Cost factors
While calculating costs, several internal cost factors have to be considered. (Note we are not here talking about price, i.e. actual selling price, since this can be affected by a variety of factors such as subsidies on some energy and sources and taxes on others):
- Capital costs (including waste disposal and decommissioning costs for nuclear energy) - tend to be low for fossil fuel power stations; high for renewables and nuclear; very high for waste to energy, wave and tidal, PV and solar thermal.
- Operating and maintenance costs - tend to be high for nuclear, coal, and waste-to-energy (fly and bottom ash disposal, emissions clean up, operating steam generators) and low for renewables and oil and gas fired peaking units.
- Fuel costs - high for fossil fuel and biomass sources, very low for nuclear and renewables, possibly negative for waste to energy.
- Expected annual hours run - as low as 3% for diesel peakers, 30% for wind, and up to 90% for nuclear.
- Revenue recovered from heat sales can be offset against running costs, and reduce the net costs in the case of Cogeneration (combined heat and power) and District heating schemes.
To evaluate the total cost of production of electricity, the streams of costs are converted to a net present value using the time value of money. These costs are all brought together using discounted cash flow here. and here .
Another collection of cost calculations is shown here:, here , and
BP claims renewables are on a decreasing cost curve, while non-renewables are on an increasing cost curve.
Calculations
Levelised energy cost (LEC) is the price at which electricity must be generated from a specific source to break even. It is an economic assessment of the cost of the energy-generating system including all the costs over its lifetime: initial investment, operations and maintenance, cost of fuel, cost of capital, and is very useful in calculating the costs of generation from different sources.
It can be defined in a single formula as:
where
- LEC = Average lifetime levelised electricity generation cost
- It = Investment expenditures in the year t
- Mt = Operations and maintenance expenditures in the year t
- Ft = Fuel expenditures in the year t
- Et = Electricity generation in the year t
- r = Discount rate
- n = Life of the system
Typically LECs are calculated over 20 to 40 year lifetimes, and are given in the units of currency per kilowatt-hour, for example AUD/kWh or EUR/kWh or per megawatt-hour, for example AUD/MWh (as tabulated below).
System Boundaries
When comparing LECs for alternative systems, it is very important to define the boundaries of the 'system' and the costs that are included in it. For example, should transmissions lines and distribution systems be included in the cost? Typically only the costs of connecting the generating source into the transmission system is included as a cost of the generator. But in some cases wholesale upgrade of the Grid is needed. Careful thought has to be given to whether or not these costs should be included in the cost of power.
Should R&D, tax, and environmental impact studies be included? Should the costs of impacts on public health and environmental damage be included? Should the costs of government subsidies be included in the calculated LEC?
Discount Rate
Another key issue is the decision about the value of the discount rate r. The value that is chosen for r can often 'weigh' the decision towards one option or another, so the basis for choosing the discount must clearly be carefully evaluated. See Internal rate of return. The discount rate depends on the cost of capital, including the balance between debt-financing and equity-financing, and an assessment of the financial risk.
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