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The levelized cost of energy, or levelized cost of electricity, is a measure of the average net present cost of electricity generation for a generating plant over its lifetime. The LCOE is used to compare different methods of electricity generation on a consistent basis. The LCOE “represents the average revenue per unit of electricity generated that would be required to recover the costs of building and operating a generating plant during an assumed financial life and duty cycle.” Key inputs to calculating LCOE include capital costs, fuel costs, fixed and variable operations and maintenance (O&M) costs, financing costs, and an assumed utilization rate for each plant type. One major incentive for LCOE is federal or state tax credits. Federal tax credits for certain renewable generation facilities can substantially reduce the realized cost of these facilities. Based on the following and where applicable, the LCOE tables show the cost both with and without tax credits that EIA assumed would be available in the year in which the plant enters service. According to the U.S. Energy Information Administration, regarding the “Production Tax Credit (PTC): New wind, geothermal, and closed-loop biomass plants receive $24 per megawatt-hour (MWh) of generation; other PTC-eligible technologies receive $12/MWh. The PTC values are adjusted for inflation and applied during the plants first 10 years of service. Plants that were under construction before the end of 2016 received the full PTC. After 2016, wind continues to be eligible for the PTC but at a $/MWh rate that declines by 20% in 2017, 40% in 2018, 60% in 2019, and expires completely in 2020. Based on documentation released by the Internal Revenue Service (IRS), EIA assumes that wind plants have four years after beginning construction to come online and claim the PTC. As a result, wind plants entering service in 2021 will receive $19.20/MWh, and those plants entering service in 2023 will receive $9.60/MWh.” These incentives are important as we work through this transition towards more renewable energy sources. The whole point of them is to make individuals and companies more inclined to produce more energy this way and make the transition period much smoother.
Electricity is a unique market due to its constantly fluctuating supply and demand. The method most commonly used to calculate the cost of electricity is called the levelized cost. This is the present value of the total cost of building and operating a power plant over its economic life. One of the most important costs for this calculation is the total lifetime plant costs.
One of the most important barriers to renewable energy is the cost, more specifically the capital costs. Capital costs are the expenses that are paid upfront for building and installing solar or wind farms. This is where the bulk of the cost comes from. These higher costs can make banks perceive renewable sources as being too risky, resulting in higher interest rates that can make investors think again. This is why looking at the levelized cost is so important. When we consider the levelized cost, it can actually make solar appear less expensive over time.
One incentive to install a renewable energy system is that there are tax credits available. Currently, a homeowner can deduct 26% of the cost of the system from their taxes. This tax break, along with the many others available in many of the states are a great incentive to encourage people to consider installing a new system. By providing more tax incentives, it will allow the every day people to see alternative sources as being more affordable. I also believe it’s important for people to consider the levelized cost because while renewable sources may seem more expensive initially, this shows that they actually are much less expensive over time.
Barriers to Renewable Energy Technologies. (n.d.). Retrieved September 25, 2020, from https://www.ucsusa.org/resources/barriers-renewable-energy-technologies
Investment tax credit for solar power. (n.d.). Retrieved September 25, 2020, from https://www.energysage.com/solar/cost-benefit/solar-investment-tax-credit/
Programs. (n.d.). Retrieved September 25, 2020, from https://programs.dsireusa.org/system/program?fromSir=0