The LCOE is a well known and, thanks to its relative simplicity and transparency, well understood metric for comparing different generation technologies. The common assumptions made in this report – for example assuming identical capacity factors for gas, coal and nuclear plants across regions – ensures that cost differences can be clearly identified. However, this approach neglects the differences in individual systems and markets that considerably influence the competitive position of technologies. These system-specific characteristics interact with the technical and economic characteristics of different technologies, i.e. their variability, dispatchability, response time, cost structure and place in the merit order. This also includes the fact that not all units are dispatched to the same extent across technologies and markets, or that revenues in many markets are determined by fluctuating prices and not, as assumed in the LCOE analysis, by a stable price over a technology’s lifetime.
More importantly, the LCOE metric applies to the level of the individual plant and does not address the value that different generation technology options add to the electricity system at different levels of penetration. The electricity generation of variable renewables of a particular type is correlated and not reliably available at all times. The simultaneity of generation, which is not necessarily correlated with demand, reduces the value of generation. The lack of reliability requires either dispatchable back-up or, alternatively, flexibility options such as storage or demand response to ensure security of supply at all times. Additionally, potentially rapid changes in variable renewable generation need to be balanced. To understand this impact and to ensure that a given demand is satisfied with low-carbon electricity at least cost, electricity system-level analysis is required (see IEA, 2019 and NEA, 2019). Overall, this means that LCOE increasingly needs to be contextualised by other analyses in order to obtain a meaningful picture of the relative competitiveness of different electricity generating technologies.
In order to complement the LCOE approach and enable a more system specific cost comparison, the IEA has developed a methodology to adjust the costs by a system value component known as the value adjusted LCOE (VALCOE). It modifies the LCOE of an individual technology in a particular electricity system according to its contribution to enabling all aspects of securely operating the system. Crucially, the calculated results reflect the value in existing, i.e. brownfield systems and their possible future development.
The results illustrate that a technology’s plant-level generating costs can vary significantly from its value to the system. The importance of taking this into account is especially striking when considering variable renewables: solar PV units show a high correlation in the output of individual plants resulting, in the analysed scenarios, in a significant reduction of the generation value with increasing shares. Curtailment during hours of high production is an additional issue and may in practice reduce load factors and increase LCOE compared to reported values. This would be taken into account in the system analysis. By contrast, the output of wind plants is less correlated among individual units and thus its loss in value is less even as its share increases. At current levels of capacity, the impact of correlation is still limited in many markets, but it may rise if ambitious renewable targets are realised and relative shares increase. Technologies with high variable costs (such as high-flexibility open-cycle gas turbines), that produce only during a few hours with very high prices, provide on average a higher value (per unit of generation) to the system. Baseload plants, typically CCGTs (an exception is Europe, where they are mostly operating during hours with high residual load), coal and nuclear, that produce reliably over a high number of hours provide a value similar to the system average.
The results reported in Figure ES6 provide sample results of IEA’s VALCOE analysis for the European Union, China and the United States. While covering these large geographical regions, the model does not take into account grid bottlenecks or cross-border flows but instead assumes full integration across areas. Results thus potentially underestimate the flexibility constraints of future systems. The VALCOE measure provides an innovative approach to capture the complexities of system analysis in a single metric. Values depend not only on the overall share of variable renewables, but also on the costs of complementary resources such as energy storage or interconnections and the costs of competing technologies. Contrary to many other system analysis that simulate future system developments assuming long-run cost optimality, the scenario underlying the VALCOE calculations tries to replicate real-world systems. Future work will systematise and refine current results.
Assessing the system contribution of different generation technologies provides a more complete picture of their economic costs. However, in order to obtain a measure of their full costs to society, the impacts on human health (both through air pollution and through major accidents), the environment, employment, the availability of natural resources and the security of supply need to be included (see, for instance, NEA 2018).