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True Cost of Electricity

November 1, 2011

There is a battle being waged about the true cost of electricity.

Proponents of various methods for generating electricity use the numbers that favor their particular interests. For some, this includes placing a price on carbon.

That’s why you will see different numbers purporting to show the true cost of electricity.

Here’s a brief overview of some of the methods being used.

Levalized Cost of Electricity (LCOE)

This attempts to take the different costs of building and operating a power plant over ten, twenty or thirty years, converted to equal annual payments in today’s dollars.

Unfortunately, the values attached to variables have a large influence over the final, so called, true cost.

Perhaps the most important variable is the discount rate used for determining the annualized cost of building the power plant. The second variable that is difficult to predict is the cost of fuel. For example, LCOEs calculated four years ago when the price of natural gas was three times as high as it is today, resulted in high LCOEs that were divorced from today’s reality.

The third is the cost of money and whether it should be included in the calculation. The fourth is the number of years over which to spread the cost. Finally operation and maintenance costs may or may not be included.

Another factor that can distort the LCOE is whether subsidies from the federal or state governments are included when determining capital or operating costs. (This is true for any method used to calculate costs.)

Overnight cost

This calculation evolved due to the very long time it took to construct nuclear power plants.

The idea is to assume the plant will be built overnight so it will not incur interest expense. The same principle can be used for coal-fired power plants that take three years to build. It can also be used for natural gas combined cycle (NGCC) plants, but the time it takes to build these plants is relatively short, so it has less significance.

Bus Bar Cost

This excludes the cost of building the infrastructure around the power plant so that Bus Bar Cost is the cost of electricity as it leaves the generator. It includes the cost of money and the cost of operation and maintenance.

Cost per kilowatt hour (cents per kWh)

This is supposed to represent the cost of producing each kWh of electricity. It incorporates either the LCOE approach or the Bus Bar approach. It doesn’t include the cost of back-up power for when a plant isn’t producing electricity or for building transmission lines needed to bring the electricity from where it’s produced to where it can be used.

Cost per Kilowatt (Dollars per KW)

This is the cost per KW of constructing a power plant. It can utilize the overnight cost or include the cost of money.


While there may be accepted definitions for these various approaches, the fact remains that numbers reported by the press are invariably sloppy.

Even when reported accurately, the LCOE is fraught with misinterpretation. The factors having the greatest potential for causing confusion are the discount rate, the cost of fuel used in the calculation and whether the cost of carbon is included.

Capacity Factor

This isn’t always factored into the cost of electricity, but should be because it describes the amount of electricity that a power plant produces regardless of its nameplate rating.

The nameplate rating establishes the theoretical capacity of a power plant to generate electricity, but doesn’t take into effect when the plant isn’t generating electricity.

For example, the capacity factor of nuclear power plants is typically 90%. In other words, over the period of a year, it generates 90% of the electricity it theoretically could, based on its nameplate rating.

The capacity factor of coal-fired power plants is generally around 85%.

The same is true for NGCC power plants.

Wind turbines have a capacity factor of 30%, though recent studies indicate it may be much lower.

If it costs one dollar to build a power plant, but it can only generate 30% of the electricity that’s expected from its nameplate rating, it actually will cost 3 dollars to build a plant that can generate all the electricity expected from its nameplate rating.

This is why it’s wrong to compare the cost per KW of building wind farms with the cost per KW of building coal-fired or NGCC power plants, without including the effect of capacity factor.

It’s unfortunate, but true, that it’s necessary to question every cost number published by the media or by various groups.

Cost of Carbon

Another cost that can distort these various measurements is the cost of carbon.

This is especially true for coal fired power plants.

The cost of carbon can be $15/ton of CO2, or $50/ton of CO2, or even higher, depending on who is making the calculation.

The U.S. Energy Information Administration (EIA) is using $15/ton when calculating the LCOE for coal-fired power plants.

The cost of carbon is being used by proponents of global warming to promote wind and solar. On a visit to several Senator’s offices in Washington DC, I was told by one of the staff member responsible for energy issues that the government needed to establish a price on carbon.

The bottom line?

Coal and NGCC power plants produce the lowest cost electricity, unless the cost of carbon is included when calculating cost.

Electricity from wind is, at best, twice as expensive as electricity from coal-fired or NGCC power plants.

Electricity from Solar is typically three times as expensive as electricity from coal-fired or NGCC power plants.

There can be exceptions, but this pattern generally holds true.

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