Levelized Cost of Energy

The US Energy Information Administration (EIA) recently published an excellent report on the projected cost of electricity generated by different technologies: coal, natural gas, nuclear, and various others, including renewables. Their Levelized Cost of Energy (LCOE) calculation combines upfront cost with recurring cost to estimate the average cost of power produced by these technologies. Here is the EIA cost data for coal, natural gas, and solar PV.

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At first glance, it looks like PV could be competitive with coal or natural gas plants if the PV cost were to drop below 10 cents/kWh. But there is an important difference between PV and the traditional technologies which makes this simple cost comparison invalid.

But first, take a look at the cost of electricity from a coal plant. The total cost is projected to be 9.5 cents/kWh per the EIA study. About 6.5 cents of this is capital cost[1] and about 2.5 cents is the cost of the coal. Looking at the natural gas plant, one can see the capital cost is about 2 cents, and the fuel cost is about 4.5 cents. Solar has no fuel cost element but significant capital investment.

But here is the rub. If you plan to power a city with PV, it is not sufficient to simply build a large PV array, because PV only produces power during the day. At night and during cloudy weather, a back-up power source is needed since there is no practical way to store the PV energy. So the city must also build a conventional coal or gas plant, which will sit idle on many sunny days. The real cost of the PV is not just its cost, but also the cost of the back-up plant. Coal and natural gas plants do not need back-up like PV does.

So what is the real value of PV? It is principally the fuel savings which occur when the traditional plant can reduce output during sunny days. Or stated another way, PV is worth avoided fuel cost. The main point is that PV is not competing against the LCOE of coal or natural gas plants; it is competing against the variable operating cost of these plants, which is 2-4.5 cents. Here in Tucson, we use coal and the fuel avoidance value is less than 3 cents. For PV to actually be cost effective today, it would need to have an LCOE of about 3 cents. Since it is currently about 21 cents, it has a long way to go before it makes sense for the citizens of this city, despite industry propaganda and political pandering.

But to further demonstrate how nonsensical this technology is, even if PV manufacturers drove the cost to $0/watt for PV panels, the cost of the aluminum mounting structure, copper wiring, labor, inverters, and maintenance result in a LCOE around 10 cents. So even with free PV panels, the total system is still 3 times too expensive to be viable. The economic case for grid-tied PV is indeed quite hopeless, and the sooner we stop the misguided subsidies the sooner we can focus on actually addressing our legitimate energy and environmental concerns.

Installing grid-tied PV is not just a waste of time and money, but a waste of copper, aluminum, labor, land, and capital. We are neither ahead nor green. This wasteful activity is unsustainable, mining the materials used in these unnecessary systems is damaging the environment, and the entire endeavor is a burden on the economy. There is hardly a clearer case of special interest run amok, besides perhaps ethanol subsidies.

PV is fantastic for people that live where there is no access to the electric grid, but it is wishful thinking to believe it can replace conventional generation methods or even be cost effective for on-grid application. Other renewables-- geothermal and biomass-- will likely become viable before PV because they do not require back-up power. But today, conservation is by far the best way to economically reduce pollution and CO2 emissions.

The economist Paul Krugman missed this concept and was forced to make a retraction.

Krugman: I’ve been getting some pushback from people I respect on today’s column, not so much for what I actually said as for what they fear readers may take away from it. So a bit of clarification.

Some of it involves questioning the cost data, but the main point, I think, is that even if solar power’s price per kwh matches coal-fired, it’s not going to take over the market right away, and maybe not ever. The sun doesn’t shine at night, and often doesn’t shine during the day. Intermittency is a big problem, and I probably should have made that clearer.

Ref: http://www.eia.gov/oiaf/aeo/electricity_generation.html

[1] EIA includes a 3 percentage point cost of capital increase for coal-fired plants without carbon capture and sequestration equipment to represent the difficulty in getting coal-fired plants permitted today. That 3 percentage point increase in the cost of capital for coal-fired plants makes the capital component larger than that of current coal-fired projects.