# Levelised cost of electricity – introduction

hello everyone this is a quick public
service video on the levelized cost of electricity combined with an explanation
of why this levelized cost sometimes called a total cost of electricity can
produce some pretty misleading statistics that suggest some renewable
energy sources like wind power might look better than they really are now
anyone who already has an engineering degree might find this video a bit
pedestrian but I think it could be helpful for our students as well as for
anyone at home who finds themselves reading about electricity prices in the
news or indeed for journalists who find themselves confused writing about them
right levelized cost of electricity is also written as LCOE this is the
cost of generating electricity often written on an industrial scale per
megawatt hour and it takes into account both the fixed and variable costs fixed
costs like rent of the plant and salaries for the staff and variable
costs like fuel for the boiler and indeed any carbon taxes which might be
applied to the fuel now these costs are added together but to add them together
we have to make an assumption about the capacity factor of the plant that’s the
percentage of its maximum output which it produces on average throughout the
year usually we assume that the power plant is being operated under the most
favourable assumption that is believable for the particular type of plant in the
case of base load generation using combined cycle gas turbines or in the
case of wind farms the assumed capacity factor would typically be the full
availability of the plant in other words they’re run as much as they can be for
other kinds of plant like a backup diesel power generator which is only
occasionally needed the assumed capacity factor might be say
eight percent capacity now the levelized cost of electricity is
the cost of generating a kilowatt hour or a megawatt hour of electricity but
it’s not necessarily the cost of supplying that on demand and it’s the
difference between those two things which results in misleading or
contradictory statistics about the cost of electricity let me show you then a
couple of graphs which highlight how confusing the statistics can easily
become on the right hand side graph we have something if this graph was
produced on the BBC using data from the UK government in 2016 it shows the total
cost of electricity per megawatt hour for a few different energy sources it
talks about total cost but what it means is levelized cost they are quoting data
from a report on levelized costs of electricity but calling it by a simpler,
friendlier, but somewhat less precise name of total cost anyway in their graph
they say that offshore wind is quite expensive but solar power on the large
scale anyway says that it’s quite a bit cheaper at only sixty five pounds per
megawatt hour it goes on to say onshore wind it finds a bit cheaper still at 62
pounds per megawatt hour and it also says combined cycle gas usually the most
favorable of the fossil fuel sources of electricity comes out as slightly more
expensive than on shore wind that’s according to the BBC’s graph combined
cycle drag gas came out at about 63 to 64 pounds per megawatt hour as it
happens that does take into account a carbon tax which I believe was about 15
pounds per megawatt hour but fine that’s the cost that the plant operators would
actually have to pay to produce their electricity
now on the left hand graph we have something apparently contradictory
although in fact both of these graphs are legitimate in the left hand graph we
have the percentage of electricity in a country generated by wind plus solar
electricity on the x-axis and we have the domestic price of electricity in
euro cents per kilowatt hour on the y-axis and this is shown for the year
2016 using data from Eurostat for various EU countries there’s a couple of
noteworthy outliers Lithuania for example imports a lot of electricity
instead of generating it so it’s marker should really be further to the left
I had to indicate that it a smaller fraction of the electricity that it
actually consumes is actually generated by this wind plus solar look-wise
Germany has quite expensive electricity domestically for regulatory reasons so
there are some slight outliers but you can see a clear trend which is the
higher proportion of electricity generated by wind plus solar power the
higher the domestic price of electricity and it’s a pretty strong trend so that
producing about 25 percent of your electricity from wind plus solar instead
of say getting it all from fossil fuels seems to be associated with the domestic
price being double what it would be if there was no wind or solar power well
this is a very like a very costly decision then and how does it come about
after all the left hand graph suggests that wind plus solar are dramatically
more expensive than traditional fossil fuel whereas the right hand graph
suggests they are about the same price or even that onshore wind is a little
cheaper so the reason for this contradiction – apparent contradiction – is
actually quite simple the right hand graph presents the cost of generating a
megawatt hour but not necessarily generating it on demand the left hand
graph presents the cost of a domestic user buying some electricity and that
electricity which they buy is being supplied on demand by the
nature of the fact that they’re buying it now whereas thermal power sources
like combined cycle gas can be supplied on demand they are called dispatchable
power sources a wind power is not generated on demand it’s generated only
when there is wind hence there are extra costs of integrating each megawatt hour
of wind power into a dispatchable power supply which are not shown in the right
hand graph let’s look at an example to see what this extra cost of integration
is and hence to see how we should really compare the cost of non dispatchable
wind power with the cost of traditional dispatchable fossil fuel power in this
example let’s imagine two fictional cities each being rebuilt after they
each suffered an earthquake which destroys all of their power plants city
number one is Gotham City Gotham City is ruled by the billionaire investor Lex
Luthor Lex Luthor holds an auction to offer the rights to use the city’s power
distribution grid to one or more electricity companies one of the winning
bids at this auction is from the penguin the penguin is a top hat wearing
capitalist and his power company plans to rent a disused coal power plant
somewhere down the coast now this power plant which survived the earthquake has
a nameplate output of 1,000 megawatts however it needs to be taken offline for
maintenance in the summer so it’s maximum availability is actually 75
percent because the penguin is a good businessman during the 75 percent of the
time his plant is available to run the pen- the Penguin manages to run it
