Levelized Cost of Energy (LCOE) Projections

Levelized cost of energy (LCOE) is a simple metric that combines the primary technology cost and performance parameters: CAPEX, O&M, and capacity factor. It is included in the ATB for illustrative purposes. The ATB focuses on defining the primary cost and performance parameters for use in electric sector modeling or other analysis where more sophisticated comparisons among technologies are made. The LCOE accounts for the energy component of electric system planning and operation. The LCOE uses an annual average capacity factor when spreading costs over the anticipated energy generation. This annual capacity factor ignores specific operating behavior such as ramping, start-up, and shutdown that could be relevant for more detailed evaluations of generator cost and value. Electricity generation technologies have different capabilities to provide such services. For example, wind and PV are primarily energy service providers, while the other electricity generation technologies provide capacity and flexibility services in addition to energy. These capacity and flexibility services are difficult to value and depend strongly on the system in which a new generation plant is introduced. These services are represented in electric sector models such as the ReEDS model and corresponding analysis results such as the Standard Scenarios.

The following three figures illustrate LCOE, which includes the combined impact of CAPEX, O&M, and capacity factor projections for natural gas across the range of resources present in the contiguous United States. For the purposes of the ATB, the costs associated with technology and project risk in the U.S. market are represented in the financing costs, not in the upfront capital costs (e.g. developer fees, contingencies). An individual technology may receive more favorable financing terms outside of the U.S., due to less technology and project risk, caused by more project development experience (e.g. offshore wind in Europe), or more government or market guarantees. The R&D Only LCOE sensitivity cases present the range of LCOE based on financial conditions that are held constant over time unless R&D affects them, and they reflect different levels of technology risk. This case excludes effects of tax reform, tax credits, technology-specific tariffs, and changing interest rates over time. The R&D + Market LCOE case adds to these the financial assumptions (1) the changes over time consistent with projections in the Annual Energy Outlook and (2) the effects of tax reform, tax credits, and tariffs. The ATB representative plant characteristics that best align with those of recently installed or anticipated near-term natural gas plants are associated with Gas-CC-HighCF. Data for all the resource categories can be found in the ATB data spreadsheet.

R&D Only | R&D + Market

• R&D Only
• R&D + Market
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R&D Only

The ATB representative plant characteristics that best align with those of recently installed or anticipated near-term natural gas plants are associated with Gas-CC-HighCF.

R&D Only Financial Assumptions (constant background rates, no tax or tariff changes)

R&D + Market

The ATB representative plant characteristics that best align with those of recently installed or anticipated near-term natural gas plants are associated with Gas-CC-HighCF.

R&D Only + Market Financial Assumptions (dynamic background rates, taxes, and tariffs)

The LCOE of natural gas plants is directly impacted by the price of the natural gas fuel, so we include low, median, and high natural gas price trajectories. The LCOE is also impacted by variations in the heat rate and O&M costs. Because the reference and high natural gas price projections from AEO 2017 are rising over time, the LCOE of new natural gas plants can actually increase over time if the gas prices rise faster than the capital costs decline. For a given year, the LCOE assumes that the fuel prices from that year continue throughout the lifetime of the plant.

These projections do not include any cost of carbon, which would influence the LCOE of fossil units. Also, for CCS plants, the potential revenue from selling the captured carbon is not included (e.g., enhanced oil recovery operation may purchase CO2 from a CCS plant).

Fuel prices are based on the AEO 2017 (EIA 2017).

To estimate LCOE, assumptions about the cost of capital to finance electricity generation , and the LCOE calculations are sensitive to these financial assumptions. Three project finance structures are used within the ATB:

• R&D Only Financial Assumptions: This sensitivity case allows technology-specific changes to debt interest rates, return on equity rates, and debt fraction to reflect effects of R&D on technological risk perception, but it holds background rates constant at 2016 values from AEO 2018 and excludes effects of tax reform, tax credits, and tariffs. A constant cost recovery period-or period over which the initial capital investment is recovered-of 30 years is assumed for all technologies.
• R&D Only + Market Financial Assumptions: This sensitivity case retains the technology-specific changes to debt interest, return on equity rates, and debt fraction from the R&D Only case and adds in the variation over time consistent with AEO 2018, as well as effects of tax reform, tax credits, and tariffs. As in the R&D Only case, a constant cost recovery period-or period over which the initial capital investment is recovered-of 30 years is assumed for all technologies. For a detailed discussion of these assumptions, see Changes from 2017 ATB to 2018 ATB.
• ReEDS Financial Assumptions: ReEDS uses the R&D Only + Market Financial Assumptions for the "Mid" technology cost scenario.

These parameters are allowed to vary by year. The equations and variables used to estimate LCOE are defined on the equations and variables page. For illustration of the impact of changing financial structures such as WACC, see Project Finance Impact on LCOE. For LCOE estimates for the Constant, Mid, and Low technology cost scenarios for all technologies, see 2018 ATB Cost and Performance Summary.