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January 12, 2011

Levelized energy costs need to be adjusted for peak and offpeak market value

Comparing the Costs of Intermittent and Dispatchable Electricity Generating Technologies by Paul L. Joskow at MIT Adjusting for market based economics makes solar and nuclear power look better and makes wind power look worse.

Economic evaluations of alternative electric generating technologies typically rely on comparisons between their expected life-cycle production costs per unit of electricity supplied. The standard life-cycle cost metric utilized is the “levelized cost” per MWh supplied. This paper demonstrates that this metric is inappropriate for comparing intermittent generating technologies like wind and solar with dispatchable generating technologies like nuclear, gas combined cycle, and coal. Levelized cost comparisons are a misleading metric for comparing intermittent and dispatchable generating technologies because they fail to take into account differences in the production profiles of intermittent and dispatchable generating technologies and the associated large variations in the market value of the electricity they supply. Levelized cost comparisons overvalue intermittent generating technologies compared to dispatchable base load generating technologies. They also overvalue wind generating technologies compared to solar generating technologies. Integrating differences in production profiles, the associated variations in the market value of the electricity supplied, and life-cycle costs associated with different generating technologies is necessary to provide meaningful comparisons between them. This market-based framework also has implications for the appropriate design of procurement auctions created to implement renewable energy procurement mandates, the efficient structure of production tax credits for renewable energy, and the evaluation of the additional costs of integrating intermittent generation into electric power networks.

Traditional levelized cost comparisons fail to take account of the fact that the value (wholesale market price) of electricity supplied varies widely over the course of a typical year. The difference between the high and the low hourly prices over the course of a typical year, including capacity payments for generating capacity available to supply power during critical peak hours, can be up to four orders of magnitude.

Different intermittent generating technologies (e.g. wind vs. solar) also can have very different hourly production and market value profiles, and indeed, specific intermittent generating units using the same technology (e.g. wind) may have very different production profiles depending on where they are located.



This problem is easily remedied by integrating generation output profiles for each with the associated expected market value that will be supplied by each technology along with their respective lifecycle productions costs.

A good starting point would be to evaluate all generating technologies, both intermittent and dispatchable, based on the expected market value of the electricity that they will supply, their total life-cycle costs and their associated expected profitability, rather than focusing only on the levelized cost per unit of output. Such an analysis would reflect the actual expected production profiles of dispatchable and intermittent technologies, the value of electricity supplied at different times, and other costs of intermittency associated with reliable network integration. That is, abandon levelized cost comparisons and adopt more standard economic evaluation methods for new generating capacity. This kind of analysis can be performed with and without direct subsidies, mandates, renewable credits, etc., so that the true costs of alternative technologies can be identified, the costs of the direct and indirect subsidies can be made transparent, and the cost per unit of CO2 displaced by different technologies can be easily measured.

This framework can be used as well to design better competitive procurement systems and can be employed to shed more light on other issues that have been associated with the growing reliance on intermittent generation. Indeed, many system operators are already using this framework to identify technical issues with large scale deployment of intermittent generation and to measure the costs networks are likely to incur to respond to intermittency in order to maintain reliability criteria (e.g. ERCOT). The framework can also be used properly to measure the costs of the renewable electricity promotion policies that have been adopted by state and federal governments and in this way increase the transparency of these costs to the public. It also provides a useful framework for quantifying the value of adding storage capabilities to intermittent technologies and for designing competitive procurement programs for renewable energy that properly take account of differences in production profiles and the associated value of the electricity produced from plants at locations with different wind and solar resources.

Finally, this approach will increase transparency about the costs of alternative generating technologies, the costs of subsidies provided to certain technologies, other costs of intermittency, and the environmental benefits of promoting technologies with subsidies, credits, and mandates that would not otherwise be economical choices. The increased transparency will improve public policy decisions and illuminate inaccuracies about costs and competitiveness advanced by interest groups promoting particular generation technologies to feather their own nests.

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