The levelised cost of energy (LCOE) is the average annual cost...

The levelised cost of energy (LCOE) is the average annual cost per unit of energy where the net present value (NPV) for the plant is zero using a discounted cash flow (DCF) analysis. It is used in the industry to try to make an 'apples with apples' comparison between different technologies and scenarios. Not all LCOE's were created equal! The results depend entirely on the assumptions and industry groups can make their own technology look good by tweaking these assumptions.

My assumptions are as follows:

1. These figures are based on information obtained from EVM for some recent US projects (the only exception is the off-shore wind figures which are based on a project off the coast of Kent, UK). All EVM figures are based on publicly available material. I have also made some assumptions of my own here. For example, the company seems to think the useful life of a solar tower will be 75 years, which is fair enough, but I have scaled it back to 50 years as anything beyond that is pretty speculative in my opinion. Also, the figures I have for total capital cost for the La Paz project say $750 million but that is out of date and I think we would all agree it is more like $800 million, subject to new announcements from the company. (I really do think $800 million is optimistic, but, hey, who am I to argue if the company says it can get a guaranteed fixed price from the contractors?)

2. Discount rate = 5%. I think this is fair enough given the depressed monetary policy in countries like the US. It is meant to represent the future cost of money, or the cost of capital.

3. I have used a very 'vanilla' method - I have not split the total capital cost into debt and equity - I have simply assumed debt at 5% in the form of the discount rate.

4. I have assumed construction periods of one year for wind and solar PV, two years for solar thermal (CST) and EVM, three years for NGCC (natural gas combined cycle) and four years for Old King Coal. In this analysis with no depreciation or income tax, the construction period seems to make very little difference.

5. I have assumed no depreciation, income tax or any government incentives, loan guarantees, rebates or even carbon price.

6. I have assumed no extra costs for water other than the estimated variable operating costs per MWHr as per the data I have obtained. This includes costs for fossil fuels like coal and gas.

7. The cheapest is clearly the gas (NGCC), with EVM not far behind at all. The figures I have for the gas plant quote a 50% capacity factor, but gas can be much higher than that - around 80%. I can only assume the project figures were for a peaking power plant.

8. I would expect a market premium for technologies that use no water and produce no pollution or greenhouse gases (nudge nudge... wink wink...) and don't require an enormous global supply chain for fossil fuel. I would also expect prices for solar technologies (particularly solar PV) to trend down and for fossil fuel generation to trend up. We also know the last ever coal-fired power station in the USA has probably already been built - due to recent EPA restrictions - hooray for that!