Abstract
The levelized cost of energy (LCOE) approach has become popular, especially in the field of renewable energy. We argue that when assessing levelized cost of energy, different rates should be used for borrowing and discount rates. We further argue that the risk-free rate should be used for discounting when assessing and comparing the cost of energy across different producers and technologies. Recent analyses used the same rate for borrowing and discounting, which leads to underestimation of the cost for risky borrowers and to distorted sensitivities of the cost to financial and non-financial factors. Specifically, it is shown that they may lead to gross underestimation of the importance of solar-to-electricity conversion efficiency when applied to photovoltaics. The importance of device efficiency is re-established under the treatment of the discount rate proposed here.
Highlights
Realistic estimates of the costs of energy from emerging energy generation technologies such as large-scale photovoltaic (PV) installations are necessary to guide rational resource allocation and to create a viable PV industry [1]
In Ref. [6], the levelized cost of energy (LCOE) from photovoltaic installations was computed based on a number of assumptions about insolation, solar cell efficiency and its temporal degradation, as well as prevailing financial variables such as capital costs, and tax rates or subsidies
We proposed a corrected description of financial factors influencing the cost of energy in the LCOE model, solar energy, vs. recently proposed models [2,6,7]
Summary
Realistic estimates of the costs of energy from emerging energy generation technologies such as large-scale photovoltaic (PV) installations are necessary to guide rational resource allocation and to create a viable PV industry [1]. [6], the levelized cost of energy (LCOE) from photovoltaic installations was computed based on a number of assumptions about insolation, solar cell efficiency and its temporal degradation, as well as prevailing financial variables such as capital costs, and tax rates or subsidies. This analysis assumed a mean power conversion efficiency of 16%, i.e., relevant for conventional solid state solar cells. We show how discounting at the financing rates leads to the neglect of risk and to unrealistic dependence of the cost on financial and physical parameters of the plant, and propose an alternative treatment of the discount rate
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