Environmental Engineering Reference
In-Depth Information
The time unit usually taken for renewables is one calendar year, since over that
period the natural cycle of resources will usually be repeated, to some extent, but
this is arbitrary. The cost of fuel, F
t
, is zero for most renewables energies, except in
the case of biomass. The capital cost includes all forms of
nancing that may be
involved, possibly including equity. The return on capital applied to each category
of
nancial source may be different, and will include a risk premium. In the case of
equity, this premium will usually be higher. The return on capital applied in the
calculation of LCOE is usually a Weighted Average Cost of Capital or WACC. The
LCOE therefore includes a positive return on equity if any. It can be understood as
an opportunity cost, so that the current return on capital in the relevant market and
an appropriate risk premium are taken into account. This is the most commonly
accepted de
nition [
18
,
29
,
41
], though there may be some minor changes in some
cases (the EIA follows a slightly different approach: see [
8
]).
The concept of LCOE deserves some discussion in order to provide a better
understanding of its meaning. It can be written in a compact way as follows:
DLC
DLG
LCOE
¼
where the numerator is the discounted lifetime cost (DLC) and the denominator the
discounted lifetime generation (DLG). Now rewrite this last expression in the
following way:
¼
LCOE
DLG
DLC
0
If the LCOE is now replaced by the current selling price of energy, PE, the
following is obtained:
PE
DLG
DLC
0
when the selling price is above the LCOE (PE > LCOE). This implies that the
investment will yield a greater return on capital than the
'
normal
'
or current market
return, and a lower return if it is lower. If the two are equal the
'
excess return
'
is
zero and the investment breaks even (
'
excess
'
here means
'
above what is taken as
standard in the market
'
). This point is what is commonly referred to as
'
grid-parity
'
,
a time and amount at which the speci
c technology considered reaches market
competitiveness, and therefore requires no further public (
nancial) support in any
form. It may require other kinds of support, however,
in the form of easing
administrative barriers, or otherwise.
Another point that has been brought to the discussion recently is the very
concept of an electricity price. This may be unfair to technologies with storage
capacities, since they can sell electricity at different times, taking advantage of the
changing prices of electricity over time (e.g. hydro power with pumped storage and
CSP with TES in molten salts). Indeed, this applies to all technologies with
intermittent or non constant output, i.e. all renewable technologies to a greater or
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