Fast forward to today, and using LCOE to argue for the “low cost” of wind and solar has become one of the clearest indications that someone is either disingenuous, misinformed, or relying on an outdated understanding of power systems.
While the battle is not over, policymakers, regulators, and analysts increasingly recognize that the cost of generating electricity and the cost of reliably serving customers every hour of the year are not the same thing. As a result, many of the institutions that spent years promoting LCOE comparisons are now developing their own firming-cost and full-system-cost methodologies to address the shortcomings of their previous analyses.
Success has many fathers, but we like to think we have a legitimate claim to being pivotal players in turning the tide in the war on the LCOE.
In truth, LCOE should never have garnered the media attention that it did.
The issue has never been the LCOE itself, which was not designed to compare the value of dispatchable, fuel-based resources with intermittent, weather-based resources. In fact, many of the organizations publishing LCOE studies at the time explicitly warned against doing so.
The problem was how the metric was (mis)used by wind and solar advocates to peddle the fiction that wind and solar were the cheapest forms of energy. //
The LCOE ignored several things to simplify cost comparisons, such as cost variations throughout a plants lifespan, discount rates variations, performance variations, and most importantly, it didn’t assess system costs to incorporate new resources, such as transmission requirements. This is why it was called the “cost of the busbar,” because it was the cost of electricity generated before hitting the transmission and distribution systems.
It also ignored the value of the electricity produced, as well as the cost of maintaining reliability using intermittent resources—which is understandable for the time, but would have huge implications going forward.
This distinction is critical because electricity generated at different times does not have the same value. Dispatchable generators can generally produce electricity when it is most needed, while wind and solar generate electricity when weather conditions permit. LCOE ignores these differences entirely, treating every megawatt-hour as if it were equally valuable.
In other words, the LCOE was a cost-of-generating metric, as opposed to a cost-of-serving (or system-cost) metric. //
This was the first edition of what we now call the Always On Levelized Cost of Energy (AO-LCOE). For the first time, we were directly incorporating the costs of backup generation, transmission, overbuilding, and curtailment into the cost of wind and solar themselves, rather than pretending those costs existed somewhere else.
