Are you thinking of building an electricity generator in New Zealand? A windfarm, a solar farm, a geothermal station, or a biogas turbine perhaps? Is it large or small?
Whatever it is, you probably want to know that it is a ‘viable’ proposition, or not, as the case may be.
You might build a generator for a variety of reasons, but when we talk of being viable, we usually mean that it's viable in the financial sense, which is to say that it will provide positive cash flows over its useful lifetime, and a positive return on the investment required to build it in the first place.
One way of looking at the question of viability, is the electricity price that your generator would need to receive over its lifetime so that it makes an adequate return on investment, i.e. your target return on investment.
This is what the Levelised Cost of Energy (LCOE) tells you. By definition, the LCOE of a generation plant is the constant average annual electricity price attained by the plant over its lifetime that just achieves target return on investment after covering all fixed and variable cash costs.
For example, suppose you were looking to build a windfarm with a 25-year lifetime, and you worked out that it needed an average annual price, when generating, in every year, of $100/MWh (the same as 10 c/kWh) to pay down debt, pay interest, pay all other variable and fixed costs, and make a profit each year which just achieves your target rate. Then $100/MWh would be its LCOE.
The LCOE is, by definition, a constant value, so it doesn’t increase over time with inflation.
Once you have the LCOE, you can compare it to the price you expect to receive if you are selling the project’s generation output to another party, or the cost that you will avoid if your project reduces the amount of electricity you expect to purchase in future, e.g. if you are a large electricity consumer putting solar panels on a large warehouse roof.
If the LCOE is equal to or higher than your estimate of the received or avoided price, then you might decide to investigate the project in more detail.
For example, suppose your LCOE is $70/MWh and you expect to receive an average price of $72/MWh by selling the project’s output into the electricity spot market, or under a “power purchase agreement” with a single buyer, then you might decide to investigate further.
Or if your project is on-site, and reduces your electricity consumption, and it reduces your electricity cost by $100 for every MWh that you don’t have to buy from an electricity retailer, you might also decide to investigate further.
Where do you get the expected prices from? That is a very good question, and you should contact Energy Link to find out more.
A word of caution: don’t compare your LCOE directly to prices you might be able to access on the internet. For example, you can go to the ASX and look up the price of electricity futures contracts pertaining to the North and South islands, but these are for very specific locations, and they are also the prices received by generators that produce the same output power in every hour across the year. The prices don’t relate directly to a windfarm or a solar farm, for example, located elsewhere. Confused? Contact us at Energy Link and we can explain in more detail.
The LCOE Calculator makes calculating your project’s LCOE easy – just follow the steps. But you will need to know some basic information about your project.
The LCOE Calculator has Calculator tips for each input that it requires. You can jump straight to the LCOE Calculator here or read on to learn about the information you will need so that you can use the Calculator, and a brief overview of how the LCOE is calculated.
The Legal Stuff - Contact Details, Status and Disclaimer
The LCOE will be emailed to you, including your inputs, so we need a name for your generation project and your email address. After working through the Calculator once, clicking on the SUBMIT button on the last page of the Calculator (page 5), you will be sent an email. You can then go BACK and change inputs: every time you change the inputs and go through to SUBMIT, you will get another email with the updated LCOE.
By supplying us with your email address, you agree to allowing us to keep your email address and project details on our records, and to allow us to contact you for the purposes of marketing. We won’t send you many emails, but we will most likely follow up to see if we can provide you with any further assistance.
We will not use the data that you input, or the LCOEs that we send you, for any purpose other than follow-up marketing, and we will keep your data confidential.
You also agree that you use the LCOE Calculator at your own risk, and that Energy Link does not warrant its accuracy, and shall have no liability whatsoever for the use you make of the LCOE(s) that you receive from us. In any case, the LCOE is a guide only, and we recommend that you undertake additional investigations before making any decision to commit to a project.
The LCOE Calculator is currently a PROTOTYPE. If we have sufficient interest, we will add additional features and make it more accurate. In the meantime, we will be running spot checks on the LCOEs you receive, and will advise you by email if we find any errors in the LCOEs calculated using your inputs. We will not, however, be checking your inputs.
Each type of generation has its own unique characteristics, so we need to know what type it is, be it solar. wind, geothermal, thermal (gas, coal or wood-fired), or some other type. As an example, the output of a solar farm falls (degrades) by a small percentage each year, whereas this does not typically occur with other types of generation.
The construction start and end date allows the LCOE Calculator to calculate the time that the construction will take to complete. However, the calculator currently assumes it takes one year to construct, regardless of the period you enter here.
Interest and principal repayments on any debt raised for the project are assumed to be repaid starting at the end of the last year of construction.
The capacity and capacity factor of the project are used to calculate the annual output in MWh. The capacity factor is the ratio of the output of the project to the theoretical maximum output. For example, a windfarm of 100 MW might have an expected capacity factor of 40%, which means that on average it will produce 40 MW over each year it operates, although it will produce more in some years and less in some years.
