NewEnergyNews: TODAY’S STUDY: NEW ENERGY BECOMES PRICE COMPETITIVE

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    Wednesday, October 15, 2014

    TODAY’S STUDY: NEW ENERGY BECOMES PRICE COMPETITIVE

    Lazard's Levelized Cost Of Energy Analysis — Version 8.0

    September 2014 (Lazard)

    Introduction

    Lazard’s Levelized Cost of Energy Analysis (“LCOE”) addresses the following topics:

     Comparative “levelized cost of energy” for various technologies on a $/MWh basis, including sensitivities, as relevant, for U.S. federal tax subsidies, fuel costs, geography and cost of capital, among other factors

     Comparison of the implied cost of carbon abatement given resource planning decisions for various generation technologies

     Illustration of how the cost of utility-scale and rooftop solar-produced energy compares against generation rates in large metropolitan areas of the United States

     Illustration of utility-scale and rooftop solar versus peaking generation technologies globally

     Illustration of how the costs of utility-scale and rooftop solar and wind vary across the United States, based on average available resources

     Forecast of rooftop solar levelized cost of energy through 2017

     Comparison of assumed capital costs on a $/kW basis for various generation technologies

     Decomposition of the levelized cost of energy for various generation technologies by capital cost, fixed operations and maintenance expense, variable operations and maintenance expense, and fuel cost, as relevant

     Considerations regarding the usage characteristics and applicability of various generation technologies, taking into account factors such as location requirements/constraints, dispatch capability, land and water requirements and other contingencies

     Summary assumptions for the various generation technologies examined

     Summary of Lazard’s approach to comparing the levelized cost of energy for various conventional and Alternative Energy generation technologies

    Other factors would also have a potentially significant effect on the results contained herein, but have not been examined in the scope of this current analysis. These additional factors, among others, could include: capacity value vs. energy value; stranded costs related to distributed generation or otherwise; network upgrade, transmission or congestion costs; integration costs; and costs of complying with various environmental regulations (e.g., carbon emissions offsets, emissions control systems). The analysis also does not address potential social and environmental externalities, including, for example, the social costs and rate consequences for those who cannot afford distribution generation solutions, as well as the long-term residual and societal consequences of various conventional generation technologies that are difficult to measure (e.g., nuclear waste disposal, environmental impacts, etc.)

    While prior versions of this study have presented the LCOE inclusive of the U.S. Federal Investment Tax Credit and Production Tax Credit, Versions 6.0 – 8.0 present the LCOE on an unsubsidized basis, except as noted on the page titled “Levelized Cost of Energy—Sensitivity to U.S. Federal Tax Subsidies”

    Unsubsidized Levelized Cost of Energy Comparison

    Certain Alternative Energy generation technologies are cost-competitive with conventional generation technologies under some scenarios; such observation does not take into account potential social and environmental externalities (e.g., social costs of distributed generation, environmental consequences of certain conventional generation technologies, etc.) or reliability-related considerations (e.g., transmission and back-up generation costs associated with certain Alternative Energy generation technologies)

    Levelized Cost of Energy—Sensitivity to U.S. Federal Tax Subsidies

    U.S. federal tax subsidies remain an important component of the economics of Alternative Energy generation technologies (and government incentives are, generally, currently important in all regions); while some Alternative Energy generation technologies have achieved notional “grid parity” under certain conditions (e.g., best-in-class wind/solar resource), such observation does not take into account potential social and environmental externalities (e.g., social costs of distributed generation, environmental consequences of certain conventional generation technologies, etc.) or reliability-related considerations (e.g., transmission and back-up generation costs associated with certain Alternative Energy generation technologies)

    Levelized Cost of Energy Comparison—Sensitivity to Fuel Prices

    Variations in fuel prices can materially affect the levelized cost of energy for conventional generation technologies, but direct comparisons against “competing” Alternative Energy generation technologies must take into account issues such as dispatch characteristics (e.g., baseload and/or dispatchable intermediate load vs. peaking or intermittent technologies)…

    Solar versus Peaking Capacity—Global Markets

    Solar PV can be an attractive resource relative to gas and diesel-fired peaking in many parts of the world due to high fuel costs; without storage, however, solar lacks the dispatch characteristics of conventional peaking technologies

    Wind and Solar Resource—U.S. Regional Sensitivity (Unsubsidized)

