Keywords

Capital cost; levelized cost; solar collection field; cost of solar cells; commodity costs; maintenance costs; finance costs; solar production cost parity

Levelized Cost of Energy Model

In order to get around this problem, economists have devised a model that provides an estimate of the lifetime cost of electricity before the station is built. Of course, since the plant does not yet exist, the model requires a large number of assumptions and estimates. In order to make this model as useful as possible, all future costs are also converted to the equivalent cost today by using a parameter known as the discount rate. The discount rate is almost the same as the interest rate and relates to the way in which the value of one unit of currency falls (typically, but it could rise) in the future. This allows, for example, the maintenance cost of a solar thermal power plant 20 years into the future to be converted into an equivalent cost today. The discount rate can also be applied to the cost of electricity from the solar power plant in 20 years’ time.

The economic model is called the levelized cost of electricity (LCOE) model. It contains a lot of assumptions and flaws, but it is the most commonly used method available for estimating the cost of electricity from a new power plant.

When calculating the economics of new power plants, the levelized cost is one factor to consider. Another is the overall capital cost of building the generating facility. This has a significant effect on the cost of electricity, but it is also important because it shows the financial investment that must be made before the power plant generates any electricity. The comparative size of the investment needed to build different types of power stations may determine the actual type of plant built, even before the cost of electricity is taken into account. Capital cost is usually expressed in terms of the cost per kilowatt of generating capacity in order to allow comparisons between technologies.

When comparing different types of power stations, there are other factors that need to be considered too. The type of fuel, if any, that it uses is one. A coal-fired power station costs much more to build than a gas-fired power station, but the fuel it burns is relatively cheap. Renewable power plants can also be relatively expensive to build. However, they normally have no fuel costs because the energy they exploit is from a river, from the wind, or from the Sun, and there is no economic cost for taking that energy. Once the renewable power plant has been paid for, the electricity it produces will have a low cost. All these factors may need to be balanced when making a decision to build a new power station.

The Capital Cost of Solar Power Plants

The capital cost of a solar power plant depends on a number of factors, the most important of which is the cost of the components needed to build the plant. For a solar power plant, these components include the collection field with its mirrors and tracking systems, heat exchangers, the steam generator and steam turbine, and ancillary equipment. In this type of plant the collector field can account for up to 50% of the total cost, depending upon the type of plant. For a solar photovoltaic (pV) plant the solar modules will probably account for close to half the cost, while the balance of the plant will account for the rest.

The cost of the components needed to construct the plant and the labor required to build it can be rolled up into a figure called the overnight capital cost, which excludes the cost of any loans needed to finance the building of the plant. The overnight capital costs of both solar thermal and solar pV plants in the United States are shown in Table 12.1. The figures in the table are from the U.S. Energy Information Administration’s (EIA’s) Annual Energy Outlook for each year in the table; the figure refers to the cost calculated for the year previous to the publication year.

For solar thermal plants the estimated cost in the 2001 report was $3681/kW. At that time there were no major U.S. solar thermal plants in operation. The estimate fell dramatically in 2003 to $2204/kW, before rising to $2675/kW by 2007. There was a steep jump in 2009, coinciding with a sharp rise in commodity prices. After some variations during the financial crisis, the capital cost from the 2015 report was estimated to be $3787/kW.

The estimated capital cost of solar pV power plants has shown similar variations. From $2394/kW in the 2001 report, prices rose to $5750/kW in 2009, but fell back sharply to $3123/kW in the 2015 report. These U.S. EIA solar pV costs are significantly higher than figures from some other sources. Lazard,¹ for example, put the cost in 2015 of utility solar pV at $1600–1750/kW. The cost of rooftop systems was higher.

Predicting the cost of solar pV power plants is difficult because a large part of the price depends on the cost of solar cells or solar modules, and the cost of these has been dropping dramatically, and continues to drop. This is illustrated in Fig. 12.1, which shows how the price of silicon solar cells has varied since 1977. Based on the data in the figure, the cost in 1977 was $76.00/W. In 2015 it was estimated to be $0.30/W. As manufacturing capacity continues to rise and technology improves, the price is likely to drop even further.

The Levelized Cost of Solar Power

For solar power plants the main contribution to the levelized cost of power comes from the capital cost. In addition, there are ongoing maintenance costs for both types, as well as the cost of financing any loans.

Table 12.2 shows the levelized cost of solar power in the United States for a number of different solar configurations, based on estimates from Lazard. The levelized cost of residential rooftop installations is $184–300/MWh, and for commercial and industrial rooftop installations it is between $193/MWh and $109/MWh. While these costs are relatively high compared to some of the others in the table, it is important to remember that these installations are competing with the retail cost of power to the residential or commercial consumer. This will be much higher than the average wholesale cost of power to the grid.

For utility-scale solar power plants the levelized cost is much lower. For a plant that uses crystalline silicon solar cells the levelized cost is $58–70/MWh, while for a plant with thin film solar cells the levelized cost is $50–60/MWh. These cost ranges put solar pV in competition with wind power and gas turbine combined cycle plants as among the cheapest sources of power in the United States. Solar cells are traded globally, so costs will be broadly similar across the globe.

Solar thermal power is much more expensive. From Table 12.2 the typical range of levelized cost is $119–181/MWh for a solar thermal plant with energy storage. The cost for a plant without storage (not shown in the table) was estimated to be $251/MWh. Based on these figures solar thermal power is similar in cost to that produced by offshore wind farms.

One key question is when solar power will reach parity with other forms of power generation. On the basis of the figures in Table 12.2, solar pV power appears to be close to parity in the middle of the second decade of the 21st century. The cost of power from competitive forms of power generation will vary from region to region, so it is not possible to make any sweeping claims based on these figures. However, it seems clear that parity is not far away.