Timing – renewable generation during peak load times has more value than during off peak times.
Ask what would be included in LCOE calculation. Externalities case studies paper – EIA.
Not enough to change cost in relation to renewables.
The world price doesn’t change but domestic supply is upward sloping. In order to encourage more production, prices should increase.
Electricity Pricing and Other Topics
Environmental Economics II Spring 2014
Lecture based on Borenstein and Field Ch. 11
Prof. Maggie Winslow
Levelized Cost of Electricity
• LCOE is the price for electricity required to
equate the NPV of the revenue from
electricity production with the NPV of the
cost of production.
Cn(qn ,...qN )
å qn ´ (1 + r )n = å (1 + r )n
Cn (qn ,...qN )
å (1+ r)n
LCOE = n =0 N
å (1+ r)n
• This is the discounted stream of costs
divided by the discounted stream of
Why is LCOE Important?
• These estimates can affect policy
decisions regarding alternative energy
• However, LCOE is difficult to estimate.
Difficulties in Estimating LCOE
• Forecasts of future fuel prices important but lots of
uncertainty. High variance in forecasts.
• Some generation just for peak times, other for base times so
LCOE not comparable (capacity factor issue)
• Timing of generation is important due to difficulties with
storage – how do you value this?
– Electricity demand is fairly inelastic in the short term so supply
must be very elastic to avoid brownouts.
– Dispatchable vs. intermittent
• Location of generation can make a difference in value due to
cost of transmission.
• Doesn’t include changes in price of electricity year to year
which is relevant to timing of costs and generation.
LCOE and Externalities
• Cost of externalities not included, but
costs of meeting regulations are.
– Would including cost of externalities matter in
choice of generating facility?
How to Promote Renewables?
• Subsidies for green power helpful but not the
– Makes power cheaper so doesn’t promote energy
– Doesn’t recognize the variations in the power
being replaced. e.g. replacing coal fired plant
more beneficial than replacing gas fired plant.
– Not clear that it helps develop the industry for the
• Not the same as taxing brown power
Energy Subsidies (Field, pg.197)
• Reduced taxes for producers to encourage certain
types of production (ethanol, domestic)
• Public support for R&D (ex. coal gasification)
• Public insurance (nuclear power)
• Not charging for externalities (free use of public
• Direct payment for adopting certain technologies.
Energy Subsidies (Borenstein
• Fossil fuel subsidies from 2002- 2008 =
• = about $0.0011 per kWh
• When true value does not show up in the
market, shadow pricing provides a proxy
• This could be used to include the cost of
externalities when evaluating the cost of
various generation options.
Electricity Generation and Environmental Externalities:
Case Studies, DOE/EIA-0598
• Small scale electricity generators being paid for the electricity
• Varies in different areas.
• Difficult due to high fixed cost associated with electricity
generation and distribution.
• Fixed costs can vary little when customers generate their own
• Off-setting peak power could reduce fixed cost needs.