save a habitable climate quickly makes it far more complicated than a popularity contest.

Lastly, much more time has now passed since the Fukushima accident, and insistent, dire predictions of doom are now largely the domain of conspiracy theorists. You can read about the harm of the over-reaction here, how nobody will die from radiation here, and how the Japanese prefecture is recovering here.

In all the consultation by the royal commission, nobody suggested somehow procuring antique 1960’s boiling water reactors to install in South Australia (let alone Soviet-era RBMKs, the design at Chernobyl). Yet, safety worries about nuclear technology invariably boiled down to pointing at such old designs, when it’s the modern, modular designs that have obviated the old risks which realistically need to be considered in Australia’s future decarbonised energy mix. Just like consideration and redesign after airline accidents make travelling by plane even safer today, modern nuclear has improved dramatically. What would survey results look like if this simple bit of obvious-when-you-think-about-it context was included?

I’d like to see the answers to these questions, but I’d like to see better education and collaboration on clean energy more, and even more importantly an inclusive, historically-guided and innovation-focused response to the need to expand energy production while also decarbonising its fuel sources. I hope there are a lot of yes votes for that.


The Sweden Metric

Last weekend, Australia’s federal opposition Labor Party confirmed that its target of 50% renewable energy for national electricity supply in 2030 would be sought through an Emissions Intensity Scheme, instead of a legislated RET essentially like the one currently in place.

An EIS, at the very least, has the potential to focus efforts on the core issue: the greenhouse gas intensity of Australia’s energy. (For electricity, this is usually expressed as grams of CO₂-equivalent per kilowatt hour.) At face value, it doesn’t favour one climate-friendly technology over any other. It could be a refreshingly realistic climate policy platform from a major party – and certainly far more hopeful than its previous committment:

The Climate Change Authority has found that for Australia to achieve its bipartisan agreement to limit global warming by less than 2°C, renewable energy will need to comprise at least half of Australia’s electricity generation by 2030.

ClimateWorks Australia has modelled multiple energy scenarios for Australia staying within its carbon budget which is derived from staying within the 2°C target. In each of the modelled scenarios, a minimum of 50 per cent renewable power by 2030 is anticipated. These scenarios maintain the current structure of the Australian economy, economic growth at current levels and only use technology available today.

Through a combination of hydroelectricity and nuclear reactors, Sweden rapidly achieved an average annual emissions intensity of 23 gCO₂e/kWh decades ago (Australia’s was 920 in latest reporting). This has in no way been detrimental to Sweden, which patiently manages the non-carbon by-products in secure engineered facilities. One recent paper has suggested that a switch away from nuclear energy will raise the nation’s emissions intensity.

There’s opposition to nuclear energy in Sweden, just as there is in Australia. Researchers from neighbouring Finland have analysed the gamble being made by these opponents by putting exclusion of nuclear before its proven track record. Oft-repeated objections were understandable once, in pre-internet times, but considering how they’re made by many of today’s most vociferous advocates for climate action, they ring increasingly hollow and ill-informed.

In the meantime, modern “100% renewable energy” literature presents itself as a tempting veneer for national energy policy, with in-built popularity but a dearth of feasibility. As observed in a recent review of this literature:

Policy makers are therefore handicapped regarding the credibility of this literature — there is no empirical basis to understand the evidence behind propositions of 100%-renewable electricity (or energy) for global-, regional- or national-scale scenarios. Consequently, there is a risk that policy formation for climate-change mitigation will be based more on considerations of publicity and popular opinion than on evidence of effectiveness, impacts, or feasibility.

A mid-2030 timeframe for an Australian coal energy exit is realistic for a modern nuclear rollout informed by a historical rollout rate. But it must begin today with a technology-neutral committment to solid policy and the bravery to look objectors dead in the eye as nuclear technology is given its place on the table.