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Levelised cost of electricity 2015 VGB PowerTech 12 l 2015

Authors

Kurzfassung

Stromgestehungkosten (LCOE) 2015

Die Elektrizitätswirtschaft ist einem dynami-schen und ständigen Wandel unterworfen, der befördert wird durch Innovationen, Lernkur-ven und Änderungen im Stromerzeugungsmix. Unter diesen Anforderungen wurde eine Neu-auflage der Stromgestehungskosten erstellt, basierend auf der Grundidee jährliche durch-schnittliche Kosten für die Errichtung von An-lagen und deren Betrieb zu berechnen und diese mit der durchschnittlichen jährlichen Stromer-zeugung zu vergleichen. Die Berechnungen der Stromgestehungskos-ten ergaben für Erneuerbare Energien, wozu Laufwasserkraftwerke, On- und Offshore-Windkraftanlagen und Photovoltaik-Freiflä-chenanlagen gehören, eine Bandbreite von 2,2 bis 18 €ct/kWh. Die Ergebnisse für thermische Kraftwerke, dazu gehören Stein- und Braun-kohlekraftwerke, Kombikraftwerke und Gas-turbinen sowie Kernkraftwerke, lagen für reale Betriebssituationen zwischen 2,9 und 22,7 €ct/ kWh und bei idealen Betriebssituationen im Mindestwert um 0,2 €ct/kWh niedriger. Die Ergebnisse der Stromgestehungskosten sind mit Sorgfalt zu betrachten aufgrund der Limi-tierungen des Modells. Die Resultate beruhen auf der Annahme von konstanten Preisen und eines Grundlastbetriebes, der in vielen Fällen nur selten für thermische Kraftwerke gegeben ist und es sind zusätzliche Systemkosten für fluktuierende Erzeugung nicht berücksichtigt worden. Die durchgeführten Berechnungen sind ein weniger geeignetes Tool für Investitionsent-scheidungen, jedoch bieten sie eine Möglichkeit unterschiedliche Stromerzeugungsarten in Grenzen zu vergleichen. l

Levelised cost of electricity 2015Christian Stolzenberger and Oliver Then

Dipl. Phys. Ing. Christian StolzenbergerDr. Oliver ThenHead of Power Plant TechnologiesVGB PowerTech e.V.Essen, Germany

Scope

The 2015 survey covers the entire genera-tion portfolio: Renewables (hydro run of river, on/offshore wind, photovoltaic) and thermal power plants (coal, lignite, gas and nuclear). To calculate LCOE, all costs at the plant level (investments, fuel, emis-sions, operation and maintenance, carbon price, etc.) are added together, before be-ing divided by the amount of electricity generated, after an appropriate discount-ing. The LCOE represents the average life-time cost for providing a megawatt-hour for a given full-load hour and provides it in euro cents per kilowatt-hour. The LCOE method allows for a comparison between power plants with different power genera-tion and costing structures.Given the continuously changing situ-ation and constraints within the Euro-pean electricity market, a new survey of VGB’s LCOE [1] that mirrors the perspec-tive of European utilities was required. Furthermore, LCOE considers a base load electricity production that is no longer a matter of course today in Europe for the electricity generation technologies hard coal, lignite and gas CCGT power plants. Thus, any consideration of these electric-ity generation types is becoming disparate. In order to counterbalance this skewed situation, two LCOE cases have been cal-culated here: an ideal LCOE case has been calculated for a base load setting and a real LCOE case has been computed for the cur-rent market.The main considerations of the 2015 sur-vey are a focus on the European electricity market and coverage of major electricity generation technologies. Additionally, a publicly accessible and proven LCOE pro-gram was chosen and used to guarantee the transparency of the input data and the calculation results. A bandwidth of input data was used, deriving from latest stud-ies, publications, data of VGB member companies and own resources. Must input data was available as a range, rather than single figure. When calculating the mini-mum LCOE value, the parameter of a cost component that resulted in a minimum was taken. The maximum LCOE value was computed vice versa. While this methodol-ogy focuses on base load generation in sta-ble market conditions, it is not limited to it. Here, it should be noted that it is not fully possible to determine the economic viabil-ity of any specific plant due to the limita-tions of the LCOE approach.

