Beyond LCOE: Value of technologies in different generation and grid scenarios

Publication Overview

Since its introduction, the levelised cost of electricity (LCOE) has become ubiquitous in the evaluation and comparison of power generation technologies. While it is a readily accessible metric, it focuses exclusively on the cost of electricity produced from an asset and neglects to address the provision of ancillary services that are vital for the reliable operation of an electricity grid. This simplification was entirely appropriate for the electricity system of the 20th century, dominated at it was by fossil fuels and nuclear technologies, but it falls well short as a metric to compare technologies in a system to provide net-zero emissions by the mid-21st century. The objective of this study was to evaluate the various concepts that have been proposed as alternatives to LCOE and to explore the potential for a concept that balances completeness and ease of use. As an alternative to LCOE, this study proposes the modified screening curve concept, which shows that, while intermittent renewables have significant value by providing energy/fuel savings, a low-carbon dispatchable technology such as CCUS has critical value by supplying the flexible capacity to deliver security of supply.

Publication Summary

• This study is aimed at exploring and proposing an alternative concept to the levelised cost of electricity (LCOE), one that can be used to generate a transparent, intuitive and comprehensive approach with which to compare the evolving impact of technologies within an electricity system – rather than simply providing direct technology-technology comparison.
• LCOE is attractive as a metric for comparing power generation technologies; it is simple to calculate and provides messages that the energy community, whether technologists, project developers or policy makers, can relate to and apply in their decision making. With these attributes, the LCOE concept has become the dominant approach.
• However, LCOE suffers from well-documented weaknesses and is widely regarded as being poorly suited to the heterogeneous electricity grid of the 21st century. The energy community has been aware of its shortcomings since the early 1990s, with several alternatives having been proposed. Examples of these include the US EIA’s ‘Levelized Avoided Cost of Electricity’ and the IEA’s ‘Value Adjusted LCOE’. While many of the alternatives proposed are excellent, no one method has emerged as being a clear preference to LCOE; they variously suffer from computational complexity, large data requirements or lack of transparency.
• In addition to providing energy and capacity services, a range of ancillary services are required by the grid. Ancillary services evaluated during the analysis for this study, include those provided by large-scale, synchronous thermal power stations (hydro, nuclear and fossil fuel):
       o Maintaining system frequency (inertia, primary, secondary, and tertiary reserves);
       o Maintaining system voltage; and
       o Restarting the system after black-out.
• If large-scale, synchronous, fossil-fuelled thermal plants were phased out, the availability of ancillary services that are inherently provided by those technologies becomes limited. In such a scenario, the value of these ancillary services would increase considerably.
• Of all the services that each technology provides to the system, modelling undertaken for this study indicates that the provision of firm capacity (MW) and energy (MWh) services are the most crucial.
• Early in the study, a new concept, the ‘Levelised Cost of Electricity Service’ (or ‘LCES’), was developed. While demonstrating great promised for comparing the impact of technologies within an electricity system – it addresses both thermal and iRES technologies, satisfies important ancillary services and covers short and long-term time horizons – the LCES suffered from the same downsides as other concepts before it. With its computational complexity and significant data needs, LCES would be unlikely to replace LCOE as the metric of choice.
• However, an existing concept which assesses the capacity and the energy services of different technologies is the screening curve. While this represents a well-established method to compare thermal generation technologies, it is not suitable for the evaluation of intermittent renewable energy sources (iRES) and storage technologies.
• But this limitation can be overcome. Incorporating the effective capacity factors1 of the technologies in the curve can reflect the capacity and energy services provided by iRES.
• Storage technologies can also be incorporated in the approach by limiting their maximum hours of discharge to the curtailed hours of the electricity source (to represent the time the technology needs to charge) and to the maximum hours of operation (which corresponds to the time needed to charge and discharge).
• Applying these rules allows the screening curve approach to be used to evaluate the capacity and energy value of dispatchable and non-dispatchable power generation technologies, as well as energy storage technologies.
• This is an accessible approach to evaluate the impact of arbitrary levels of all power generation technologies on the total system cost. The proposed concept can also be used to estimate the level of economic deployment of technologies considered and to determine the optimal role the technologies can play.
• Although the optimal energy share of iRES can be significant, the role of dispatchable plants remains critical in the system to meet the electricity demand.
• This study proposes the modified screening curve concept as an alternative concept to LCOE2. It shows that iRES have significant value by providing energy/fuel savings for the electricity system, with dispatchable technologies having critical value by supplying capacity for security of supply.