Levelized Energy Cost: Honest Pricetags Minus Ideological Bias

Posted by Ben Jervey

 


When I have the opportunity to talk to very smart people in the energy field (which, fortunately, is pretty often), I like to ask them about what energy concepts those of us who aren’t quite as smart should be more aware of. Almost without fail, they get all worked up and agitated and start talking about the levelized cost of electricity (or, sometimes, the levelized cost of energy). 

You can stop cringing—we’re going to take this nice and slow. Yes, the levelized cost of electricity sounds like the vocab of a utility exec or political aid or econ professor. But trust me, it’s important.  

And if you’re the type of person who likes to talk breathlessly about planting wind farms up and down our continental shelves or plugging PV panels on every rooftop in order to wean our grid off of coal and natural gas (or, for that matter, if you’re the type who wants to build 200 new nuclear plants, or harness this so-called shale gas revolution), then this is a concept that you simply have to get comfortable with.

So put on your jargon stomping boots and let’s trudge in.

The levelized cost of electricity—let’s call it LCOE from here on out—is basically an economic tool for figuring out how much power is going to cost from a certain energy source over the long term. As we figure out what power sources we’ll build to keep our nation’s lights on and refrigerators chilled, it’s the best way to ensure that we’re comparing apples to apples (or megawatt hours to megawatt hours, as the case may be).

It takes political and ideological bias out of the equation and gives you the cold, hard facts about the economics of energy. It basically explains why, today, natural gas plants are being built at a breakneck rate and why nuclear and coal plant development is basically stagnant. It can also show pretty clearly why solar and wind aren’t immediately in full-scale, rapid deployment, despite the better wishes and intentions of clean energy advocates and climate hawks.

Technically speaking, LCOE reflects the “overnight capital costs, fuel costs, fixed and variable operation and maintenance costs, financing costs, and an assumed utilization rate for each plant type, expressed in terms of real dollars to remove the impact of inflation.” Um, yeah.

So non-technically speaking, LCOE reflects the estimated cost of producing a certain amount of electricity (in the case of this handy chart we’re going to walk you through, a megawatt hour) from each energy source. It lets us compare and evaluate the relative costs and competitiveness of different generation technologies. And, yes, in case you’re wondering, LCOE takes into account the intermittent nature of some technologies (like solar and wind), and the relatively high “capacity factors” of power plants like coal, natural gas, biomass, and geothermal.

Uh oh, there’s another piece of jargon to stumble over. The “capacity factor” of a power plant is the ratio of the actual output of the power plant over a period of time and its output if it had operated at full “Installed Capacity” the entire time. In simpler terms: a nuclear plant has a really high capacity factor because it produces close to 100-percent of the electricity that it is able to at any given moment of operation. A wind farm is much lower, because, you know, sometimes the wind don’t blow.

This is all going to make a whole lot more sense when you can see LCOE laid out for you. Lucky for you, I worked with Focus the Nation last year to create a really handy infographic that compares the LCOEs of the most common sources of electricity.

The graphic compares the levelized costs of new energy generation technologies. This doesn’t include coal or gas plants or wind farms or anything else that is already built.

So when we talk about what we need to build to replace all the aging nuclear plants that are soon to be decommissioned, or the decades-old, horribly-polluting coal plants or creaky old wind farms, these are the economics that we should be looking at. The costs are listed as ranges (which can be somewhat unsatisfying), because there can be some pretty enormous variability between geographical regions and in fuel costs. Take solar, for example, which has the largest ranges—it’s a whole lot cheaper per megawatt hour in the sunny Southwest than it is in, say, Oregon.

The baseline data in this infographic (the light blue bars) comes directly from the Energy Information Agency’s Annual Energy Outlook, 2012. That data is super useful, but we thought it would be enlightening to consider how the various costs of power would be affected by a couple of policy changes that are entirely reasonable (if politically difficult). So you can compare energy costs if major tax credits and federal loan guarantees were removed (in green), or if there was a cost on carbon (in orange). The pink bars estimate how much a megawatt would cost if the tax credits and loan guarantees were gone and there was a carbon pricing. (Allow me a quick moment to thank researcher-extraordinaire Taylor Curtis for her incredible number-crunching efforts this past summer as a Focus the Nation intern.)

While we’re inclined to let the infographic speak for itself, there are a couple of obvious takeaways worth spotlighting.

First, it’s still far cheaper to reduce energy use through efficiency measures than it is to build out new plants. Efficiency first.

Second, even with it’s incredibly capacity factor and reliability, nuclear has a hard time competing with the low-end ranges of pretty much every other electricity source.

Third, for all the promise of concentrated solar power (and trust me, I’m a huge evangelist of CSP), the costs have got to come down even in the most productive regions of the country before we’ll see a lot of solar towers built.

And, one last one: there’s a good economic reason why combined cycle natural gas plants are all the rage these days. Utilities love the reliability, and consumers love the cheap electricity.

So take some time and wrestle with this graphic. And next time your dinner conversation turns to the deployment of wind or solar or the natural gas boom, you can wow your friends and colleagues by dropping LCOE into the discussion. And, you know, you can better understand the tricky economics of our transition to clean, renewable energy.

image (cc) flickr user danxoneil