The GreenStalk

Burdened LCOE

Posted in Cleantech, Solar by Paul Grana on May 30, 2010

Renewable energy isn’t yet competitive with the grid.  That’s no surprise.  However, it’s an unfair fight.  And I’m not talking about carbon pricing (which would be nice).  I’m talking about the fact that renewables will deliver energy, with zero fuel costs, for 20-25 years, while they are being compared against today’s spot price for electricity.  And while electricity prices may change, the energy out of a solar project is locked in as soon as you build it.  In other words, renewable energy plants provide a hedge against future energy price changes.

And electricity prices have a good chance to increase in the future.  Historically, they have grown by about 2% per year, but many smart people think they will grow at faster rates going forward.

That benefit is hard to bake into today’s current LCOE calculations.  But if the price of electricity is rising, then the true comparison for a renewable source is not today’s price, but the average electricity price over the next 25 years.

I’ve created a metric called “Burdened LCOE”.  For this, I’m simply starting with today’s energy rates, and then growing them over 25 years, at different growth rates.  The 25-year average is the burdened LCOE.

Burdened LCOE, as function of growth rate

Burdened LCOE, as function of growth rate

The impact is significant.  A customer paying $0.15/kWh today would actually have a burdened 25-year LCOE (with 4% annual price growth) of $0.25/kWh.  In other words, someone would be just as well-off by buying a solar system with a $0.25 LCOE as they are if they pay $0.15 today, expecting prices to go up by 4% per year.  Someone paying $0.12 today would expect to pay an average of $0.20 over the same horizon.  Seen through this lens, renewables are much more competitive with fossil fuels.

So this begs the question: will electricity price increases actually accelerate?  I don’t know.  But many of the smartest people are betting on this.  Some reasons to be bullish on electricity prices:

  • Natural gas prices may increase.  We have a lot of supply, but limited refining capacity and port capacity for importing LNG.  That’s the extent of my knowledge – for people who know what they are talking about, surf over to The Oil Drum.
  • Coal plants are not being built.  Activism and NIMBYism are preventing nearly all new coal plants from being built.  See Earth2Tech’s coal death map.  So supply of electricity cannot keep up with demand.  Prices rise.
  • Maintenance costs will likely go up.  This is related to the fact that no new plants are built – therefore, old plants have to be kept running beyond their planned lifetimes.  Maintenance costs begin to escalate.

Look, I’m not trying to convince you to buy electricity futures.  But I am trying to get you to cut renewables some slack when comparing a 25-year generation asset against an electricity spot price that may go up tomorrow.

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