Tag Archives: CEC

Levelized costs are calculated correctly

The Utility Dive recently published an opinion article that claimed that the conventional method of calculating the levelized cost of energy (LCOE) is incorrect. The UD article was derived from an article published in 2019 in the Electricity Journal by the same author, James Loewen. The article claimed that conventional method gave biased results against more capital intensive generation resources such as renewables compared to fossil fueled ones. I wrote a comment to the Electricity Journal showing the errors in Loewen’s reasoning and further reinforcing the rationale for the conventional LCOE calculation. (You have until August 9 to download my article for free.)

I was the managing consultant that assisted the California Energy Commission (CEC) in preparing one of the studies (CEC 2015) referenced in Loewen. I also led the preparation of three earlier studies that updated cost estimates. (CEC 2003, CEC 2007, CEC 2010) In developing these models, the consultants and staff discussed extensively this issue and came to the conclusion that the LCOE must be calculated by discounting both future cashflows and future energy production. Only in this way can a true comparison of discounted energy values be made.

The error in Loewen’s article arises from a misconception that money is somehow different and unique from all other goods and services. Money serves three roles in the economy: as a medium of exchange, as a unit of account, and as a store of value. At its core, money is a commodity used predominantly as an intermediary in the barter economy and as a store of value until needed later. (We can see this particularly when currency was generally backed by a specific commodity–gold.) Discounting derives from the opportunity cost of holding, and not using, that value until a future date. So discounting applies to all resources and services, not just to money.

Blanchard and Fischer (1989) at pp. 70-71, describe how “utility” (which is NOT measured in money) is discounted in economic analysis. Utility is gained by consumption of goods and services. Blanchard and Fischer has an extensive discussion of the marginal rate of substitution between two periods. Again, note there is no discussion of money in this economic analysis–only the consumption of goods and services in two different time periods. That means that goods and services are being discounted directly. The LCOE must be calculated in the same manner to be consistent with economic theory.

We should be able to recover the net present value of project cost by multiplying the LCOE by the generation over the economic life of the project. We only get the correct answer if we use the conventional LCOE.  I walk through the calculation demonstrating this result in the article.

Vogtle nuke cost could top $25 billion| From Utility Dive

The Vogtle nuclear power plant cost is projected to balloon to more than $12,000 per megawatt. In a study we did for the California Energy Commission in 2009, even at $4,000 per megawatt, nuclear power was uneconomic. This explains why nuclear power is not taken seriously as a solution to reducing greenhouse gas emissions.

Source: Vogtle nuke cost could top $25B as decision time looms | Utility Dive

An economically attractive environmental solution in peril

The agreement to take down PacifiCorp’s dams on the Klamath River is in peril. In 2006 we showed in a study funded by the California Energy Commission that decommissioning the dams would likely cost PacifiCorps ratepayers about the same as relicensing. That mitigated the economic argument and opened up the negotiations among the power company, farmers, tribes, environmentalists and government agencies to came to an agreement in 2010 to start decommissioning by 2020.

The agreement required Congress to act by the end of 2015 and that deadline is looming. Unfortunately, there are still opponents who mistakenly believe that the project’s hydropower is cheaper than the alternatives. In fact, the economics are even more favorable today whether PacifiCorp uses natural gas or renewables to replace the lost power. And this analysis ignores the benefits to the Klamath fisheries from decommissioning. It’s too bad that bad simplistic economics can still get traction in the legislative process.