Debunking Levelized Cost of Energy (LCOE)
Exposing one of the most expensive half-truths ever told.
“It costs a lot of money to look this cheap.” – Dolly Parton
From elementary schools to university campuses, in newspapers and magazines, on televisions, radios, phones, and computers, an unrelenting chant of dogma deafens like no other: wind and solar are the cheapest forms of electricity. The higher prices and degraded grid reliability inevitably found wherever wind and solar achieve meaningful market penetration are of no bother to this Orwellian choir, nor is its mantra quieted by the ongoing collapse of the wind sector. “Wind and solar are the cheapest forms of electricity,” they say, and all evidence to the contrary is merely proof of the need to build more.
Among scores of examples from contemporary media stories, a recent and fawning report in The New York Times stands out for its shameless puffery in this regard. Optimistically titled “The Clean Energy Future Is Arriving Faster Than You Think,” the article hoardes attention with more than 3,000 words written by the four reporters crowding its byline. A little more than halfway in, we come upon the inevitable (emphasis added throughout):
“But clean energy became cheap far faster than anyone expected. Since 2009, the cost of solar power has plunged by 83 percent, while the cost of producing wind power has fallen by more than half. The price of lithium-ion battery cells fell 97 percent over the past three decades.
Today, solar and wind power are the least expensive new sources of electricity in many markets, generating 12 percent of global electricity and rising. This year, for the first time, global investors are expected to pour more money into solar power — some $380 billion — than into drilling for oil.”
Nearly all such claims can be traced back to the same source: Lazard’s so-called levelized cost of energy (LCOE) calculations. How a financial services firm came to be the leading arbiter on the economics of energy sources is a topic for another day but, suffice it to say, Lazard’s woefully inadequate appraisal has ballooned to a degree of importance that must surprise even them. In a classic example of “if you can source it, you can use it,” the Times reporters dutifully give credit to Lazard and, by extension, indemnify themselves from bothering to even superficially probe its veracity:
Like all great lies that go viral, LCOE is a concept that feels like it could be true. To calculate LCOE, Lazard merely tallies up the expected lifetime electricity generation of proposed power plants and compares them to the costs involved in building and maintaining such facilities. As we’ll demonstrate shortly, this is the intellectual equivalent of judging the efficacy of automotive brakes by first tolerating instances in which they stop too abruptly or not at all, washing away such arbitrariness behind the cloak of the almighty mean. Lazard openly admits that its calculations have limitations, but this does little to stop the report’s widespread misuse.
Armed with the veneer of credibility so bestowed by a 175-year-old financial giant, politicians around the world have tripped over themselves to flush trillions in taxpayer money chasing renewable energy unicorns. Why are LCOE calculations flawed? Why are wind and solar irreconcilably disruptive to existing electricity grids, and what is the true long-term potential of these technologies? Let’s run through the five major defects of LCOE analyses, just in time for the holiday cocktail party circuit.