Evaluation of the Levelized Cost of Energy Method for Analyzing Renewable Energy Systems: A Case Study of System Equivalency Crossover Points Under Varying Analysis Assumptions

Abstract

A modified levelized cost of energy (LCOE) model was created to determine the economic crossover point (measured in ${{\hskip1pt}{\ssr C} {\hskip-7pt} \raise2.4pt \hbox{$\buildrel{\vrule depth0.5pt width5.5pt} \over{\vrule depth0.5pt width5pt}$}{\hskip2pt}}/\hbox{barrel} $ of oil) between a traditional diesel power-generating facility and a hybrid closed-loop wind–hydro energy system on the island of El Hierro. This island represents the first system-of-systems coupled wind and pumped-storage hydroelectric facility in the world aimed at achieving energy independence for an island. LCOE models were developed using fixed baseline oil prices of 30, 40, and 50 ${{\hskip1pt}{\ssr C} {\hskip-7pt} \raise2.4pt \hbox{$\buildrel{\vrule depth0.5pt width5.5pt} \over{\vrule depth0.5pt width5pt}$}{\hskip2pt}}/\hbox{barrel} $ , which is the price range when the construction project was undertaken. The percentage change of the Spanish consumer price index and industrial price index were used to assess the effect of changing oil prices on the LCOE. This paper involved on-site investigation of the technical and financial elements of the project and resulted in an LCOE model that includes investment, operation and maintenance, emissions, and land costs. Sensitivity analyses were carried out at varying inflation and discount rates. Results indicate that the economic crossover point between the energy production systems to be below the current world oil price and within the range of prices when the project was initiated. Increasing inflation rates reduces the crossover point by increasing future costs associated with the diesel system, and increasing discount rates raises the crossover point by discounting future costs associated with diesel fuel expense. Under constant dollar analysis, the LCEO model robustly highlights system equivalency points; however, the inclusion of discount rate challenges this robustness by introducing the potential for gaming the analysis in favor of one technology over another.