Purchasing Power Parity: A Critical Neglected Factor in Energy Cost Estimates
- April 4, 2018
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- Energy costs for different countries are generally reported in nominal terms.
- It turns out that purchasing power parity (PPP) adjustments make costs between countries more comparable.
- This adjustment is very important when trying to determine global average costs of different energy technologies.
Purchasing power parity (PPP) is an important concept in economics. It adjusts for the fact that one US dollar can purchase much more goods and services in developing countries than in developed countries. As an example, the PPP adjustor is 1 for the US and 0.53 for China, implying that goods or services costing $1 in the US will cost only $0.53 in China. Thus, even though China can generally build power plants for half the cost of the US, the amount of economic effort required is actually quite similar.
This article will present some data about the effect of PPP adjustment on power plant costs in different countries and show the effect of this adjustment on results of global average electricity costs from the Seeking Consensus project.
The effect of PPP adjustments
Two fairly recent IEA reports (1, 2) give projected costs for different power plants commissioned around 2020. Total capital costs (including interest during construction) for different power generation technologies are plotted below both in nominal and PPP adjusted values.
Clearly, the PPP adjustment makes the power plant cost more uniform between different countries in all cases except for wind. This adjustment therefore appears to increase the quality of the data when determining a globally representative cost.
Effect on Seeking Consensus results
The above graphs were used to determine the PPP adjusted capital costs of different power generation technologies as follows:
- Coal: $2000/kW
- Gas: $1200/kW
- Nuclear: $5000/kW
- Onshore wind: $2100/kW
- Utility PV: $1800/kW
- Residential PV: $2400/kW
These adjusted values were then used to redo the LCOE calculations in the Seeking Consensus project, together with appropriate adjustments for fuel and operating costs. The new results are reported below:
All the costs increased due the general increase in average capital cost when adjusting for PPP, except for residential solar where the adjusted capital cost remained similar. As may be expected, coal shows the biggest cost increase because it is deployed almost exclusively in developing countries with a low PPP adjustor.
Given that these PPP adjusted values are more representative, this methodology will be employed in future Seeking Consensus articles exploring the future costs of various energy technologies.