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LCOE is dead!

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 that 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!

An executive summary and full report are available for download at http://www.powerfactbook.com/media-categories/reports

Steph Byrom's picture

Thank Steph for the Post!

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Bob Meinetz's picture
Bob Meinetz on June 7, 2019

Steph, one of the more thoughtful contributions to EnergyCentral I've seen here in a while. And a noble effort - if possibly being one of those which, in the final analysis, ends up creating more problems than it solves. Let me explain.

On another forum online, for several hours this week, I watched an online debate unfold on this very subject. Although the term "LCOE" was not used, it was very much about evaluating the relative costs of different sources of energy.

As I was witnessing two knowledgeable people debate this topic, it became obvious the word "cost" has a whole raft of assumptions built in no matter how hard you try to pin it down. One participant made a case for quantifying the the cost of centralization of electric power, how "big corporations" providing the public with electricity enacts a cost on society. A definition for the cost proved elusive, however. Though most would agree carbon emissions have an associated medical cost, there are an infinite variety of emissions - those which cause climate change, airborne particulates (PM10, PM25, etc), toxins (arsenic, mercury)...etc., etc. That there is a cost to society of climate change is undeniable. Coming up with a value for it, however, is an argument which never ends (and generally escalates, to no one's satisfaction).

If we avoid considering externalities at all, as some have done, we end up with little justification for building nuclear plants, solar farms, wind farms, or other carbon-free sources of energy, and a lot for continuing to burn our terrestrial house down with fossil fuel.

To avoid declaring LCOE dead last year, the Energy Information Administration shoved a second metric, Levelized Average Cost of Energy (LACE) into the room to slug it out with LCOE. Neither considers externalities, only economic value to plant owners. I considered emailing EIA with another, a Levelized Cost of Ideology (LCOI), which would attempt to quantify the irrational, ideological attachment each source of energy attracts, but it didn't happen. I suppose I decided the effort's Levelized Cost of Overanalysis (LCOO) made it too expensive compared to other things I had to get done that day.

Steph Byrom's picture
Steph Byrom on June 7, 2019

Hi Bob,

Thanks for taking the time to read my post and comment. The term "cost" is definitely one that is tricky to get away from. We use TSC as a way of finding the value a particular technology brings to the grid... we run the model, get a TSC, add a technology in a particular area and then run it again. The delta is the value of that technology. Unfortunately it is a very complex way to get the cost, or value, for a technology, but no one uses power technologies in isolation, so the value means nothing if the grid it is being added to isn't included in that equation. 

The other problem you've eluded to in terms of carbon emissions... without specific market mechanisms or policy, we have used Australia's Paris targets as the goal (26-28% by 2030 and net zero by 2050). So our model seeks to decarbonise the grid, while keeping the grid strong (based on minimum inertia), and keeping the total system cost down. 

Thanks for reading,

Steph

Bob Meinetz's picture
Bob Meinetz on June 9, 2019

Interesting Steph. So a TSC is only applicable to each system - a technology, solar for example, may have a lower cost (delta) in one system than another. Makes sense, although I don't know how it could be used for comparative purposes.

Another contributor to EC, Richard Brooks, is helping ISO New England figure out how to value capacity - whether the capacity of traditional sources (gas, coal, nuclear), intermittent sources (solar, wind, etc), and that of non-energy "sources of energy" (demand reponse, efficiency, energy conservation, energy consolidation, energy procrastination, etc) can possibly compete in a meaningful way with each other. Doesn't make a lot of sense - like racing motorcycles against horses in the Kentucky Derby. Richard has proposed a separate auction, an Always-On Capacity Exchange (AOCE) for dispatchable sources, a renewables exchange to meet state RPS requirements, etc.

All of these problems are products of deregulation, and as a veteran watcher of utility electricity I believe more and more it's been a mistake. In a recent discussion with a former FERC attorney, I was trying to make a point about inefficiency in wholesale markets when she stopped me. "What makes you think a market for electricity exists?," she asked. She went on to point out that where there is no real choice available to end users  - everyone is offered the same product, by the same utility, with prices strictly controlled by PUCs - the idea there's an "electricity market" is a fiction, one that's little more than a magnet for fraud.

