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Miscalculated levelized cost of electricity data has overvalued power plants: study

Highlights

Capacity factors have been held constant

Conventional plant LCOE artificially low

New York — Mainstream energy analyses have significantly underestimated the levelized cost of electricity from conventional power plants by assuming the plants can sell the same volume of electricity each year from now through 2040 and beyond, experts at independent think tank RethinkX said. This miscalculation overestimates the value of conventional energy assets, the authors said.

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"The more electricity a power plant produces and sells, the lower the average or levelized cost per kilowatt-hour," Adam Dorr, an environmental social scientist and technology theorist with RethinkX, said in a March 15 email.

"The problem — which is creating a trillion dollar global financial bubble — is that virtually all mainstream analysts are making a fundamental methodological error in holding capacity factor high and constant, and as a result they assume a new conventional coal, gas, nuclear, or hydropower plant will produce far more electricity than it actually will," Dorr said.

The US Energy Information Administration assumes coal power plants will have a capacity factor of 85% through 2040 and beyond, but the real number is 40% today, down from 70% in 2010, and it will continue to collapse as coal is outcompeted by solar, wind, and batteries, he said.

"Unless we correct course, governments, investors, and regulators will continue to sink trillions into doomed conventional energy assets - not just power plants but mines, ports, and refineries throughout their value chains," he said.

The LCOE methodologies used in "virtually all mainstream analyses" contain the same critical error: they assume a high and constant capacity factor, or utilization rate, for the entire lifetime of any individual power plant, according to the study titled "The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy Assets."

The researchers adjusted LCOE estimates based on actual historical power generation output data and came up with higher electricity cost data than that reported by leading energy research organizations.

Based on the projection that capacity for each conventional technology declines to 10% by 2035, and altering nothing but capacity factor in the LCOE calculation, the report found the following:

  • Coal: By 2030, corrected LCOE is 65 cents/kWh or nine times higher than the EIA's LCOE estimate of 7.5 cents/kWh
  • Natural Gas: By 2030, corrected LCOE is 18 cents/kWh or 4.5 times higher than the EIA's LCOE estimate of 4.1 cents/kWh
  • Nuclear: By 2030, corrected LCOE is 105 cents/kWh or 13.5 times higher than the EIA's LCOE estimate of 7.8 cents/kWh
  • Hydropower: By 2030, corrected LCOE is 49 cents/kWh or nine times higher than the EIA's LCOE estimate of 5.3 cents/kWh

The researchers confirmed the use of capacity factors being held constant in data from 13 widely cited LCOE sources. The EIA is the most transparent data source, so they focused on EIA numbers as an example, but all the data sources they analyzed were found to be holding capacity factors constant.

Overvaluation

The study contends that conventional energy assets are "severely mispriced," and that overvaluation is creating a growing asset valuation bubble in the conventional energy sector.

In direct competition with solar, wind power and batteries on open electricity markets, "conventional baseload and peaker plants will rarely, if ever, be able to sell their electricity at prices high enough to cover their costs," the report said.

Since 2010, LCOE analyses have consistently overestimated future cash flows from coal, gas, nuclear, and hydropower assets by "ignoring the impacts of solar, wind and battery disruption" and assuming a high and constant capacity factor, according to the report

As a result, such analysis has "inflated the value of those cash flows and reported far lower LCOE than is actually justified," the report said.

However, power plant and energy infrastructure investors consider more than just LCOE when making investment decisions, analysts with S&P Global Platts Analytics said.

For example, there are still over 20 GW of gas-fired power generation capacity in the PJM Interconnection queue. PJM has access to low-cost gas supplies, a large pool of coal capacity to be replaced, and nuclear units threatening to retire, Platts Analytics said.

Among other metrics, investors consider market fundamentals for energy and capacity prices and gas costs, the analysts said.