Levelized cost of energy (LCOE), a common metric for project costs, measures a power plant’s lifetime and operation-cycle and amortizes these costs over an assumed lifetime. Yet, EIA analysts pointed out LCOEs do not include contractual terms on price, duration, or price inflators, hence “they should not be directly compared with other prices such as power purchase agreements.”
“Power purchase agreements may involve project- or corporate-specific finance terms, reflect differing contract terms with the power purchaser, or reflect the value rather than the cost of the energy,” said Cara Marcy, Principal contributor at the US Energy Information Administration (EIA).
“Because electricity prices differ throughout the day, the timing of a plant’s output affects its cost recovery. Also, dispatchable generating technologies (such as coal-fired steam or nuclear steam plants, combined-cycle plants, and simple-cycle combustion turbines or internal combustion engines) provide both energy and capacity services to meet daily and seasonal fluctuations in demand”, she stressed.
Comparing new-build capacity with some older power plants has significant limitations: “Some types of existing plants that may have been expensive to build but have relatively low operating costs can continue to operate competitively, even though the LCOE for new plants of these types may be higher than the LCOE for other technologies,” she said.
Different generator technologies are operated in different ways – some are dispatchable, others operate around the clock as baseload energy, and others still hinge on energy sources that are available intermittently, e.g. wind and solar.
Tax incentives, either on a federal, state, or local level, can also affect some of the costs associated with the construction of power generation infrastructure. All these factors make LCOE alone an inadequate metric of measuring the grid-value of flexible power plants.
Alternative concept
Levelized avoided cost of energy (LACE), an alternative cost concept, attempts to measure the value to the electric system that certain technologies provide. LACE reflects the cost that would be incurred to provide the same supply to the system if new capacity using a specific technology were not added and used.
For example, if a hypothetical new natural gas plant were not constructed, other technologies may need to be added or the utilization rate (and fuel use) of existing plants may need to be increased to meet the energy and capacity services that the hypothetical new plant would have provided. A technology is generally considered to be economically competitive when its LACE exceeds its LCOE.
To avoid misconceptions, EIA’s published LCOE estimates are presented with and without relevant federal tax incentives, “but they do not capture the effects of state or local programs, such as payments for compliance with state renewable portfolio standards,” Marcy pointed out.
Although EIA does not directly apply the LCOE and LACE in its modeling, EIA calculates both LCOE and LACE for several technologies for all regions to provide insight into factors driving capacity addition and dispatch decisions. These calculations are available in the Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2017 report.