Content displaying: LCOE

Offshore Wind

Levelized Cost of Energy (LCOE) Projections

Levelized cost of energy (LCOE) is a summary metric that combines the primary technology cost and performance parameters: CAPEX, O&M, and capacity factor. It is included in the ATB for illustrative purposes. The ATB focuses on defining the primary cost and performance parameters for use in electric sector modeling or other analysis where more sophisticated comparisons among technologies are made. The LCOE accounts for the energy component of electric system planning and operation. The LCOE uses an annual average capacity factor when spreading costs over the anticipated energy generation. This annual capacity factor ignores specific operating behavior such as ramping, start-up, and shutdown that could be relevant for more detailed evaluations of generator cost and value. Electricity generation technologies have different capabilities to provide such services. For example, wind and PV are primarily energy service providers, while the other electricity generation technologies provide capacity and flexibility services in addition to energy. These capacity and flexibility services are difficult to value and depend strongly on the system in which a new generation plant is introduced. These services are represented in electric sector models such as the ReEDS model and corresponding analysis results such as the Standard Scenarios.

The following three figures illustrate LCOE, which includes the combined impact of CAPEX, O&M, and capacity factor projections for offshore wind across the range of resources present in the contiguous United States. The R&D Only LCOE sensitivity cases present the range of LCOE based on financial conditions that are held constant over time unless R&D affects them, and they reflect different levels of technology risk. This case excludes effects of tax reform, tax credits, and changing interest rates over time. The R&D + Market LCOE case adds to these financial assumptions: (1) the changes over time consistent with projections in the Annual Energy Outlook and (2) the effects of tax reform and tax credits. The ATB representative plant characteristics that best align with those of recently installed or anticipated near-term offshore wind plants are associated with TRG 3. Data for all the resource categories can be found in the ATB Data spreadsheet; for simplicity, not all resource categories are shown in the figures.

R&D Only | R&D + Market

R&D Only
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R&D + Market
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The ATB representative plant characteristics that best align with those of recently installed or anticipated near-term offshore wind plants are associated with TRGs 3-5.
R&D Only Financial Assumptions (constant background rates, no tax changes)
The ATB representative plant characteristics that best align with those of recently installed or anticipated near-term offshore wind plants are associated with TRGs 3-5.
R&D Only + Market Financial Assumptions (dynamic background rates, taxes)

The methodology for representing the CAPEX, O&M, and capacity factor assumptions behind each pathway is discussed in Projections Methodology. In general, the degree of adoption of technology innovation distinguishes the Constant, Mid, and Low technology cost scenarios. These projections represent trends that reduce CAPEX and improve performance. Development of these scenarios involves technology-specific application of the following general definitions:

  • Constant Technology: Base Year (or near-term estimates of projects under construction) equivalent through 2050 maintains current relative technology cost differences
  • Mid Technology Cost Scenario: Technology advances through continued industry growth, public and private R&D investments, and market conditions relative to current levels that may be characterized as "likely" or "not surprising"
  • Low Technology Cost Scenario: Technology advances that may occur with breakthroughs, increased public and private R&D investments, and/or other market conditions that lead to cost and performance levels that may be characterized as the " limit of surprise" but not necessarily the absolute low bound.

To estimate LCOE, assumptions about the cost of capital to finance electricity generation projects are required, and the LCOE calculations are sensitive to these financial assumptions. Two project finance structures are used within the ATB:

  • R&D Only Financial Assumptions: This sensitivity case allows technology-specific changes to debt interest rates, return on equity rates, and debt fraction to reflect effects of R&D on technological risk perception, but it holds background rates constant at 2017 values from AEO2019 (EIA 2019) and excludes effects of tax reform and tax credits.
  • R&D Only + Market Financial Assumptions: This sensitivity case retains the technology-specific changes to debt interest, return on equity rates, and debt fraction from the R&D Only case and adds in the variation over time consistent with AEO2019 (EIA 2019) as well as effects of tax reform and tax credits. For a detailed discussion of these assumptions, see Project Finance Impact on LCOE.

A constant cost recovery period-over which the initial capital investment is recovered-of 30 years is assumed for all technologies throughout this website, and can be varied in the ATB data spreadsheet.

The equations and variables used to estimate LCOE are defined on the Equations and Variables page. For illustration of the impact of changing financial structures such as WACC, see Project Finance Impact on LCOE. For LCOE estimates for the Constant, Mid, and Low technology cost scenarios for all technologies, see 2019 ATB Cost and Performance Summary.

In general, differences among the technology cost cases reflect different levels of adoption of innovations. Reductions in technology costs reflect the cost reduction opportunities that are listed below:

  • The financing conditions assumed for the ATB are applicable to commercial-scale offshore wind projects only. Commercial-scale fixed-bottom offshore wind projects are expected to be installed starting in the early 2020s (Walter Musial et al. forthcoming). Offshore wind projects using floating technology are in a pre-commercial phase currently (i.e., multi-turbine arrays between 12-50 MW in size) for which the ATB financial assumptions are likely too favorable. Once floating technology is deployed at commercial scale, the ATB financial assumptions are expected to appropriately reflect the terms of financing. The use of floating technology for commercial-scale projects is expected by the mid-2020s. Continued turbine scaling to larger-megawatt turbines with larger rotors such that swept area/megawatt capacity decreases resulting in higher capacity factors for a given location
  • Greater market competition in the production of primary components (e.g., turbines, support structure), and installation services
  • Economy-of-scale and productivity improvements in manufacturing, including mass production of substructure component and optimized installation strategies
  • Improved plant siting and operation to reduce plant-level energy losses, resulting in higher capacity factors
  • More efficient O&M procedures combined with more reliable components to reduce annual average FOM costs
  • Adoption of a wide range of innovative control, design, and material concepts that facilitate the high-level trends described above.

References

References are specific to this page, see all references page for all references.

EIA. (2019a). Annual Energy Outlook 2019 with Projections to 2050. Retrieved from U.S. Energy Information Administration website: https://www.eia.gov/outlooks/aeo/pdf/AEO2019.pdf

Musial, Walter, Beiter, P., Spitsen, P., & Nunemaker, J. (forthcoming). 2018 Offshore Wind Technologies Market Report. https://doi.org/10.2172/1226783