Lazard reported in late 2021 that they have conducted an analysis comparing the LCOE for various conventional and renewable energy generation technologies in order to understand which renewable energy generation technologies may be cost-competitive with conventional generation technologies, either now or in the future, and under various operating assumptions.
They found that renewable energy technologies are complementary to conventional generation technologies, and believe that their use will be increasingly prevalent for a variety of reasons, including to mitigate the environmental and social consequences of various conventional generation technologies, RPS requirements, carbon regulations, continually improving economics as underlying technologies improve and production volumes increase, and supportive regulatory frameworks in certain regions.
In this analysis, Lazard’s approach was to determine the LCOE, on a $/MWh basis, that would provide an after-tax IRR to equity holders equal
to an assumed cost of equity capital. Certain assumptions (e.g., required debt and equity returns, capital structure, etc.) were identical for all
technologies in order to isolate the effects of key differentiated inputs such as investment costs, capacity factors, operating costs, fuel costs
(where relevant) and other important metrics. These inputs were originally developed with a leading consulting and engineering firm to the
Power & Energy Industry, augmented with Lazard’s commercial knowledge where relevant.
This analysis (as well as previous versions) has benefited from additional input from a wide variety of Industry participants and is informed by Lazard’s many client interactions on this topic. Lazard has not manipulated the cost of capital or capital structure for various technologies, as the goal of this analysis is to compare the current levelized cost of various generation technologies, rather than the benefits of financial engineering. The results contained herein would be altered by different assumptions regarding capital structure (e.g., increased use of leverage) or the cost of capital (e.g., a willingness to
accept lower returns than those assumed herein).
Key sensitivities examined included fuel costs, tax subsidies, carbon pricing and costs of capital. Other factors would also have a potentially significant effect on the results contained herein, but have not been examined in the scope of this current analysis. These additional factors, among others, could include:
- capacity value vs. energy value;
- network upgrades, transmission, congestion or other integration-related costs;
- significant permitting or other development costs, unless otherwise noted; and
- other costs of complying with various environmental regulations (e.g., carbon emissions offsets or emissions control systems).
This analysis also does not address potential social and environmental externalities, including, for example, the social costs and rate consequences for those who cannot afford distributed generation solutions, as well as the long-term residual and societal consequences of various conventional generation technologies that are difficult to measure (e.g., nuclear waste disposal, airborne pollutants, greenhouse gases, etc.).
[Note: This approach does not take into account the intermittent nature of energy production of solar and wind installations]
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