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Lazard's Latest Energy Cost Report Draws Mixed Opinions on Implications



By Mark Watson

November 6, 2017 - The latest Lazard Levelized Cost of Energy Analysis shows a continued decline in US wind and utility-scale photovoltaic solar power costs, relative to conventional resources such as nuclear, coal and some types of gas-fired generation, but industry observers on Friday differed over the report's implications.

The annual report attempts to calculate the power price that would be required in a purchase power agreement in order for a generator of various types to be built and operate with a 12% internal rate of return, according to Lazard, a global financial advisory and asset management company.

"Energy industry participants remain confident in the future of renewables, with new alternative energy projects generating electricity at costs that are now at or below the marginal costs of some conventional generation," said Jonathan Mir, Head of Lazard's North American Power Group, in a prepared statement.

The report, issued Thursday, includes the following ranges for the cost of these generation types, excluding federal subsidies such as wind power's production tax credit and solar power's investment tax credit:

-- Wind, onshore: $30/MWh to $60/MWh

-- Natural gas combined cycle: $42/MWh to $78/MWh

-- Solar PV, utility-scale: $43/MWh to $53/MWh

-- Biomass: $55/MWh to $114/MWh 

-- Coal, conventional: $60/MWh to $143/MWh

-- Natural gas reciprocating engine: $68/MWh to $106/MWh

-- Solar PV, community-scale: $76/MWh to $150/MWh

-- Geothermal: $77/MWh to $117/MWh

-- Solar PV, commercial and industrial: $85/MWh to $194/MWh

-- Coal, integrated gasification combined cycle: $96/MWh to $231/MWh

-- Solar thermal tower with storage: $98/MWh to $181/MWh

-- Nuclear: $112/MWh to $183/MWh

-- Natural gas peaker: $156/MWh to $210/MWh

-- Solar PV, residential rooftop: $187/MWh to $319/MWh

-- Diesel reciprocating engine: $197/MWh to $281/MWh

Joshua Rhodes, a post-doctoral fellow at the University of Texas Energy Institute, said the results do not surprise him, and he considers them valid, because he has been able to replicate similar numbers independently.

"We are seeing this play out in the markets as more than half of new generation capacity in the US added every year since 2007 (except 2013) was from wind and solar," Rhodes said in an email Friday. "I think the markets already know this and will continue on the current trends of adding more wind and solar."

In contrast, Peter Hartley, Rice University economics professor, said he does not trust the results.

"Consider for example, nuclear costs," Hartley said in an email Friday. "While I agree there is substantial uncertainty about the capital costs for nuclear, there should be much less uncertainty about the operating costs. However, I found the previous Lazard estimates of nuclear operating costs to depart enormously from the [US Energy Information Administration] estimates (Lazard mean annual fixed [operations and maintenance] for nuclear was 35% higher than the EIA estimate and their mean variable O&M 70% higher). I verified the EIA estimates as accurate for the South Texas nuclear project by asking their engineers. Hence, I seriously doubt the Lazard estimates."

Also, Jim Carson, principal at the RisQuant Energy consultancy in St. Paul, Minnesota, said he does not trust the LCOE numbers, saying, "They explicitly ignore 'integration costs,' reliability value and externalities."

The location value of generation -- where it is located, relative to load -- is also excluded for consideration, Carson said.

"Does the real estate industry compare the cost of building manufactured housing in rural areas with the cost of building McMansions in the suburbs? No," Carson said in an email Friday. "Would policy makers consider such information? Of course not. For the same reasons and more, LCOE is worse than useless."

Rice's Hartley said he thinks policymakers may be more willing to use EIA's numbers than Lazard's, but it also "depends on whether they understand that LCOE costs are virtually meaningless for non-dispatchable power sources such as wind and solar."

But other industry observers were not so quick to dismiss the LCOE findings.

For example, Matthew Cordaro, a former Midcontinent Independent System Operator CEO who now resides in New York, said, "The central finding of lower costs for renewable energy, particularly given all the [research and development] in the area in recent years, is not surprising."

However, Cordaro said in an email Friday that one should not conclude that renewables development is "poised to 'take off.'"

"In many places both the generation and related transmission improvement costs for renewables make them cost prohibitive," Cordaro said.

John Shelk, Electric Power Supply Association president and CEO, said the report "documents the dynamic evolution within the resource mix that is unfolding daily and will continue."

"Attempting to prevent it from happening would be a costly mistake for consumers and contrary to clean energy goals," Shelk said.

Shelk said the study should serve as "a cautionary reminder" as the Federal Energy Regulatory Commission considers the US Department of Energy's notice of proposed rulemaking that would compensate coal and nuclear facilities for keeping 90 days of fuel on hand constantly, as a method of bolstering grid reliability.

"The Lazard data confirm that resources other than coal and nuclear will continue to have a relative cost advantage," Shelk said. "Thus, the DOE NOPR will only serve to force consumers to pay much more than necessary either by displacing dispatch of less expensive resources or by needlessly paying certain coal and nuclear units to sit around and not generate much if any electricity."

Alexandra Hobson, Solar Energy Industries Association senior communications manager, noted that the report shows that "diverse energy resources that enhance the grid can also help control energy costs."


"They also show the increasingly significant role solar can play in our mix of energy sources, given its falling costs," Hobson said in an email Friday.