Economic Competitiveness Evaluation of the Energy Sources: Comparison between a Financial Model and Levelized Cost of Electricity Analysis

Abstract

The levelized cost of electricity (LCOE) is used widely to compare the economic competitiveness of the energy mix. This method is easy to understand and simple to apply, which makes it preferable for many energy policymakers. However, the method has several disadvantages from the energy business perspective. First, the LCOE approach does not consider revenue, and a high-interest rate usually correlates with the tariff growth rate. Thus, if a high-interest rate increases the cost, that high rate increases the revenue, which can affect economic competitiveness. Second, the LCOE does not consider different stakeholders. Equity investors and loan investors have different interests depending on different financial indicators, which influence the same energy sources’ differential economic attractiveness. This study analyzes and compares the LCOE, Project Internal Rate of Return (Project IRR), Equity Internal Rate of Return (Equity IRR), and Debt Service Coverage Ratio (DSCR) of an illustrative wind, coal, and nuclear power project using Monte-Carlo simulations. The results show that energy sources’ economic competitiveness can vary depending on financial indicators. This study will help energy policymakers develop more economically realistic energy portfolios.

Grid-connected Electricity Generation Potential from Energy Crops: A Case Study of Marginal Land in Thailand

“…As can be observed, the LCOE with a discount rate of 8% for each biomass price scenario is the lowest. As reported in previous works, the discount rate parameter impacts the LCOE value (Garcia-Gusano et al, 2016;Sung and Jung, 2019). When a higher discount rate is used, the levelized cost in the future will also be higher as well.…”

“…According to the operational data obtained from the power plant, Napier grass at moisture content of 40% wet basis is used as fuel. Previous research reveals that the electricity consumption of the power plant and the gross efficiency exhibited by a biomass power plant with a direct-fired boiler and steam turbine are assumed to be 10% of the total electricity produced (Tangmanotienchai et al, 2014) and 23% (Delivand et al, 2011), respectively. Based on these figures, the net efficiency of the power plant equates to about 21%, which is a conservative value compared to the 20 to 40% mentioned in previous studies (Singh, 2016).…”

LCOE: A Useful and Valid Indicator—Replica to James Loewen and Adam Szymanski

“…Additionally, the focus is on the implications of financial aspects for assessment. A random selection comprises recent publications on economic evaluation methodologies for renewable energy projects [26], financial modeling [27], and financing costs [28][29][30].…”

A Comparison of Dispatchable RES Technoeconomics: Is There a Niche for Concentrated Solar Power?

“…On the other hand, projects with low LCOE may have a negative NPV or ROI. Consequently, no single metric can be regarded as adequately representative and reliable when comparing projects [57,58].…”