Levelized Cost of Energy (LCOE): An Overview


>>Kosol: Hello, everyone. Thank you for joining us. My name is Kosol
Kiatreungwattana. I am a Senior Engineer at the National Renewal
Energy Laboratory, NREL. NREL is one of the national labs of the U.S.
Department of Energy. For today’s
webinar, I will be giving a presentation on the levelized cost of energy. And today’s
agenda, we will go through what is the levelized cost of energy and why is it important. And we’re going to look at the application
of the LCOE. The second one and how to evaluate the LCOE. We’re going to look at the key
parameters and what the sensitivity of those parameters to the LCOE. And the last one,
we’re going to look at the example of the results and the application, particularly
we’re going to show you the show you transparent
cost database that includes the cost of the renewable energy project or the energy generation
technology. That will include all the
cost of the LCOE. The capital cost and the O&M cost, operation
and maintenance cost. What is the LCOE and why is it important? LCOE or levelized costs of energy is a
measure of lifetime cost divided by energy production. It’s an economic assessment of the
net present value of the unit cost of electricity. A common unit of it is the dollar or the
currency divided by kilowatt hours, or megawatt hours if the scale is bigger. LCOE is
used to compare different electricity generation technology on a consistent basis. Most
common electronic generation technology are from the renewal energy, such as solar,
wind, biomass, geothermal. Or in non-renewable, such as the conventional
by coal, natural gas, or nuclear. Why LCOE is important. From this chart, you can see most common term
that people will talk about in any project. What’s the cost, what’s the install cost,
what’s the capital cost of the project? And on this chart, we’re showing that on the
scale for a PV project or a varied type of size, the wind technology,
and the biomass, you can see what the average cost. However, these costs, or capital costs, does
not provide you a complete picture with electricity technology or cost of energy. That’s what LCOE is a good indicator to
compare project by project. The next line on the application of the LCOE. The LCOE is one of the most commonly
use metrics for assessing the financial viability of the energy projects. It’s a measure
value across a longer term, showing life cycle costs means that we’re looking at not just
only the capital costs, basically all the costs associated of the whole project life. It
highlights the opportunity to develop future projects. So once you’re comparing the
LCOE or a particular technology, you will start seeing a potential to develop by looking
further into future investment on particular technology. It will help make informed decisions to pursue
projects on an economic basis and we compare utility rates. So I’m going to show you the common term that
the industry has been using when comparing the LCOE with the
utility rates. That’s a term called grid
parity. Grid parity is the breakeven point when LCOE
of the alternative energy is less than or equal to a price of purchasing electricity
from the grid. It will help inform
decision to proceed to a future project development. On this chart, you can see that the electricity
that’s produced by solar energy, it’s showing that with the time, the cost will go down
and go down. You can see that when we
compare with the utility cost, whether it’s going to be a common – I’ll just give you
a number for example, ten cents per kilowatt
hours. So electricity, the cost will come down
and then cross that section, that way showing that if potentially you can compete with the
cost of the electricity from the grid. So it’s very popular metric when we evaluate
particular projects. The next slide is showing the grid parity
on the solar energy, this is for the United States. You can see that in many areas of U.S., LCOE
of solar PV actually is lower than the electricity rates. So it’s showing that the economic feasibility
of the solar PV in many areas of the U.S. And from the GTM research in 2016, it’s showing
the 20 United States states are currently at the grid parity. And by 2020, another 42 states are expected
to reach that milestone as well. We’re talking about under business as usual
conditions. So
the more detail of this study you can see from the link below. How to evaluate LCOE. I will give you example as a simple – the
LCOE is basically a total life cycle cost of a particular project
divided by a total lifetime energy production. On the graphic below, it’s showing a cash
flow of the project. You’re starting with up
front system costs and then there might be some incentives that are applicable from the
bottom of the chart. And you start seeing the cost of the project
on the operation and maintenance. Any variable or fixed operation and maintenance
cost for the project. And the project itself for the solar would
produce electricity which is the cost value of
