“We’re about to launch a new, free tool on our web site. It calculates the LCOE of your generation project. But what the f*&% is it?"
By Greg Sise.
Are you thinking of building an electricity generator in New Zealand? A windfarm, a solar farm, a geothermal station, a biogas engine, or a diesel generator 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 is 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.
Your generator, once built, will either need to collect revenue as it generates, e.g from the spot market or under a power purchase agreement, or in the case of a smaller generator located on a site where electricity is consumed, the equivalent of revenue is the cost that is avoided by not having to buy electricity from an electricity retailer.
One way of looking at the question of viability, is the electricity price that your generator would need to receive, or avoid, over its lifetime, so that it makes an adequate return on investment. If this price is at or below the price you expect to receive, or avoid, then it may well be viable.
This price is the “Levelised Cost of Energy” (LCOE). 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 cents/kWh) to pay down debt, pay interest, pay all other variable and fixed costs including tax, and make a profit each year which just achieves your target rate. Then $100/MWh would be its LCOE.
Once you have the LCOE, you can compare it to the price you expect to receive, and if the LCOE is equal to or higher than that price, then you might 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.
We’re about to add an LCOE tool to our web site that 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 tool has tool tips for each input that it requires, and our web site will have information about what you will need so that you can use the tool, and a brief overview of how the LCOE is calculated.
Once the data is entered, the LCOE tool calculates the various costs over the project’s lifetime, 35 years in the project to which the chart below relates, and then calculates the price you would need to receive each year to cover those costs, including tax, and to give you your target rate of return on your investment in the project. The project is constructed in year one, then operates from year two to year 36.
In the hypothetical example in the chart, the generator is partly funded by a loan which is paid back over the first ten years of the generator’s operation.
The LCOE in this example is shown by the red line and is $67/MWh (6.7 cents/kWh). We find that LCOEs are significantly affected by a number of the inputs, so you can use the tool to test different values of the various inputs, and therefore determine if you can make your project stack-up in the financial sense.
The inputs required by the tool include the generation type, the capacity and capacity factor of the project, the construction cost, financial details including any debt used to finance the project, operating and maintenance costs, and details of any additional capital payments over the life of the project.
The LCOE tool is coming soon – watch this space…