1: Levelized Cost of Energy Calculation

Methodology and Sensitivity

What is LCOE?

Levelized Cost of Energy (LCOE) is the constant unit cost (per kWh or MWh) of a payment stream that has the same present value as the total cost of building and operating a generating plant over its life.
Initial Investment and Annual Costs
$1,000,000 LCOE $750,000 Annual Cost ($) $125 LCOE ($/MWh) $150

$500,000

Equity Investment Debt Service Operating Expenses Taxes LCOE

$100

$250,000

$75

$0 0 2 4 6 8 10 12 14 16 18 Year
-2

$50 20

Why Use LCOE?

Very useful in comparing technologies with different operating characteristics

LCOE Range based on Capacity Factor Range Solar Thermal

Solar PV

Wind - Offshore Deep Wind - Offshore Shallow Wind - Onshore 0

Typically, LCOEs are calculated over 20 to 40 year life, and are given in the units of currency per kWh or MWh
0.5 1 1.5 Levelized Cost of Energy (RMB/kWh) 2

-3

Different Ways to Calculate LCOE.

Simplified LCOE Approach 1. Using a discount rate i, the capital recovery factor (CRF) is:
CRF = i(1 + i) n [(1 + i) n]-1
2.

Discount rate

Used to convert future costs to present value. Typically based on market interest rates or weighted cost of capital (WACC), with or without adjustments for risk and uncertainty. Can vary depending on the entity. Can be Real or Nominal

The sLCOE is the minimum price at which energy must be sold for an energy project to break even (or have present value of zero)
sLCOE = [(capital cost * CRF)+ fixed O&M cost] (8.76 * capacity factor)

+ (variable O&M cost * output )

-4

Different Ways to Calculate LCOE.

Cost of Generation Calculator
All inputs are in blue.

T echnology Assumptions Project Capacity (MW) Capital Cost ($/kW) Fixed O&M ($/kW) Fixed O&M Escalation Variable O&M ($/MWh) Variable O&M Escalation Fuel Cost ($/MBtu) Fuel Cost Escalation Heat Rate (Btu/kWh) Capacity Factor Misc Revenue ($/MWh) Misc Escalation Degradation Year 0

1 $2,000 $50 2.5% $0 2.5% $0 2.5% 0 35% $0 2.5% 1% 1 3,066 $139.35 $0.00 $427,249 2 3,035 $139.35 $0.00 $422,976

Financial/Economic Asumptions Debt Percentage Debt Rate Debt Term (years) Economic Life (years) Percent 5-year MACRS Percent 7-year MACRS Percent 15-year MACRS Percent 20-year MACRS Energy Price Escalation Tax Rate Cost of Equity Discount Rate

Financial Model Approach

50% 8.00% 15 25 0% 0% 0% 100% 0.0% 50% 14.00% 9.000%

Financial model that solves for the required revenue (LCOE) to achieve a certain internal rate of return (IRR). Captures impacts of tax incentives and depreciation. Captures more complex financing assumptions and revenue requirements for an IPP

3 3,005 $139.35 $0.00 $418,746

4 2,975 $139.35 $0.00 $414,559 $53,845 $0 $0 $53,845 $70,435 $46,395 $116,830 $0 $0 $0 $123,540 $166,739 $0 $83,370 160,515

5 2,945 $139.35 $0.00 $410,413 $55,191 $0 $0 $55,191 $66,723 $50,106 $116,830 $0 $0 $0 $114,260 $174,239 $0 $87,120 151,273

Annual Generation (MW h) LCOE Misc Revenue T otal Operating Revenue Fixed O&M Variable O&M Fuel Cost Operating Expenses Interest Payment Principal Payment Debt Service Tax Depreciation Tax Depreciation Tax Depreciation Tax Depreciation Taxable Income PTC T axes Total 5 7 15 20

AN FIN L E E P L OD AM M
$50,000 $0 $0 $50,000 $51,250 $0 $0 $51,250 $80,000 $36,830 $116,830 $77,054 $39,776 $116,830 $0 $0 $0 $144,380 $150,292 $0 $75,146 179,750

L IA C

$52,531 $0 $0 $52,531

$73,872 $42,958 $116,830

$0 $0 $0 $75,000 $222,249 $0 $111,124 149,295

$0 $0 $0 $133,540 $158,804 $0 $79,402 169,984

(1,000,000)

-5

Real or Nominal LCOE?

1.

Real LCOE (2010 RMB/kWh) Constant stream of values denoted in todays currency (Real) Real LCOE (with Inflation) (RMB/kWh) Nominal path that maintains Real value constant (Nominal) Nominal LCOE (RMB/kWh) Constant stream of values in nominal currency. (Nominal)
Nominal vs. Real LCOE
0.90 2.) Real LCOE with Inflation (Nominal) 0.9

2.

3.

