Environmental Engineering Reference
In-Depth Information
lesser degree. This point deserves some discussion: consider the present discounted
value of all future energy proceeds, DLP for short, generated by a speci
c
investment and given by
X
t¼n
P
t
E
t
1
DLP
¼
t
ð
þ d
Þ
t¼
1
where
P
t
is the selling price of electricity at a specied future time
t
(the remain-
ing symbols are de
ned above in the expression for the LCOE). Now denote
D
t
= (1/(1 +
d
)
t
). For ease of notation, this expression can be conveniently rear-
ranged as follows:
X
t¼n
DLP
¼
P
t
E
t
D
t
t¼
1
!
!
X
X
t¼n
t¼n
E
t
D
t
P
1
E
t
D
t
¼
E
t
D
t
P
t
t¼
1
t¼
1
rst summation term in brackets is precisely the present discounted amount
of all energy generated in the future, i.e. the denominator in the standard de
The
nition
of LCOE; the second is a weighted average of all future electricity prices, where the
weights themselves are discounted to the present. A very similar distinction is made
in
nance: see, for example, Bierwag [
2
]. Finally, this weighted price is what
should be compared to the LCOE in order to arrive at a meaningful conclusion,
rather than to an abstract concept of
“
electricity price
”
which in practice is rarely a
constant value.
In practice, the concept of LCOE is used with no in-depth consideration of its
many underpinnings. A thorough discussion of all those underpinnings is beyond
the scope of this chapter, but some mention, however preliminary, should be made
of them. A brief comment on some of the main points follows: (1) the price
P
t
, and
the electricity
E
t
, both refer to a future calendar year, and both will change over
time; even within a given year the price changes hour by hour. Thus, the method for
forecasting
P
t
, and
E
t
, will have an impact on the
nal calculation; (2) a context of
likely increases in the prices of non renewables should be considered when cal-
culating the LCOE for these technologies; (3) calculations are customarily per-
formed assuming constant prices (one exception is [
41
]); however, even if in
ation
rates are low, for long time frames they may be relevant, so they should be dealt
with appropriately; (4) the discount rate may have a strong impact on the
nal
calculated value; Irena, for example, uses the WACC, which is 10 % in their case; a
study conducted on behalf of the British Government recommends using a 3.5 %
discount rate [
38
],
nally, [
9
] suggests a declining discount rate, since otherwise
future distant revenues will play no role; (5) when making international compari-
sons, the choice of the conversion rate is another factor that may have a decisive
impact on the
nal assessment. A discussion of this point can be found in [
30
];
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