The construction cost is a key input because your project aims to recover this amount over its lifetime, along with other operating costs, plus a return on your investment. Make sure you include all construction costs, including any costs incurred to connect to the grid.
The expected operating life is the period, in years, over which you expect your windfarm to operate, with allowances for normal maintenance, before it has to be substantially rebuilt or dismantled.
It can make a lot of difference to the LCOE how your project is financed. For example, if all other things are equal, then a project financed with a lot of debt at current low interest rates, will almost certainly have a lower LCOE than a project financed solely with your own money (equity), on which you probably want a higher return than what you’ll get at the bank or in bonds.
The percentage of project as debt refers to the percentage of the construction cost that will be funded by debt. The LCOE Calculator assumes that the rest of the funding comes from your own equity.
The cost of debt is the interest rate that you expect to pay on the debt. In actuality, this could change over time, for example if you have to refinance after a few years, so you should enter a value that you think you can achieve through to when you pay back most of the debt’s principal amount.
The principal repayment over is the number of years over which you expect to pay back the debt principal (the term of the loan).
The percentage of debt sets the percentage of your own equity that will go into the project, but the Calculator needs to know the return you are targeting on your equity, after paying tax, called the post-tax cost of equity, entered as a percentage per annum. The cost of equity is a key variable as it is used as the discount rate in the financial model behind the LCOE Calculator.
The tax rate has a default value of 28% which is the company tax rate in New Zealand. The LCOE Calculator assumes that if the project makes a loss in any given year, then this reduces the profit the wider enterprise makes, but does not turn the enterprise profit into a loss. In reality, a loss in your project could turn the enterprise’s profit into a loss, in which case your enterprise would not pay any tax, and the loss would be set off against profits in future years (assuming the enterprise qualifies under the IRD’s rules). However, the LCOE Calculator does not have the ability to carry losses made in one year over into a future year.
To help calculate the profit on the project, and hence the cash tax that must be paid each year, the LCOE calculates depreciation, which is an accounting allocation of the cost of the project as an expense over the life of the project. By default, the LCOE Calculator depreciates the construction cost using a constant amount each year (known as ‘straight line’ diminishing depreciation), equal to the construction cost divided by the life of the project that you enter, e.g. a 20 year lifetime would be depreciated at 5% per year. But you can also select diminishing value depreciation which calculates the annual depreciation expense using a constant percentage of the undepreciated amount.
The IRD has tables of depreciation rates for generation equipment. For example, ‘Solar power harnessing equipment’ can be depreciated using the straight line method at the rate of 10.5% per annum, or 16% on a diminishing value basis. The equivalent values for ‘Wind turbine generators’ are 13.5% and 20% per annum, respectively. For straight line depreciation, as noted above, the LCOE Calculator depreciates the project in equal increments over its lifetime.
Your project will require some maintenance to keep it operating at or near its design output, and you could have other costs such as land rentals, insurance, and you need to include the cost of connecting to the grid. The fixed operations and maintenance cost is a fixed annual amount, independent of how much your project actually generates, which you can also choose to inflate on an annual basis using the fixed OM inflation slider.
On the other hand, the variable operations and maintenance cost is proportional to the amount that your project generates, so it must be expressed in $/MWh (where $10/MWh is the same as 1 c/kWh).
Also on this page is where you can enter the annual plant degradation, e.g. for high quality solar panels this might average 0.5% or less per year, which is expressed as the percentage of the installed capacity, in MW, that is lost each year.
Additional One-off Maintenance Payments
Your project has on-going operating and maintenance costs, but you may also expect to spend larger amounts along the way to keep the project operating at its design capacity. For example, a solar farm might need to have its inverters replaced after 10 or 12 years. Or your generator might need scheduled overhauls at intervals that are measured in years, e.g. every five years, or halfway through the life of the plant.
Enter these additional one-off maintenance payments by entering the month and year, along with the amount that you expect to spend at that time in the future. You can add as many of these as you think you need.
NZECS Certified Generation
Renewable energy certificates are new to New Zealand, but they are offered by Certified Energy, and the LCOE Calculator allows you enter the details of your certificates and includes the certificate revenue in the LCOE calculations.
Enter the sale price per certificate in $/MWh and the percentage of the project that you think will be covered by certificates. The Calculator shows you the revenue that you will receive each year from the sale of the certificates.
The certificates come at a cost, so your sale price should be net of the cost of the certificates, and the revenue will then be net revenue.
New Zealand has committed to reducing net greenhouse emissions to zero by 2050, so it is unlike that new fossil-fuelled generators will be built in this country. However, if you want to work out the LCOE for this type of generation, you can select the ‘Thermal’ generation type, with inputs for fuel and carbon costs.
At the end of a project’s life, it may have some residual value, known as terminal value. This is what you might be able to sell it for, or maybe you could dismantle it and sell parts. We follow the usual LCOE assumption that the terminal value exactly equals the cost of dismantling it and making good the site.
Go to the LCOE Calculator now.