• Hans van Mameren

The Myth of LCOE

Updated: Jun 10, 2021

LCOE (levelized cost of electricity) has become a mantra in discussions on Electrical Energy Generating. It is considered a good tool. By LCOE the costs of the various ways of energy generated can be compared. But is that so?

A cynical expression in IT circles, and still very true, is: Garbage in, gives garbage out. LCOE includes all sorts of energy generated and they are compared with the benchmark of conventional generating: oil or coal. But how useful is it to make a comparison with things that are no longer acceptable. Why compare to coal or oil when we can no longer afford the usage of these sources? The externalities of burning coal or oil should be included as well. Negative effects like health issues, climate change, impact on bio-diversity and so on, are all to be paid for. Either now or in the future.

Various types of Renewable Energy are compared to conventional energy generating. And often Renewables score very well. Pay-back times range from 2 to max 10 years. And still one finds it hard to choose for Renewables. Even when added that a PV panel will last for 20 to 25 years. And yet you are not convinced? Then the following argument might be the last push.

When the fossil fuel age started, the energy value was about a hundred fold the cost of extracting it. It became more and more expensive to extract this value. Some claim it is now less than six times. The influx of value into the economy decreases. That is one of the reasons we cannot generate any meaning full growth in the world economy.

How can? The added value of energy is too low and the external costs are increasing.

It is estimated that the external downstream fossil fuel costs are 1%–2% of the EU’s entire Gross Domestic Product (GDP). For China this estimation is much higher. We are burning away our resources, our health, our environment, our climate and… our economy. When fossil fuels are adding too little to the economy, or even cost money, there can be no economic growth.

But when Renewable Energy has a payback time of less than half its life time, the added value in its second half of life will create growth. And no money is wasted on dealing with all the damage of climate change and consequent matters. The calculation of LCOE should not stop once it passed the breakeven mark. Finish the mathematics and then estimate the contribution to the economy. Growth will come from added value into the economy. Not from free money from Central Banks. And we need such growth in order to clean our world. Cleaning the mess will give an income to some but for the whole of the economy it is just a cost. When Renewables have such large margin between generating costs and the value for the economy, just as oil had when it was starting, renewables can bring that growth.

Mopping the mess we have created will be costly. The sooner we start on the energy transition the sooner Renewables will contribute. The least we have to mop up. Discussions should not be about the costs but about the profits it will bring. The sooner fossil fuels are phased out the least they add to the mess. It are not the least economists who warn about SCC (Social Cost of Carbon). One can argue about the accuracy of such method. But one can no longer deny the negative effect on the economy. When Central Banks are handing out free money they better do it only for sustainable projects. Carbon Tax income should solemnly be used for energy transition. Not as a subsidy for sustainable energy but as an investment in order to save climate and economy for the better of all.

1 https://medium.com/dialogue-and-discourse/the-economics-of-climate-change-explained-e895ff73ee57

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