Economics of Renewable Energy Plants

When evaluating renewable power plant or new renewable energy projects on an economic basis or comparing the economics of different technologies, the following measures provide insights:

For details on how to finance renewable energy generators, read our separate section on Financing.

Capital Costs

Capital costs are the upfront costs to construct the plant and major maintenance work that needs to be carried out during the lifetime of the plant beyond typical operrating expenses.

To compare different technologies, capital costs are divided by the peak power (or "name plate power") of the plant to get the specific capital cost, where the peak power is the maximum electric power that the plant can deliver.

As the cost for most plant components, especially electric, rises with the required power, the specific capital cost is useful to compare the upfront costs of different technologies.

Among renewable energy sources, solar is now one of the least expensive technologies on a "per MW" basis.

Operating Costs

Operating costs cover operations, maintenance and, where appropriate, costs for fuels. Renewable energy plants tend to be very low on operating costs in comparison with fossil fuel generators.

Capacity Factor

Capacity FactorsThe capacity factor of a power station is the ratio of average output power to peak power that the station could deliver. Due to fluctuations in the availability of the primary energy source and outages due to maintenance of the equipment, the capacity factor is never 100%. In fact, for renewable energy sources, it is mostly below 50%.

The capacity factors of solar plants are particularly low. After all, the sun is only half of the time above the horizon.

Why is this important?

  • All electrical components have to be sized such that they can deliver peak power, which is more cost-efficient when the plant runs at high capacity.
  • Higher capacity factors imply less fluctuation.

Cost of Capital

WACC The weighted average cost of capital is measure of how much money the plant has to pay banks and investors in order to provide them with their expected return on the assets. The returns are shared by debt providers (banks) and investors.

This expected return also reflects the risk associated with the business, or in this case, technology. According to figures published by Zelya Energy, solar photovoltaics are considered a lower risk than wind or liquid gas turbines (LNG).

The wacc is impacted by level of maturity of technology, predicatbility of the energy yield, fuel supply risk and also policy risk. The expectation of rising carbon prices could increase the cost of capital for coal-fired power plants in future. The risk of solar PV is particularly low because the forecast of energy yields of solar modules is more accurate than for other sources.

Levelised Cost of Energy

The levelised cost of energy (lcoe) is the price (per kWh) for generated electricity that makes the net present value of the installation zero. In other words: If the sales price is lower than the lcoe, the plant does not provide the required return. It is a measure of the cost of ownership of the plant.

lcoe formula

We are deducting tax credits from costs in this formula, as they are benefits independent from the sales price level. It is particularly important to take into account any capital allowances (investment tax credits), as their availability may be limited to certain technologies.

In the absence of availiability of tax credits, and assuming that the investment is all made in the first year with constant operating costs and annual energy yield, the formula becomes:

lcoe formula simple

Levelised cost of energy

The levelised cost of energy is a very sophisticated measure, as it takes into account the capital costs, operating costs, cost of capital, capacity factor, generated electricity as well as the timing of all flows.

The graph shows indicative values for levelized cost of energy for different technologies. The wide ranges reflect varying costs of installations depending on size, but also the underlying cost of capital.

The big unknown is the cost of capital. Changing the wacc from 7% to 6% in the same calculation, results in a (-9%) - swing in the level of the cost of energy.

Whilst the levelised cost of energy is the most comprehensive measure, it should be read with utter caution, especially when it is used to compare different technologies.


Marginal Cost

The marginal cost of a power plant is the dollar amount that needs to be spent to generate an additional kWh, over and above the fixed costs associated with the initial investment and operation. With no fuel requirements and very little maintenance, the marginal cost of solar parks is virtually zero, whilst fuel and regular maintenance costs drive up marginal costs for other technologies.

When considering which generators to use in order to meet the electricity demand, generators with the lowest marginal costs should have priority, thus contributing to lower overall cost of providing electricity.

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