At the Institute for Energy Research (IER), we have spent a lot of time and effort trying to explain that the Levelized Cost of Electricity (LCOE) does not tell the whole story when it comes to comparing different types of electricity generation resources. For example, we produced this report in 2015 comparing the Levelized Cost of Electricity from Existing Generating Resources and updated it in 2019. Our point has been that LCOE as a metric does not tell the whole story and one needs to use extreme caution when comparing the LCOE of dispatchable and non-dispatchable sources of generation. The IER reports show that the cost of the back-up technology should be added to the LCOE of intermittent technologies such as wind and solar because back-ups are needed when the wind isn’t blowing and the sun isn’t shining.
In today’s inflationary environment, analysts should be even more careful using the numbers estimated by modelers such as Lazard as inflationary costs including higher interest rates are not being sufficiently included in the LCOE estimates of many forecasters. Consider what is happening in New York state. New York wants to get at least 70% of its electricity from renewable sources by 2030. But renewable energy companies are now saying that they will need massive increases in their purchase power agreements to help New York get there. Utility Dive reports:
- “On average, offshore wind developers are seeking a 48% increase in their contract prices to $167.25/MWh and a petition from the Alliance for Clean Energy New York asked the PSC to increase onshore wind contract prices by 71% on average to $115.66/MWh and solar prices by 63% to $102.22/MWh, according to NYSERDA.”
These are massive price increases and they are much, much higher than what the LCOE estimates suggest the prices are expected to be. For example, in April, Lazard updated his LCOE estimates and found that the unsubsidized cost of offshore wind is expected to be between $72 and $140/MWh, the unsubsidized cost of onshore wind is expected to be between $24 and $75/MWh, and the unsubsidized cost of utility solar between $24 and $96 per/MWh.
The table below compares Lazard’s estimated LCOE to the actual prices renewable companies say they need in New York. In every instance Lazard’s high-cost estimate is lower than the prices renewable companies are now asking for.
Orsted, an offshore wind company, says it needs these much higher prices or it may abandon its US projects even if it has to pay fines.
This price differences once again show that analysts and others need to be careful when using LCOE estimates. The problem may be the inflationary environment, but then again, as Bloomberg correctly opined lately, “President Joe Biden’s signature climate legislation might actually be making it more difficult for companies to invest in the US offshore wind industry for the clean energy transition by producing more inflation.”