MONDAY’S STUDY: New Energy Costs Get Better

Levelized Cost of Energy Analysis – Version 13.0

November 2019 (Lazard)

Introduction

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

• Comparative LCOE analysis for various generation technologies on a $/MWh basis, including sensitivities for U.S. federal tax subsidies, fuel prices and costs of capital

• Illustration of how the LCOE of onshore wind and utility-scale solar compare to the marginal cost of selected conventional generation technologies

• Historical LCOE comparison of various utility-scale generation technologies

• Illustration of the historical LCOE declines for wind and utility-scale solar technologies

• Illustration of how the LCOEs of utility-scale solar and wind compare to those of gas peaking and combined cycle

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

• Deconstruction of the LCOE for various generation technologies by capital cost, fixed operations and maintenance expense, variable operations and maintenance expense and fuel cost

• Overview of the methodology utilized to prepare Lazard’s LCOE analysis

• Considerations regarding the operating characteristics and applications of various generation technologies

• An illustrative comparison of the value of carbon abatement of various renewable energy technologies

• Summary of assumptions utilized in Lazard’s LCOE analysis

• Summary considerations in respect of Lazard’s approach to evaluating the LCOE of various conventional and renewable energy technologies

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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; network upgrades, transmission, congestion or other integration-related costs; significant permitting or other development costs, unless otherwise noted; and costs of complying with various environmental regulations (e.g., carbon emissions offsets or emissions control systems). This analysis also does not address potential social and environmental externalities, including, for example, the social costs and rate consequences for those who cannot afford distributed 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, airborne pollutants, greenhouse gases, etc.)

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Selected renewable energy generation technologies are cost-competitive with conventional generation technologies under certain circumstances

The Investment Tax Credit (“ITC”) and Production Tax Credit (“PTC”), extended in December 2015, remain an important component of the levelized cost of renewable energy generation technologies

Variations in fuel prices can materially affect the LCOE of conventional generation technologies, but direct comparisons to “competing” renewable energy generation technologies must take into account issues such as dispatch characteristics (e.g., baseload and/or dispatchable intermediate capacity vs. those of peaking or intermittent technologies)

A key consideration in determining the LCOE values for utility-scale generation technologies is the cost, and availability, of capital(1) ; this dynamic is particularly significant for renewable energy generation technologies

Certain renewable energy generation technologies are approaching an LCOE that is competitive with the marginal cost of existing conventional generation

Lazard’s unsubsidized LCOE analysis indicates significant historical cost declines for utility-scale renewable energy generation technologies driven by, among other factors, decreasing capital costs, improving technologies and increased competition

In light of material declines in the pricing of system components and improvements in efficiency, among other factors, wind and utility-scale solar PV have exhibited dramatic LCOE declines; however, as these industries mature, the rates of decline have diminished

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Solar PV and wind have become increasingly competitive with conventional technologies with similar generation profiles; without storage, however, these resources lack the dispatch characteristics, and associated benefits, of such conventional technologies

In some instances, the capital costs of renewable energy generation technologies have converged with those of certain conventional generation technologies, which coupled with improvements in operational efficiency for renewable energy technologies, have led to a convergence in LCOE between the respective technologies

Certain renewable energy generation technologies are already cost-competitive with conventional generation technologies; a key factor regarding the continued cost decline of renewable energy generation technologies is the ability of technological development and industry scale to continue lowering operating expenses and capital costs for renewable energy generation technologies

Certain renewable energy generation technologies are already cost-competitive with conventional generation technologies; a key factor regarding the continued cost decline of renewable energy generation technologies is the ability of technological development and industry scale to continue lowering operating expenses and capital costs for renewable energy generation technologies

Lazard’s LCOE analysis consists of creating a power plant model representing an illustrative project for each relevant technology and solving for the $/MWh value that results in a levered IRR equal to the assumed cost of equity (see subsequent “Key Assumptions” pages for detailed assumptions by technology)

Despite convergence in the LCOE between certain renewable energy and conventional generation technologies, direct comparisons must take into account issues such as location (e.g., centralized vs. distributed) and dispatch characteristics (e.g., baseload and/or dispatchable intermediate capacity vs. those of peaking or intermittent technologies)

As policymakers consider ways to limit carbon emissions, Lazard’s LCOE analysis provides insight into the economic value associated with carbon abatement offered by renewable energy technologies. This analysis suggests that policies designed to shift power generation towards wind and utility-scale solar could be a particularly cost-effective means of reducing carbon emissions, providing an abatement value of $36 – $41/Ton vs. Coal and $23 – $32/Ton vs. Gas Combined Cycle

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Summary Considerations

Lazard has conducted this analysis comparing the LCOE for various conventional and renewable energy generation technologies in order to understand which renewable energy generation technologies may be cost-competitive with conventional generation technologies, either now or in the future, and under various operating assumptions. We find that renewable energy technologies are complementary to conventional generation technologies, and believe that their use will be increasingly prevalent for a variety of reasons, including to mitigate the environmental and social consequences of various conventional generation technologies, RPS requirements, carbon regulations, continually improving economics as underlying technologies improve and production volumes increase, and supportive regulatory frameworks in certain regions.

In this analysis, Lazard’s approach was to determine the LCOE, 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, etc.) 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 other important metrics. These inputs were originally developed with a leading consulting and engineering firm to the Power & Energy Industry, augmented with Lazard’s commercial knowledge where relevant. This analysis (as well as previous versions) has benefited from additional input from a wide variety of Industry participants and is informed by Lazard’s many client interactions on this topic.

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Lazard has not manipulated the cost of capital or capital structure for various technologies, as the goal of this analysis is to compare the current levelized cost of various generation technologies, rather than the benefits of financial engineering. The results contained herein would be altered by different assumptions regarding capital structure (e.g., increased use of leverage) or the cost of capital (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; network upgrades, transmission, congestion or other integration-related costs; significant permitting or other development costs, unless otherwise noted; and costs of complying with various environmental regulations (e.g., carbon emissions offsets or emissions control systems). This analysis also does not address potential social and environmental externalities, including, for example, the social costs and rate consequences for those who cannot afford distributed 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, airborne pollutants, greenhouse gases, etc.).

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