The LCOE approach

To compare the cost of electricity produced by different technologies, the total specific cost of each technology is calculated over the entire lifetime of the power plant and an average LCOE is calculated. When cal-culating the cost for electricity produced by different power generation technolo-gies, different assumptions govern. Put simply, the methodology applied is based on a single input parameter over all years considered. For example, only one price for CO2 certificates is assumed for the entire lifetime of a power plant.Considered in more detail, the LCOE is calculated on the basis of a dynamic proce-dure that calculates the LCOE over a period of operation. The starting point is an annu-al cost analysis, in which the costs of each operating year are considered separately.The cost components of capital costs, oper-ating costs and fuel costs during plant op-eration are cumulated for each year. The capital-related costs decrease over time according to the weighted average cost of capital, and fuel prices generally tend to increase, depending on the selected fuel price scenario. The overall costs thus differ each year.The annual overall costs would result in a different LCOE for each operating year. This approach is only suitable, for com-paring various power plant technologies. Therefore, the cost components are added up over the entire technical service life, discounted against current value, and then compared to the net power generation. This allows for the average annual costs during operation to be calculated.The calculation of LCOE was performed using the publicly available program [2], freely accessibly on the Agora Energiewende website.

Electricity generation types, cost components and LCOE calculation

The main electricity generation types in Europe for the LCOE calculation were as follows. Under the heading nuclear power plants are the pressurized water reactors and nuclear power plants of the third gen-eration currently under construction and planning within Europe. Typical supercrit-ical and ultra-supercritical plants with a steam temperature above 600 °C stand for the coal and lignite power plants. New gas turbines combined with a heat recovery steam generator represent CCGTs typical of the dominant gas-based technology for

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VGB PowerTech 12 l 2015 Levelised cost of electricity 2015

intermediate and baseload power genera-tion. A gas turbine alone covers the OCGT that is only in operation today as an emer-gency reserve. Hydro run of river represent classical hydro electricity generation in cases where there is sufficient water levels owing to good weather conditions or dams. Pumped storage power plants are not con-sidered because they are another type of plant. On/offshore wind farms are includ-ed due to their increasing importance for electricity generation. Large-scale ground mounted photovoltaic power stations are also part of the electricity support.

The cost for each different electricity gen-erators listed above consists of a set of in-dividual parameters. The investment costs are capital expenditure arising from the building of an electricity generation plant, relative to the installed electrical net out-put. This includes cost components that are directly and indirectly related to the building and commissioning of the plant, or cost components that are incurred by the plant operator before or during the construction process. Demolition costs are not part of the payments. There is a discount rate spread between 4 % and 7 % for all generation technologies. The lifetime of each technology is widely ac-cepted across all European countries. Op-eration and maintenance (O&M) costs include the costs of maintenance, and ex-penses for auxiliary and operating materi-als, personnel, administration and insur-ance. So as to respect different strategies and operation hours, it was appropriate to allow for a range of O&M costs. Fuel costs also have a range due to various sources, qualities, price developments, and so forth. Development costs are integrated and a spread of around ±20 % on the price is

estimated. Electrical efficiency depends on a number of different factors, including load, fouling air or water temperature, hu-midity, degradation, and a minimum and maximum value were selected. The carbon factor for varying fuels one number was factored in. The full-load hours were split too, with the particular feature of describ-ing one set for base load operation (ideal LCOE case) and the other for the current market situation (real LCOE case).The LCOE was calculated in such a manner that the parameter of a cost component that resulted in a minimum was taken for

the minimum LCOE value. The maximum LCOE value was computed vice versa. However, the methodology of the LCOE calculation assumes a base load market, which only partly exists for hard coal, lig-nite and gas CCGT power plants in Europe. Therefore, there is a degradation of these electricity generation types. For this rea-son, the approach was modified for hard coal, lignite and gas CCGT power plants and two scenarios introduced. The real case (F i g u r e 1 ) reflects the current op-eration hours in the electricity market and the so-called ideal case (F i g u r e 2 ) fo-cuses on the general optimum range. The perspective of individual companies can differ from this cost comparison.

