Vai dal Barbieri: the true cost of green energy and the LCOE paradox

In June, Lazard, a well-known global investment bank, released the seventeenth edition of its Levelized Cost of Energy (LCOE) analysis. This metric represents an estimate of the cost of electricity generation for different types of plants such as solar, wind, coal, natural gas and nuclear, expressed in megawatt hours (MWh). It is calculated by considering the expected lifetime of the plant and the energy produced. Lazard's study of LCOE is often cited to support the argument that renewables are cost-competitive with conventional ones. However, this approach has significant limitations, especially when comparing the costs associated with intermittent energy sources with those of conventional sources.

Lazard itself acknowledges some of the limitations of this metric in the early pages of its study, but many public figures tend to quote it without heeding these caveats. This contributes to a distortion of public perception regarding the true costs of generating renewables versus conventional energy. The main variables that influence the LCOE calculation include capital costs for construction, financing costs, the price of fuel and its efficiency in converting heat to electricity, as well as operating and maintenance costs. However, the LCOE calculation is done in isolation, excluding the costs associated with the integration of these energy sources into the power grid, which greatly impacts the actual final cost.

Here are some of the costs excluded from the LCOE calculation but critical to understanding the overall impact of renewable energy:

1. Additional transmission expenses: The integration of a large proportion of intermittent energies such as wind and solar into the grid requires significant expansion of the transmission grid, as these sources are often located far from high-demand areas, in addition to an upgrade/upgrade not included in the LCOE calculation.
2. Load balancing charges: The intermittency of renewable sources requires the use of backup generators and energy storage systems to ensure a stable supply. Balancing costs include maintaining overcapacity and reducing generation to avoid overloads on the grid. Natural gas and storage batteries play a key role in this process, but both carry significant costs.
3. Overbuilding and reducing production: Since energy storage by batteries is expensive, it is proposed to overbuild wind and solar plants to ensure supply during periods of low production. However, when production exceeds demand, excess energy is reduced, increasing costs per megawatt-hour (MWh) produced. In addition, the expansion of energy infrastructure leads to an increase in taxable assets, especially in the United States, resulting in higher property taxes that are not factored into the LCOE calculation.

In addition to integration costs that are not included in the LCOE, there are additional problems in its calculation and especially in estimation:
● Capital costs: The $1300 per kilowatt estimate used by Lazard is considered too low and contributes to the lower cost of LCOE.The EIA also estimates higher costs, this can lead to an underestimation of the actual costs of renewable energy.
● Capacity factor: Using an average value of 55 percent for capacity factor is unrealistic according to 2022 data, where for example only 0.5 percent of plants were operating at this level due to the data. Overestimating this value causes the denominator in the LCOE calculation to increase, thus lowering its value.
● Useful life of plants: Lazard tends to overestimate the useful life of turbines, always going to operate on MWh produced and artificially reducing the value of LCOE, at the same time underestimating the useful life of gas.

The LCOE was effective when energy production came mainly from stable and constant sources. However, with the integration of intermittent sources into the energy mix, it no longer fully represents actual generation costs. It is designed to compare sources with equal reliability, such as coal, natural gas, and nuclear, that provide energy on demand. In contrast, sources such as wind and solar do not guarantee constant output, making the comparison of LCOE of dispatchable and non-dispatchable sources misleading.

Although LCOE remains an important metric, it no longer comprehensively represents the costs of renewable energy in the modern context, especially when considering the challenges of integrating it into the electricity grid. Indeed, the LCOE does not include the overall costs to the electricity system, nor the costs that fall on consumers, such as grid adaptation and the provision of backup resources. Moreover, it would be more accurate to compare the cost of renewables with the cost of existing power plants that have already been depreciated and are still capable of producing low-cost power. The U.S. Energy Information Administration suggests using LACE (Levelized Avoided Cost of Energy) to compare energy sources from different groups, taking into account systemic costs. Ultimately, to get a clearer and more complete picture of the global energy situation, a more multifaceted and less simplistic approach is needed.