Shortcomings of the traditional “levelized cost of energy” [LCOE] for the determination of grid parity

Abstract

The LCOE is a widespread indicator, which is often used for cost comparisons of renewable energy technologies with energy prices from the grid in order to determine whether or not grid parity has been achieved. In theory and practice it has been alleged that this is the case if the LCOE is lower or equal than the current energy price. If so, such technologies are considered as marketable and therefore it is assumed that they don't need subsidies any more. However, the application of the “traditional” LCOE formula is not appropriate for such a grid-parity-check and thus can lead to faulty results, policy and investment decisions because it neglects energy price changes over time. Deduced from an NPV formula and exemplified by a sample calculation in this paper it will be shown that an investment can be profitable – in terms of generating a positive NPV – although the traditional LCOE lies above the current price for energy from the grid. And this contradicts the definition of grid parity. We go back to the origin of the problem and present a modification to the traditional LCOE formula, which considers energy price rise and thus allows more accurate LCOE calculations.