flat out so that every year he manages to sell 750 megawatt years of
electricity to the people of Gotham what are the Penguins costs for doing this
well every year he spends 750 (small) gold bars to rent
the coal plant and pay salaries to his staff
these are his fixed costs and it so happens he also spends 750 more gold
bars buying the coal to produce the 750 megawatts years of power this fuel cost
is a variable cost because it would increase proportionately if he produced
and sold more electricity so this overall means the Penguin’s operating
costs is two gold bars per megawatt year and this plus his profit margin is what
the penguin charges for electricity in Gotham but the two gold bars per
megawatt here is the levelized cost of electricity for a coal plant okay
city number two is Brit Cit now Brit Cit is not ruled by a billionaire
businessman instead Brit Ci is ruled by its civil service and so decisions
about infrastructure in Brit Cit are made by the chairman of an
infrastructure planning committee and at the moment that chairman is Cyclops
Cyclops has read the BBC and knows that wind power according to their graph is
cheaper than gas accordingly Cyclops orders his chief engineer the
Beast to build a mixed energy system which involves both a wind farm and a
coal power plant Cyclops’ reasoning is that the
cheaper wind power when used as much as possible, whenever the wind is blowing,
will – when averaged with the slightly more expensive coal – produce
power that is nonetheless cheaper than is obtained by the people of Gotham City
Cyclops is of course wrong but we’re going to explain why to do that let’s
first look at the statistics for the wind farm operated by Frost Renewables
the wind farm has a nameplate capacity of 1,000 megawatts an availability of 25
percent that is the fraction of the time on average the wind is blowing and it is
operated by beasts mixed energy at the full availabilities
it’s capacity factor is 25% the costs for doing this and producing 250
megawatt years of electricity in the year is that frost renewables has to pay
a rent which turns out to be four hundred and sixty five small gold bars
and of course the fuel cost for the wind farm is zero they have zero direct costs
for producing electricity overall this means the operating cost for Frost
renewables is one point eight six gold bars per megawatt a year and this is the
levelized cost of electricity of the wind farm you see it’s lower than the
levelized cost of electricity of the coal plant and this is how the BBC’s
graph comes about roughly saying that the quote unquote
total cost of wind power is less than that of the combined cycle gas in their
case however that cost does not include the cost of integrating the wind power
and using it as part of a dispatchable supply system that cost the additional
cost there you can see how that comes about by considering the economics of
Phoenix coal okay so Phoenix coal has to be able to back up the wind turbines
when the wind is not blowing so this plant also has a nameplate capacity of
1,000 megawatts and it has like the Penguins plant it has 75 percent
availability and its capacity factor is only 50 percent in this case that’s
because there’s the same demand for 750 megawatts years of electricity that’s
what the city Brit Cit will buy 250 of those are already supplied by the wind
farm so only 500 megawatt years are sold every year by Phoenix coal in order to
produce that their costs are 750 gold bars of rent the same as the penguin
coal companies and a direct cost of the fuel of 500 gold bars so that is
decreased in proportion to the lower amount
of electricity they are producing the total cost of operating for a year for
Phoenix coal is therefore one thousand two hundred and fifty gold bars giving
an operating cost per megawatt year of 2.5 gold bars though this operating cost
is much higher than the penguin coal companies operating cost per megawatt
year that is because the same fixed costs have to now be divided among a
smaller amount of total production because some of the production has been
displaced by Frost renewables so what does this mean this explains how the
overall operating cost per megawatt here for Beast mixed energy is now one third
of the energy is produced by wind so we take an average of one third of a
megawatt year produced by wind and two thirds of a megawatt here produced by
Phoenix coal and taking that average beast mixed energy generates electricity
at a cost of two point two nine gold bars per megawatt year so this explains
how even though the levelized cost of the wind system on its own is lower than
it is for the penguin coal companies levelized cost nonetheless the cost of
keeping beast mixed Energy’s supply dispatchable increases the other costs
buy a whole gold bar in this way Brits it’s well intentioned but incompetent
civil servants manage to produce much more expensive electricity for their
city than the top hat wearing capitalist the penguin manages to produce for the
good people of Gotham City now how then should we compare different energy
sources if we want to decide which is the cheapest well if we’re comparing two
dispatchable sources like coal and combined cycle gas then it would be fine
to just compare the levelized cost of electricity from each plant it’s when
we’re comparing a dispatchable source like combined cycle gas with a non
dispatchable source like wind power that we have to be careful because the extra
cost of integration to make the wind power dispatch
trouble is not accounted for just looking at levelized costs what we have
to do in this case is take the levelized cost of the wind power plant that’s the
one point eight six gold bars per megawatt year and compare it with the
marginal cost of the coal plant the marginal cost is just the direct cost of
fuel for producing the extra megawatt year of power mixed costs for the coal
plant are not decreased by having the wind power available some of the time as
well so what we need to compare is the 1.86
gig or gold bars per megawatt year of the wind plant with the one gold bar per
megawatt year direct fuel costs of the power of the coal power system and in
that way we see that the wind farm is not going to decrease the average costs
of beast’ mixed energy when it’s used to provide some supply the takeaway message
is therefore that when we want to compare renewable non-disposable wind
power with dispatchable fossil fuels we need to compare the marginal cost of the
fossil fuel with the levelized cost of the wind turbine system I hope that
clears up how the bbc’s graph claims that wind power is slightly cheaper than
combined cycle gas and yet the more wind power is added to a grid the more
expensive the domestic electricity prices become and I hope that’s
explained to you what is levelized cost of electricity well I hope you enjoyed
that fascinating statistics note and I will see you in the future