levelized cost of energy calculation_bv_en

8/3/2019 Levelized Cost of Energy Calculation_BV_EN

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1:1: LevelizedLevelized Cost of EnergyCost of Energy

CalculationCalculationMethodology and Sensitivity


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What is LCOE?Levelized Cost of Energy (LCOE) is the constant unit cost (per kWhor MWh) of a payment stream that has the same present value as the

total cost of building and operating a generating plant over its life.

Initial Investment and Annual Costs

LCOE

$0

$250,000

$500,000

$750,000

$1,000,000

0 2 4 6 8 1 0 1 2 1 4 1 6 1 8 2 0

Year

A n n u a l

C o s t

( $ )

$50

$75

$100

$125

$150

L C

O E ( $ / M W h )Equity Investment

Debt ServiceOperating ExpensesTaxesLCOE


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Why Use LCOE?

Very useful in comparing technologies with differentoperating characteristics

LCOE Range based on Capacity Factor Range

0 0.5 1 1.5 2

Wind - Onshore

Wind - OffshoreShallow

Wind - Offshore Deep

Solar PV

Solar Thermal

Levelized Cost of Energy (RMB/kWh)

Typically, LCOEs arecalculated over 20 to 40

year life, and are givenin the units of currency

per kWh or MWh


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Different Ways to Calculate LCOE.

Simplified LCOE Approach1. Using a discount rate i , the capital

recovery factor ( CRF ) is:

CRF =

2. The sLCOE is the minimum price atwhich energy must be sold for anenergy project to break even (orhave present value of zero)

sLCOE =

Discount rate

Used to convert futurecosts to present value.

Typically based on marketinterest rates or weightedcost of capital (WACC),with or without adjustmentsfor risk and uncertainty.

Can vary depending on the

entity.Can be Real or Nominal

[(capital cost * CRF)+ fixed O&M cost]

(8.76 * capacity factor)+ (variable O&M cost * output )

i(1 + i) n

[(1 + i) n ]-1


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Different Ways to Calculate LCOE.Financial Model Approach

Financial model that solves forthe required revenue (LCOE) toachieve a certain internal rate ofreturn (IRR).

Captures impacts of taxincentives and depreciation.

Captures more complexfinancing assumptions andrevenue requirements for an IPP

Cost of Generation CalculatorAll inputs are in blue .

Technology Assumptions Financial/Economic AsumptionsProject Capacity (MW) 1 Debt Percentage 50%Capital Cost ($/kW) $2,000 Debt Rate 8.00%Fixed O&M ($/kW) $50 Debt Term (years) 15Fixed O&M Escalation 2.5% Economic Life (years) 25

Variable O&M ($/MWh) $0 Percent 5-year MACRS 0%Variable O&M Escalation 2.5% Percent 7-year MACRS 0%Fuel Cost ($/MBtu) $0 Percent 15-year MACRS 0%Fuel Cost Escalation 2.5% Percent 20-year MACRS 100%Heat Rate (Btu/kWh) 0 Energy Price Escalation 0.0%Capacity Factor 35% Tax Rate 50%Misc Revenue ($/MWh) $0 Cost of Equity 14.00%Misc Escalation 2.5% Discount Rate 9.000%Degradation 1%

Year 0 1 2 3 4 5

Annual Generation (MWh) 3,066 3,035 3,005 2,975 2,945LCOE $139.35 $139.35 $139.35 $139.35 $139.35Misc Revenue $0.00 $0.00 $0.00 $0.00 $0.00Total Operating Revenu $427,249 $422,976 $418,746 $414,559 $410,413

Fixed O&M $50,000 $51,250 $52,531 $53,845 $55,191Variable O&M $0 $0 $0 $0 $0Fuel Cost $0 $0 $0 $0 $0Operating Expenses $50,000 $51,250 $52,531 $53,845 $55,191

Interest Payment $80,000 $77,054 $73,872 $70,435 $66,723Principal Payment $36,830 $39,776 $42,958 $46,395 $50,106Debt Service $116,830 $116,830 $116,830 $116,830 $116,830

Tax Depreciation - 5 $0 $0 $0 $0 $0Tax Depreciation - 7 $0 $0 $0 $0 $0Tax Depreciation - 15 $0 $0 $0 $0 $0Tax Depreciation - 20 $75,000 $144,380 $133,540 $123,540 $114,260Taxable Income $222,249 $150,292 $158,804 $166,739 $174,239PTC $0 $0 $0 $0 $0Taxes $111,124 $75,146 $79,402 $83,370 $87,120

Total (1,000,000) 149,295 179,750 169,984 160,515 151,273

S A M P

L E F I N

A N C I A

L

M O D E

L


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Real or Nominal LCOE?1. Real LCOE (2010 RMB/kWh) Constant stream of values denoted in todays

currency (Real)

2. Real LCOE (with Inflation) (RMB/kWh) Nominal path that maintains Realvalue constant (Nominal)

3. Nominal LCOE (RMB/kWh) Constant stream of values in nominal currency.(Nominal)

Nominal vs. Real LCOE

2.) Real LCOEwith Inflation

(Nominal)

3.) Nominal LCOE

1.) Real LCOE(2010RMB)

0.40

0.50

0.60

0.70

0.80

0.90

1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0

Year

N o m

i n a l ( R M B / k W h )

0.4

0.5

0.6

0.7

0.8

0.9

R e a

l ( 2 0 1 0 R M B / k W h )

Inflation = 2.5%

Discount Rate = 10%


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Real or Nominal LCOE?