    The availability of wind and solar resource has a meaningful impact on the levelized cost of energy for various regions of the United States. This regional analysis varies capacity factors as a proxy for resource availability, while holding other variables constant. There are a variety of other factors (e.g., transmission, back-up generation/system reliability costs, labor rates, permitting and other costs) that would also impact regional costs

    Levelized Cost of Energy—Wind/Solar PV (Historical)

    Over the last five years, wind and solar PV have become increasingly cost-competitive with conventional generation technologies, on an unsubsidized basis, in light of material declines in the pricing of system components (e.g., panels, inverters, racking, turbines, etc.), and dramatic improvements in efficiency, among other factors

    Levelized Cost of Energy—Rooftop Solar (Forecasted)

    Rooftop solar has benefited from the rapid decline in price of both panels and key balance-of-system components (e.g., inverters, racking, etc.); while the small-scale nature and added complexity of rooftop installation limit cost reduction levels (vs. levels observed in utility-scale applications), more efficient installation techniques, lower costs of capital and improved supply chains will contribute to a lower rooftop solar LCOE over time

    Capital Cost Comparison

    While capital costs for a number of Alternative Energy generation technologies (e.g., solar PV, solar thermal) are currently in excess of some conventional generation technologies (e.g., gas), declining costs for many Alternative Energy generation technologies, coupled with rising long-term construction and uncertain long-term fuel costs for conventional generation technologies, are working to close formerly wide gaps in electricity costs. This assessment, however, does not take into account issues such as dispatch characteristics, capacity factors, fuel and other costs needed to compare generation technologies

    Levelized Cost of Energy—Sensitivity to Cost of Capital

    A key issue facing Alternative Energy generation technologies resulting from the potential for intermittently disrupted capital markets (and the relatively immature state of some aspects of financing Alternative Energy technologies) is the impact of the availability and cost of capital(a) on their LCOEs; availability and cost of capital have a particularly significant impact on Alternative Energy generation technologies, whose costs reflect essentially the return on, and of, the capital investment required to build them…

    Summary Considerations

    Lazard has conducted this study comparing the levelized cost of energy for various conventional and Alternative Energy generation technologies in order to understand which Alternative Energy generation technologies may be cost-competitive with conventional generation technologies, either now or in the future, and under various operating assumptions, as well as to understand which technologies are best suited for various applications based on locational requirements, dispatch characteristics and other factors. We find that Alternative Energy technologies are complementary to conventional generation technologies, and believe that their use will be increasingly prevalent for a variety of reasons, including RPS requirements, carbon regulations, continually improving economics as underlying technologies improve and production volumes increase, and government subsidies in certain regions.

    In this study, Lazard’s approach was to determine the levelized cost of energy, on a $/MWh basis, that would provide an after-tax IRR to equity holders equal to an assumed cost of equity capital. Certain assumptions (e.g., required debt and equity returns, capital structure, and economic life) were identical for all technologies, in order to isolate the effects of key differentiated inputs such as investment costs, capacity factors, operating costs, fuel costs (where relevant) and U.S. federal tax incentives on the levelized cost of energy. These inputs were developed with a leading consulting and engineering firm to the Power & Energy Industry, augmented with Lazard’s commercial knowledge where relevant. This study (as well as previous versions) has benefitted from additional input from a wide variety of industry participants.

    Lazard has not manipulated capital costs or capital structure for various technologies, as the goal of the study was to compare the current state of various generation technologies, rather than the benefits of financial engineering. The results contained in this study would be altered by different assumptions regarding capital structure (e.g., increased use of leverage) or capital costs (e.g., a willingness to accept lower returns than those assumed herein).

    Key sensitivities examined included fuel costs and tax subsidies. Other factors would also have a potentially significant effect on the results contained herein, but have not been examined in the scope of this current analysis. These additional factors, among others, could include: capacity value vs. energy value; stranded costs related to distributed generation or otherwise; network upgrade, transmission or congestion costs; integration costs; and costs of complying with various environmental regulations (e.g., carbon emissions offsets, emissions control systems). The analysis also does not address potential social and environmental externalities, including, for example, the social costs and rate consequences for those who cannot afford distribution generation solutions, as well as the long-term residual and societal consequences of various conventional generation technologies that are difficult to measure (e.g., nuclear waste disposal, environmental impacts, etc.)

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