whole project. So once we put everything in the calculations
– so here’s another graphic that’s showing, adding this costs, these kinds
of scenarios, and then come out at the end, the LCOE from this calculation is at twelve
and a half cents per kilowatt hour. So with
the a little bit more mathematics, but don’t freak out, because we have a tool that will
help the projects to doing analysis on this LCOE. So on the other terms, those are the terms
and the parameters that we’re going to go talk
about in the next slide on those terms and how important are those terms. On the Excel
spreadsheet, so this is the LCOE calculator that we will be going through in detail during
the workshop. LCOE key parameters starting with the investment
costs is a cost, whether it’s going to be the total investment cost
or the cost by the system capacity. The project
financing and incentives sometimes could be a fixe capacity based incentive, or a
production based incentive. Discount rate is an interest rate that basically
discounts the whole cash flow to a net present value of the project, for part of
the calculation that we use the discount rate. We
will discuss what would be an appropriate discount rate during the workshop. Fixed
operation for the operation and maintenance, or O&M, usually a common cost is per
system capacity. So it’s a dollar per kilowatt hour. That’s a common term. Variable O&M cost, normally or commonly, it’s
a dollar per production, which is a dollar per kilowatt hour. It’s an incremental O&M cost that incurs upon
increasing level of production. It includes minor unplanned maintenance, water
usage, chemicals, auxiliary energy use, or ash disposal costs. This for example, with the conventional generation. The next parameter is the capacity factor
or another term is called utilization. Basically,
it’s a percentage of how much the electricity generation technology can produce at lower
than full capacity, technically. The heat rate for any thermal generation technology
will have a heat rate and what kind of convergence
factor that we will convert the heat rate to
the amount of unit that will be neutral for the whole calculation. The fuel cost, whether it’s going to be a
dollar per liter, a dollar per ton of biomass, or any
fuel cost that would be. Most of the renewal energy projects have zero
fuel cost, but biomass, whether because of the most of the
time, it’s the times of whether it’s going to be
woodchips for an agricultural byproduct that would be a raw material for this biomass
technology. System degradation rate for the system runs
over the lifetime starting from produce electricity at whether it’s going to be a
rate of pretty high on the efficiency, but over the
lifetime, it will produce less and less electricity over the lifetime. So we’ll estimate the
percentage of the degradation and apply to this calculation. And the last one, the annual
electricity generation. Basically, whether we have the data that the
actual data it would be a model base where we’ll estimate the annual
electricity generation and the value of this electricity that this technology produces. On this slide, we show you that the sensitivity
and if it’s just only an example for the solar sensitivity, particularly looking at the system
cost. This one we will see that is the data
for the United States and this is the model that we’re looking at in 2014. That at the
system costs, you can see that on this graph showing most LCOE basically over 60
percent of the breakeven. It means the cost is still high, it’s pretty
high. Just only you can see that the California,
which on the green in the color, that is showing that because of the cost of electricity in
California it’s relatively pretty high. So for a
dollar, it’s basically still okay, still competitive. So on the graphic on the right hand side,
the ones we will simulate the system cost at two dollars per watt. We can see that most
LCOE are slightly above breakeven, means it’s getting very cost competitive to the grid. The next slide how about as a dollar per watt. The dollar per watt, we can see that
definitely most LCOE are below 25 to 50 percent below the breakeven. Pretty much at a
dollar per watt. The solar PV very competitive almost everywhere
in the United States. So when we’re looking at this, you can see
that the system cost is very important and makes the LCOE very sensitive to the system
cost. So in the last graphic on the right hand side,
so we were under breakeven then. So United
States, so what the breakeven of the system cost will reach the grid parity, we can see
that with the utilities in the United States, different
states will have a different utility rate, but
pretty much it will show that the breakeven is about a dollar to three dollars per watt,
with an exception of the California. That you can see that, even five dollars,
or even over five dollars per watt in 2014. It can be very cost competitive compared to
the utility rate. How about other parameters? There’s a study that looked at the LCOE sensitivity
