While there will no doubt be a string of shallow references to figures calculated by the EIA, the EIA's work is valuable primarily in the context of a decision being made about supply for a particular region within the context of the remainder of the existing supply mix.
The evolution of the EIA's methodology is refreshing as it continues to improve towards a model I suggested last year in The Real High Price of Low-Value Electricity - which discussed changes in the history of the EIA's methodology.
Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014 | U.S. Energy Information Administration (EIA):
It is important to note that, while LCOE is a convenient summary measure of the overall competiveness of different generating technologies, actual plant investment decisions are affected by the specific technological and regional characteristics of a project, which involve numerous other factors. The projected utilization rate, which depends on the load shape and the existing resource mix in an area where additional capacity is needed, is one such factor. The existing resource mix in a region can directly impact the economic viability of a new investment through its effect on the economics surrounding the displacement of existing resources. For example, a wind resource that would primarily displace existing natural gas generation will usually have a different economic value than one that would displace existing coal generation.Read the full post at the U.S. Energy Information Administration (EIA) site - particularly in order to understand the tables displayed, as those figures will not doubt be cited out of context many times to come by those interested in the cost of everything and the value of nothing.
A related factor is the capacity value, which depends on both the existing capacity mix and load characteristics in a region.Since load must be balanced on a continuous basis, units whose output can be varied to follow demand (dispatchable technologies) generally have more value to a system than less flexible units (non-dispatchable technologies), or those whose operation is tied to the availability of an intermittent resource. The LCOE values for dispatchable and nondispatchable technologies are listed separately in the tables, because caution should be used when comparing them to one another.
Since projected utilization rates, the existing resource mix, and capacity values can all vary dramatically across regions where new generation capacity may be needed, the direct comparison of LCOE across technologies is often problematic and can be misleading as a method to assess the economic competitiveness of various generation alternatives. Conceptually, a better assessment of economic competitiveness can be gained through consideration of avoided cost, a measure of what it would cost the grid to generate the electricity that is otherwise displaced by a new generation project, as well as its levelized cost. Avoided cost, which provides a proxy measure for the annual economic value of a candidate project, may be summed over its financial life and converted to a stream of equal annual payments. The avoided cost is divided by average annual output of the project to develop the “levelized” avoided cost of electricity (LACE) for the project.4 The LACE value may then be compared with the LCOE value for the candidate project to provide an indication of whether or not the project’s value exceeds its cost.
Related, from original content site:
- The Real High Price of Low-Value Electricity
- The Capacity Trap: Ontario's Electricity Costs Soar as Emissions Drop
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