Limitations of LCOE in deregulated markets

A rate-regulated electricity market is the foundation for the LCOE methodology. Sev-eral advantages are implied by the LCOE methodology, and it is considered a con-venient tool for answering key questions posed by regulators, who want a simple measure, comparable across technologies and transparent in particular to its assump-tions, all of which are easily made explicit. A straightforward comparison of technolo-gies is made possible by this simple metric for different size, different lifetimes and a different profile of expenditures.The close link of the LCOE methodology to the ubiquitous and well-understood finan-cial notion of net present value (NPV) has always increased its appeal (i.e. LCOE is the constant price of electricity for which the net present value is equal to zero). This has led to the LCOE methodology also be-

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Fig. 1. LCOE calculation of the real case, current electricity market situation.

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Levelised cost of electricity (LCOE) “ideal case“ for coal, lignite and gas CCGT power plants.

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Levelised cost of electricity 2015 VGB PowerTech 12 l 2015

ing used for cost comparisons in deregulat-ed markets, which has its limitations.

LCOE relates to the costs of the chosen technology up to the moment of connec-tion to the electricity grid. By definition, these costs do not consider any effects at the system level in the sense that specific technologies demand additional invest-ments in transmission and distribution grids or specific additional reconfigura-tions of the electricity systems such as flex-ibility or added capacity provision. The results are influenced by how system costs and boundaries between categories are defined, the time horizon (short term vs. long term) as well as assumptions about the ability of the power system to adapt, and future parameters, including fuel and CO2 prices.

The ability to balance the system is a bur-den for non-dispatchable electricity gener-ated from wind turbines or solar panels. While meteorology can help, it is not deci-sive. Even when shortfalls are announced in advance, they must be compensated for by other sources of generation that can be mobilized on short notice, namely hydro or thermal power plants. In principle, part of the cost of such system reserves should

be added to the LCOE of non-dispatchable renewables when comparing these to other base load generation sources. The report, however, focuses exclusively on technical system costs.Competitive electricity markets establish prices that reflect the marginal costs rather than average costs that underlie LCOE ac-counting independent from system issues.LCOE is of limited practicability, especially once electricity prices are an input rather than an output of investors’ profitability calculations. Investors calculate the NPV to assess whether the cash flow of a new project is sufficient to reimburse the in-vestment and capital costs used to finance a project. NPV calculations are based on expected external electricity prices and al-low for variation and uncertainty over time to be considered. A negative NPV will not deliver sufficient information not to invest in a project, but even a positive NPV is not appropriate for reaching an investment de-cision in a project. The fact remains that the LCOE methodol-ogy is not particularly well suited to assess the competitiveness of different generation technologies, especially in OECD countries that have had liberalised electricity mar-

kets since the 1990s. To guarantee robust results, any undertaking to calculate true comparative costs would require addition-al analysis.

Summary

The approach for the LCOE calculation is described, including the requirements for the VGB’s issue of LCOE 2015 as well as the view of European utilities. Furthermore, the different applied electricity generation technologies are listed in the two areas “renewables” and “thermal power plants”. The cost components are indicated for each generation type as is an explanation for the calculation of a maximum and minimum LCOE. The description of the limits of the LCOE in deregulated markets – a feature of most OECD countries since the 1990s – forms an important part.

References[1] Levelised Cost of Electricity,

www.vgb.org|News, VGB PowerTech e.V.[2] Calculator of Levelized Cost of Electricity for

Power Generation Technologies of AGORA; Daniel Fürstenberg; February 2014; http://www.agora-energiewende.de/de/service/daten-tools/ l

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