The levelized cost of energy and regulatory uncertainty in plant lifetimes

Abstract

The levelized cost of energy is commonly used in both policymaking and capital investment decisions. It unitizes capital costs by amortizing them over an assumed asset life. The life of the asset is usually assumed to be known with certainty. But in many electric power applications, the life is both uncertain and subject to regulatory shocks. In these cases, the standard levelized cost of energy calculation is incorrect and potentially misleading. We propose a corrected version of this measure using expectation under a probability model for shortened life and show its implications for several investment and policy applications.