When speaking with people about the price of electricity, it is hard to convey exactly how they bare the costs of that generation. It isn’t just through the rates they pay but also through the laws and regulations that govern the electric industry. Those rules can force rates up or hide those increases through manipulation of the tax code. Either way, if you pay taxes or bills, or buy goods or services from those who do, increases in the cost of electricity will affect you.
This is especially relevant with the EPA’s adoption of the mercury MACT rule which will require many plants to choose between closing older coal-fired power plants and spending billions of dollars on pollution control technologies to upgrade the plants to the new rule’s specifications. The EPA has estimated that the costs for compliance over the next 20 years will be about $195 billion. With numbers like that, utility operators are surely rethinking their current energy portfolios and looking at the costs of building new generation versus the cost of upgrading existing plants.
It is with this in mind that I think it is even more important that the Institute for Energy Research released a great report today on the Energy Information Administration’s levelized cost assessment (“Making Sense of Levelized Costs”). The EIA annually projects the life-cycle cost of electricity generation five years into the future. As IER states, this is far from a perfect measure and provides unrealistic expectations of renewable energy while overstating the costs of conventional fossil fuels. They conclude:
Analysis of levelized costs of electricity should more accurately evaluate technologies and costs by considering the following factors:
- The expected market values of the electricity that they will supply,
- Their total life-cycle costs, and
- Their expected profitability.
Levelized costs are an excellent measure when comparing technologies that serve similar loads and that have similar production profiles. But levelized cost comparisons are much less valuable when comparing intermittent technologies to dispatchable, or “on demand” power sources.
For the full story, click here.
In upcoming debates over new generation capacity (wind and solar vs. nuclear and nautral gas), it will be helpful to keep these factors in mind when renewable advocates use these numbers to justify costly subsidies and regressive mandates.