Maybe we're better off doing it the old way, with PUCs acting in the public interest, with the SEC monitoring utilities for shenanigans. The electricity coming out of my wall is exactly the same as it was 20 years ago, it just costs more. What were the benefits this "energy transition" was supposed to offer consumers, again?

ps - where is the report on TSC available at your link?

Steph Byrom's picture
Steph Byrom on June 10, 2019

Exactly, Bob. Each system has a different TSC at any one time. Unfortunately with a large, complex beast like a grid, there are no easy metrics. The goal would be for each grid and market operator to have a model of what their grid looks like so they can make informed choices for the next best technology addition. 

We have a capacity market in West Australia, but that is fraught with other issues involving diesel gensets sitting in storage gaining capacity credits. A price on inertia may well be the way to go, as we have found that inertia is a good catalyst for grid services as a whole. 

It seems the grid evolved rapidly and the regulators and operators are struggling to keep up. Agree that things were easier to manage when everything was a public asset, but now we have public assets, private assets, and private companies that have joined the market selling distributed assets behind the meter. We will remain in this mess as long as the only product that is valued is electrons!

Link to the papers are here: 

http://www.powerfactbook.com/media-categories?task=document.viewdoc&id=25

http://www.powerfactbook.com/media-categories?task=document.viewdoc&id=32

Matt Chester's picture
Matt Chester on June 8, 2019

Agreed with Bob that this is such a huge and important topic, and one that you've tackled with some great insights that really just kick off the conversation. These cost comparison metrics are used quite freely by anyone trying to make their desired case and it can get quite sloppy-- not sure if the solution is better metrics, better education on the limitations of the metrics, or something else. But these discussions are certainly on the right pathway

Steph Byrom's picture
Steph Byrom on June 10, 2019

Thanks for your comment, Matt. It's a difficult one because the solution is very complex. I think energy literacy among the decision makers would help as a start. I think the hardest thing for people to comprehend is that the grid is essentially a team sport, but everyone is still focused on their star player. Agree that more fact-based discussions are necessary. 

Mark Krebs's picture
Mark Krebs on June 13, 2019

Matt & Steph:

I would not characterize the misuse of LCOE/LACE as sloppy.  I wouldcharacterize it as manipulative in an attempt to push the market towards some predetermined result to get systems placed into ratebase (in the U.S. at least).

The concepts have become politicized with Lazard (et. al.) on one end and IER (et. al.) on the other: https://www.instituteforenergyresearch.org/tag/lcoe/

Even the term LCOE is political.  To some, LCOE stands for Levelized Cost of Energy and should include alternatives to electricity. To most, the E stands for electricity; thus ignoring non-electric alternatives.

 

 

Bob Meinetz's picture
Bob Meinetz on June 14, 2019

Mark, LCOE does stand for "Levelized Cost of Energy", but in every definition I can find it applies specifically to electricity.

Though electricity doesn't work well for all transportation purposes, civilization has been steadily moving toward electrification of other energy needs, for many reasons. What non-electric alternatives do you have in mind?

There's a wide world of energy analysts who don't come from the renewables-centric outlook of Lazard nor the libertarian outlook of IER. I don't see these two as opposites, but of having different purposes: the first driven by marketing, the second by ideology.

Mark Krebs's picture
Mark Krebs on June 17, 2019

There are alternatives to electricity and they can also be rated on an LCOE basis.  Here is an example: https://www.apga.org/resources/lcoe

 

Bob Meinetz's picture
Bob Meinetz on June 18, 2019

Mark, first - though burning methane gas works great on my stove and for warming my house, methane lighting hasn't been used since the turn of the 20th century. I need something that will not only turn on my lights, but

• charge my cellphone
• power my microwave oven
• power my laptop computer
• power my desktop computer
• power my entertainment center
• charge my electric car, etc.

Second, in 2018 methane was responsible for 830 million tons of CO2 emissions in the U.S. alone (see: climate change).

Now, I'm familiar with the desperate greenwashing campaign APGA and API have undertaken to try to replace nuclear- and renewables-generated electricity with electricity made by burning methane:

"The voice of the campaign comments on this transformation, acknowledges the 'genius' moves these people are making and encourages them to do more with natural gas — all while poking a little fun and laughing with them about who they used to be and how far they have come."

but it only reinforces how clueless the "Einsteins" relying on a dead-end, 19th-century form of energy truly are. Environmentally-aware Americans are laughing not with them, but at them.

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