Beyond LCOE by Giles Hundleby

Just when we’d all (sort of) got our heads round LCOE, we need to do more. Cost reduction in renewables has been so successful that we are starting to see projects developed without subsidy, even in offshore wind. Once politicians realise they can have renewables with ‘zero subsidy’, we can be certain they’ll want a lot more of it.

By definition, LCOE is a LEVELISED cost, which is very helpful when the revenue is also levelised by a fixed-price PPA (for example like the UK’s contract for difference system). The lower your LCOE, the lower you can bid in an auction to win a PPA. Once you’ve won and are supplying energy, every MWh supplied is worth the same. In a zero subsidy world, however, the price the supplier receives depends only on market forces.

Many countries now have significant renewable capacity in their energy mix. This capacity operates with very low marginal cost because its ‘fuel’ is free. In such countries, the more the wind blows, the higher the supply of energy, and so lower the price, will be. (If we assume, for simplicity, that electricity demand is not influenced by wind conditions.) This fundamental shift to power prices being determined (at least in part) by wind speed is why we need to go ‘beyond LCOE’.

What will this exposure to the red tooth and claw of the market mean in practice? For example, what would be the optimum rotor size? With no subsides, it is likely a turbine with a larger rotor will show a better project IRR because it delivers more energy at lower wind speeds, when the market price is (on average) higher. The optimum rotor size in this scenario is likely to be very different from that in an ‘LCOE’ world.

Other examples of actions that could improve IRR in a zero-subsidy world include: changes to OMS strategy; changes to turbine operating strategy; ‘overplanting’ a wind farm and addition of energy storage. All will optimise possible production in a different way to that required for fixed price PPA scenarios. Of course, the wonders of the invisible hand of the market means that if the whole market adopts such strategies, supply will increase and price rises will be smaller when wind speeds are low. Such complexities reinforce the need for a strategic approach to cost modelling in these exciting times for renewable industry.

We are extending our modelling tools to describe this ‘beyond LCOE’ world: from an hourly analysis of wind speed, market price and curtailment, and from power curves for operating farms, we can model the average annual power price achieved by wind. We can then model revenue to show the best way to increase project IRR.

While LCOE is still an essential concept, it’s clear that we need to go beyond. Let us know if you would value a discussion of what this means for you.

Giles Hundelby