Use and Abuse of LCOE

Levelized Cost of Energy (LCOE) has been used for several years to estimate the cost of producing various kinds of electrical-generating equipment. It is useful to companies producing such equipment and to companies financing that production (the investment firm of Lazard is a good source of LCOE data).   LCOE is not useful to the purchaser of the equipment; all he needs to know is the price tag plus the cost of operation and maintenance.

LCOE also gives no insight into the size of electrical bills. And it certainly cannot be used to estimate the impact of renewable-energy portfolios on state economies, as opponents of renewable energy have done.

Examination of the opponents approach shows why their estimates are invalid. They treat electric bills as taxes (which actually is a good idea). They then use LCOE to estimate the increase in electricity costs due to replacement of conventional fuels with wind energy. Their numbers are plugged into a computer program that calculates the economic losses to a state caused by a tax increase [1]. The results are losses in investments, jobs, income, etc.

One flaw in these analyses is using LCOE to represent the cost needed to fulfill portfolio requirements.  Providers of electricity generally satisfy their portfolio requirements by purchases of Renewable Energy Certificates (REC) [2] and the much lower REC prices should be plugged into the computer. It is crucial to recognize that RECs uncouple the installation of renewable-energy generators from state portfolio requirements. Since nobody is required to install renewable electricity by statute, the decision to do so must be made on economic grounds. Construction of new wind farms in portfolio states is evidence of the competitiveness of wind with conventional sources of electricity.

A second flaw in opponents’ reports is that LCOE is not the actual price of electricity. If one wishes to evaluate the effect of wind energy on economic well-being, the value to plug into the computer program should be the price of wind-generated electricity, which is determined by power purchase agreements (PPA) and is readily available [3]. As shown in my earlier posting [4], the actual price of wind energy is considerably lower than LCOE. In fact, there is evidence to suggest that wind is less expensive than conventional fuels, in Ohio at least [5].

In conclusion, we do not know the real economic cost or benefit of renewable-energy portfolios, because no correct analysis has been done.

References

[1] e.g. Randy T Simmons, et al., Institute of Political Economy, Utah State University Renewable Portfolio Standards: Ohio, April 2015, http://emsc.legislature.ohio.gov/Assets/Testimony/72015-dr-ryan-yonk-report.pdf ; there are other flaws in the Simmons report, including the use of obsolete cost data.

[2] Wikipedia, Renewable Energy Certificate (United States), https://en.wikipedia.org/wiki/Renewable_Energy_Certificate_(United_States); accessed 23 May 2016

[3] Ryan H. Wiser and Mark Bolinger, 2014 Wind Technologies Market Report, Report LBNL-188167, August 2015, https://emp.lbl.gov/publications/2014-wind-technologies-market-report

[4]   Al Rosenfield (aka alanpeg), Recent Data Questions Traditional LCOE Estimates, Renewable Energy/Energy Policy, 4 January, 2016, https://groups.yahoo.com/neo/groups/renewable-energy/conversations/messages/14385

[5] Al Rosenfield (aka alanpeg), Renewable Energy Competitiveness Update, April 6, 2016,  https://alanpeg.wordpress.com/

 

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