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LCOE is dead

image credit: Gamma Energy Technology

Ok a little dramatic, but the metric has outgrown its usefulness in the diverse landscape of today’s electricity grids.

Levelised cost of electricity (LCOE) is the go-to metric when comparing anything power generation. The thing is, it’s not being used the way it was intended. LCOE was first thought up when comparing like for like. It’s a simple metric, so there’s a whole chunk of assumptions built in, mainly that the technologies being compared offer the same services. This is where we run into the biggest problem.

When two power generation technologies are being compared and they can provide the same services that a grid requires to function, such as frequency control and inertia, and can deliver 24/7 dispatchable power, that works just fine. But the issue occurs when you start comparing one technology that has these services and one that doesn’t, or one technology that can deliver power at night time and one that cannot. Without a value on grid services or dispatchability, the simple metric can’t include these in the sums.

So, what do we use now? The answer is simple, but it’s not a simple answer. Total system cost is the most useful metric we can use to value a technology, as it looks at the whole electricity system across all timescales. It’s important to remember that no power generation technology should be assessed in isolation if it is to be incorporated into the grid.

With that said, there’s three main things that total systems cost (TSC) addresses that distinguishes it from LCOE:

  • The value of a power generation technology depends on existing grid

Power generation technologies do not have a value or measure that can be assessed independent of the grid to which they are to be connected. TSC incorporates the existing mix of generation and storage technologies on a grid, which makes a big difference to the best choice for new additions.

  • Energy supply is only one of several services that technologies bring to a grid

The electricity grid needs a range of essential services to allow it to deliver energy reliably to its customers. These are often neglected or considered as an afterthought when targets are set. TSC considers services such as frequency response, reserve, inertia, firm capacity and flexibility alongside energy at the outset to lead to a better solution.

  • Aiming for intermediate emissions reduction targets without considering the long-term goals can lead to poor decisions

Choosing a set of technologies to meet an intermediate target, like one for 2030, may lead to a more difficult pathway beyond that to the eventual decarbonisation objective. Building new unabated fossil-fuelled power generation, without planning for its decarbonisation or early withdrawal from the market, may result in stranded assets or locked-in emissions. Building too many renewables may make it difficult to introduce low carbon flexible technologies needed for eventual decarbonisation. TSC takes into account targets across all timescales.

Long live the total system cost… only downside is it’s harder to calculate than LCOE, requiring a full system model. It does make sense that a complex beast like the grid requires complex problem solving!

For more read our following reports: 

The Effect of Renewable Energy Targets on the National Energy Market

Managing Flexibility Whilst Decarbonising Electricity The Australian NEM is Changing

Steph Byrom's picture

Thank Steph for the Post!

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