of other parameters. Here’s a summary of that study. A higher discount rate almost always results
in a higher LCOE. It means like if the discount rate, it’s definitely
important how much you discount all this cash flow to the project. So it means like when we’re looking into
the discount rate, it’s got to be appropriate and then reasonable for your projects, what
would be the reasonable discount rate that will be used for the LCOE analysis. The system performance, a lot of the time
you can see that the system degradation is a
significant contributor to the LCOE. But a lot of the time it can be minimized
as the manufacturer will improve that process to
eliminate number of marginal barriers prematurely, this is for example. Or the degradation, instead of a certain percentage,
it might be a lot lower when the technology progress
in the future. The solar insolation, or the solar radiation,
is actually to have a relatively small correlation with the LCOE. By all means when looking at some areas that
have a lot of sunshine and then there might be some areas
that have slightly less sunshine, actually it
has pretty low impact to the LCOE from this study. On this example, also another study that looking
at the LCOE sensitivity of the wind technology. Here are the two summaries from that study. The initial capital cost, basically
the system cost that we just talked about, and then the capacity factor are two critical
drivers of the LCOE for the wind technology. Discount rate and annual operating costs
are also significant contributors. So again, I encourage that if you are looking
at the detail of this study, there’s a source and then the
reference at the bottom, to check it out. The next section, we’re going to look at the
results and the application of the LCOE. On
this chart, it’s showing that the example of the LCOE of the energy technology in United
States. So this will include both the renewable energy
and non-renewable energy technology. And you can see from the y-axis, that’s where
the units which is the dollar per kilowatt hour. And then on the x-axis was showing that that’s
the technologies and those numbers are basically showing the number
of data being calculated for these calculations. So in this example, you can see that for the
solar photovoltaic, we have a lot of data, more data, and then have a wide range
of the LCOE from that calculation. So how about what’s the trend of the LCOE
of the renewable energy technology? You
can see that most of the renewable energy technology, the LCOE goes down as the time
progressing due to the cost of the technology, the capital cost of the technology drops
significantly from 2010 to 2016. Particularly if you’re looking at the solar
photovoltaic category. And then, interesting from this study showing
that on the geothermal and the hydro, the LCOE is higher with the time progressing. On the next slide of showing the previous
study of the LCOE analysis that’s been done for the Asian countries. And it’s showing that three renewable technologies
from the hydro, biomass, and then a different scale
of the solar photovoltaic projects. And then on
the right hand side, showing the various LCOE from those countries. So we can see that
the, again, once energy rates, the next step is to compare the LCOE with the utility rates
that you can pinpoint which projects will be worth pursuing in the next step, such as
[inaudible] study or help screening for your future projects. And on this one, when we talk about transparent
cost database. For the transparent cost
database, which is a part of this project, it’s a database that from this study, we will
look at how calculating the LCOE for various types
of the technology will track all the capital cost and O&M cost, operation and maintenance
costs, and then what would be the capacity factor for a particular technology
that should be used, or what actual capacity factor from particular technology. What’s the application of the transparent
cost database? This is a database that it can be
viewed and compared with other published estimates. It includes the technology that
from both from the future and from the current projects that you will use and then
compare what kind of use is for the future. Let’s say that you think about that you want
to develop a solar project or a wind project
or a biomass project. This cost will help you
help doing the economic in the future and for any developer can use this cost data as
a reference. For additional resources of this study, I
encourage you to check out both from the previous webinar and the workshop that we
have on the renewable energy data explorer. And the user guide is coming soon. So we’ll have a user guide for this too. And on the
bottom, on the levelized cost of energy analysis, so that’s a good useful resource. Also,
please check on the tutorial series that we have from the previous webinar and workshop. Thank you very much, and have a good day.

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