Real LCOE

Removes effects of inflationassociated with O&M and fuelcosts

Uses Real Discount Rate

Analogous to the Year 1 price ofa PPA/FIT that increases withinflation each year.

Preferred by government/policymakers

Nominal LCOE

Incorporates assumptionsregarding inflation

Uses Nominal Discount Rate

Analogous to a PPA/FIT pricethat is the constant each year orflat across economic life ofproject.

Preferred by developers/projectowners

Either LCOE is acceptable, but must be clearly communicated.

Example: Real LCOE = 0.50 RMB/kWh and Nominal LCOE = 0.59 RMB/kWh

With 2.5% inflation, Nominal LCOE is 18% higher than Real LCOE


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General Inputs to LCOE Calculation

Determine representative size of

projects and locations toestimate remaining project-related inputs

For example, 10 MW wind farm

vs. 200 MW wind farm

Establish boundaries of system

Capital, O&M, fuel cost

Performance/resourcecharacteristics

Cost of capital (debt/equity) anddiscount rate

Taxes, depreciation and taxincentives (if applicable)

Inflation (optional)Transmission/integration costs(optional)

Externality costs (optional)


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Making Good Assumptions

Use current data (preferably within the past year)

Take the median of data sources

Apply method of developing assumptions consistently

across technologiesSurvey market participants

Reflect tax conditions and incentives in the country

Discuss and agree upon assumptions through stakeholdermeetings


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Sample Base Case Assumptions and LCOE

1.6628%30030,000Solar CSP1.7215%20020,000Solar PV0.5440%2509,000

OnshoreWind

LCOE(RMB/kWh)

CapacityFactor

O&M(RMB/kW-yr)

Capital Cost(RMB/kW)

8%WACC2.5%O&MEscalation

30%Tax Rate20 yearsTax Life forDepreciation

10%Discount Rate20 yearsEconomic Life


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Sensitivity of LCOE to Assumptions

LCOE of renewable energy can be highly sensitive to inputassumptions

Different assumptions can change LCOE by 50% or more.Some of the key assumptions are:

Capacity factor (performance)

Weighted Cost of capital (WACC)

Capital cost

Important to select assumptions in a consistent manneracross technologies


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Sensitivity of LCOE (Busbar Cost) to Assumptionsfor WindOnshore Wind LCOE Sensitivity

20%

6%

7,200

200

30%

8%

9,000

250

40%

12%

10,800

300

-0.2 -0.1 0.0 0.1 0.2 0.3

O&M (RMB/kW)

Capital Cost (RMB/MW)

Costequity-WACC

Capacity Factor

LCOE relative to Base Case (RMB/kWh)

0.3 0.4 0.5 0.6 0.7 0.8

Absolute LCOE (RMB/kWh)

Low High

Base Case


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Sensitivity of LCOE (Busbar Cost) to Assumptionsfor Solar PVSolar PV LCOE Sensitivity

6%

16,000

16%

160

8%

20,000

18%

200

12%

24,000

20%

240

-0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6

O&M (RMB/kW)

Capacity Factor


Cost equity-WACC

LCOE re lative to Base Case (RMB/MWh)

1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3


Low High

Base Case


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Sensitivity of LCOE (Busbar Cost) to Assumptionsfor Solar CSPSolar CSP LCOE Sensitivity

240

26%

24,000

6%

300

28%

30,000

8%

360

30%

36,000

12%

-0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

O&M (RMB/kW)

Capacity Factor


Costequity-WACC

LCOE re lative to Base Case (RMB/kWh)

1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4


Low High

Base Case


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Cost vs. Value Concepts for LCOE

Busbar Cost

+

Transmission Cost

+Integration Cost

-Capacity Value

-Energy Value

Busbar Cost

Delivered Cost

Adjusted DeliveredCost


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Summary

LCOE is the constant unit cost (per kWh or MWh) of a

payment stream that has the same present value as thetotal cost of a generating plant over its life.

There are multiple ways to calculate LCOE, depending on

the level of financial detailLCOE can be Real or Nominal

Establishing boundaries of each system for assumptions is

importantAssumptions can have significant impact on the resultingLCOE, so consistent assumptions across technologies are

important

levelized cost of energy calculation_bv_en

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