Cost of Electricity - PV
LCOE OF PV, FEBRUARY 2014
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LEVELISED COST OF ELECTRICITY H1 2014:
METHODOLOGY NOTES (2 OF 2)
Exclusion of subsidies
The LCOEs shown in this report represent the gross cost of building, operating and financing electricity generation technologies.
As such the analysis excludes all subsidies and incentives (eg accelerated depreciation, grants, production tax credits) but
includes conventional taxes such as corporation tax. This approach enables a direct comparison of the cost of generating
electricity from different sources. These LCOEs are therefore from the price at which a developer may wish to sell the electricity,
as the sale price would be net of any subsidies.
Lumpy nature of certain technologies
While cost evolutions can be tracked consistently for widely deployed technologies such as PV and onshore wind – creating a
coherent time series – this may not be the case for other less mature technologies such as solar thermal and marine. Heavy
dependency on support mechanisms and highly localised costs means that central scenarios reflecting current costs for these
projects may move erratically as the geographic centres of deployment shift over time.
Macroeconomics and universal assumptions
For each individual country scenario, we apply the market’s standard corporate tax rate and an inflation rate equal to the average
of the IMF’s forecasted CPI rate for that country, or the previous five years of actual inflation if a forecast is unavailable. For our
central scenario, we have necessarily made certain simplifying assumptions: a single corporate tax rate of 35% and an annual
inflation of 2%. We also assume that all projects are depreciated using a straight line approach. LCOEs are calculated assuming a
development timeline that commences today. Today’s LCOE is then inflated each year to reflect that project revenues are typically
inflation-linked. This analysis is done in nominal dollars.
The use of debt
A key driver of the LCOEs for all renewable energy technologies is the cost of finance, and specifically the cost of debt finance.
The cost and availability of debt is a function of project risk and market conditions. The technology-independent portion of debt
costs is the level of the underlying interest rate from which debt costs are calculated. The specific market in which a project is
being financed can also have an effect on debt spreads through lenders’ perception of market-specific sovereign, policy, regulatory
or economic conditions. The higher the perceived risk, the higher the cost of debt.
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