Nominal (RMB/kWh)

0.70 3.) Nominal LCOE

0.7

0.60

0.6

0.50 1.) Real LCOE (2010RMB) 0.40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year

0.5

Real (2010RMB/kWh)

0.80

0.8

0.4

Inflation = 2.5% Discount Rate = 10%

-6

Real or Nominal LCOE?

Real LCOE

Nominal LCOE

Removes effects of inflation associated with O&M and fuel costs Uses Real Discount Rate Analogous to the Year 1 price of a PPA/FIT that increases with inflation each year. Preferred by government/policy makers

Incorporates assumptions regarding inflation Uses Nominal Discount Rate Analogous to a PPA/FIT price that is the constant each year or flat across economic life of project. Preferred by developers/project owners

Example: Real LCOE = 0.50 RMB/kWh and Nominal LCOE = 0.59 RMB/kWh With 2.5% inflation, Nominal LCOE is 18% higher than Real LCOE

Either LCOE is acceptable, but must be clearly communicated.

-7

General Inputs to LCOE Calculation

Determine representative size of projects and locations to estimate remaining projectrelated inputs

Establish boundaries of system

Capital, O&M, fuel cost Performance/resource characteristics Cost of capital (debt/equity) and discount rate Taxes, depreciation and tax incentives (if applicable) Inflation (optional) Transmission/integration costs (optional) Externality costs (optional)

For example, 10 MW wind farm vs. 200 MW wind farm

-8

Making Good Assumptions

Use current data (preferably within the past year) Take the median of data sources Apply method of developing assumptions consistently across technologies Survey market participants Reflect tax conditions and incentives in the country Discuss and agree upon assumptions through stakeholder meetings

-9

Sample Base Case Assumptions and LCOE

Capital Cost O&M (RMB/kW) (RMB/kW-yr) Onshore Wind Solar PV Solar CSP 9,000 20,000 30,000 250 200 300 Capacity Factor 40% 15% 28% LCOE (RMB/kWh) 0.54 1.72 1.66

Economic Life Tax Life for Depreciation O&M Escalation

20 years 20 years 2.5%

Discount Rate Tax Rate WACC

10% 30% 8%

- 10

Sensitivity of LCOE to Assumptions

LCOE of renewable energy can be highly sensitive to input assumptions Different assumptions can change LCOE by 50% or more. Some of the key assumptions are:

Capacity factor (performance) Weighted Cost of capital (WACC) Capital cost

Important to select assumptions in a consistent manner across technologies

- 11

Sensitivity of LCOE (Busbar Cost) to Assumptions for Wind

Onshore Wind LCOE Sensitivity Base Case
Absolute LCOE (RMB/kWh) 0.3 0.4 0.5 0.6 0.7 0.8

Capacity Factor

20%

30%

40%

Costequity-WACC

6%

8%

12%

Capital Cost (RMB/MW)

7,200 9,000 10,800

O&M (RMB/kW)

200
-0.1

250

300

Low

High

-0.2

0.0 0.1 LCOE relative to Base Case (RMB/kWh)

0.2

0.3

- 12

Sensitivity of LCOE (Busbar Cost) to Assumptions for Solar PV

Solar PV LCOE Sensitivity Base Case
1.3 1.4 1.5 1.6 1.7 1.8 Absolute LCOE (RMB/kWh)

1.9

2.0

2.1

2.2

2.3

Cost equity-WACC

6%

8%

12%

Capital Cost (RMB/MW)

16,000

20,000

24,000

Capacity Factor

16%

18%

20%

O&M (RMB/kW)

160

200

240

Low

High

-0.4

-0.3

-0.2

-0.1

0.0

0.1 0.2 0.3 0.4 0.5 LCOE relative to Base Case (RMB/MWh)

0.6

- 13

Sensitivity of LCOE (Busbar Cost) to Assumptions for Solar CSP

Solar CSP LCOE Sensitivity Base Case
Absolute LCOE (RMB/kWh) 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4

Costequity-WACC

6%

8%

12%

Capital Cost (RMB/MW)

24,000

30,000

36,000

Capacity Factor

26% 28% 30%

O&M (RMB/kW)

240 300 360

-0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 LCOE relative to Base Case (RMB/kWh)

Low

High

-0.4

0.5

0.6

0.7

- 14

Cost vs. Value Concepts for LCOE

Busbar Cost

Busbar Cost

+ Transmission Cost + Integration Cost Capacity Value Energy Value

Delivered Cost

Adjusted Delivered Cost

- 15

Summary

LCOE is the constant unit cost (per kWh or MWh) of a payment stream that has the same present value as the total cost of a generating plant over its life. There are multiple ways to calculate LCOE, depending on the level of financial detail LCOE can be Real or Nominal Establishing boundaries of each system for assumptions is important Assumptions can have significant impact on the resulting LCOE, so consistent assumptions across technologies are important

- 16