Avoided Cost Comparison Levelized Cost of Energy ($/MWh)

or when DPS will close the gap completely. The
industry will have to maintain steady declines in
costs before it is competitive with the costs of central
generation.
Cost of Distributed Generation – Levelized Cost of
Energy
Levelized cost of energy (LCOE) is a commonlyused
metric that compares the cost per unit of
energy (MWh) across different technology types.
This metric translates upfront capital costs, ongoing
expenditures, taxes and resource performance
factors into a levelized, lifecycle energy cost that
takes into account changes in costs and production
over time. Formulaically, the LCOE refers to
the present value of the lifecycle costs of a project
divided by the present value of its lifecycle energy
production.
lCOE =
Pv (lifecycle Costs)
Pv (mwhEnergy Production)
It is important to define a comparative cost metric
such as LCOE in a rigorous way in order to
avoid unintentionally introducing bias into the
technology-specific results. For example, a model
that fails to account for financing realities such as
a minimum debt service coverage ratio (DSCR)
required by lenders may unduly favor capitalintensive
technologies. Therefore, the LCOE
model used incorporates a minimum DSCR and
many other factors in order to provide a realistic
unbiased comparison across technologies. The
58 E3’s levelized cost analysis is fully documented and publicly available. The analysis can be verified and updated using E3’s Distributed Energy
Costing Model available at www.ethree.com.
59 “SGIP Staff Proposal and Workshops,” California Public Utilities Commission, Last modified: February 15, 2011. (http://www.cpuc.
ca.gov/PUC/energy/DistGen/sgip/proposal_workshops.htm); “California Solar Initiative Cost-Effectiveness Evaluation,” E3 (Prepared for
the California Public Utilities Commission), April 2011. (http://ethree.com/documents/CSI/CSI percent20Report_Complete_E3_Final.
pdf); “Tools & Spreadsheets,” California Public Utilities Commission, Last modified: June 17, 2011. (http://www.cpuc.ca.gov/PUC/energy/
Procurement/LTPP/LTPP2010/2010+LTPP+Tools+and+Spreadsheets.htm).
60 “LTPP Solar PV Performance and Cost Estimates: Potential and Levelized Cost of Energy (LCOE),” E3, June 18, 2010. (http://www.ethree.
com/documents/LTPP/LTPP percent20Presentation.pdf)
aSSESSIng THE ROlE OF dISTRIBuTEd POwER SySTEmS In THE u.S. POwER SECTOR
22
levelized cost analysis used for this analysis is fully
documented and publicly available. 58
For the present analysis, capital and operating
costs, capacity factors and tax treatment for all of
the distributed technologies (with the exception
of PV) were taken from the best available public
sources. 59 All of the input assumptions and results
by cost component for each scenario are provided
in Annex 1. An ITRON SGIP study provides a
robust review of distributed generation technology,
cost and performance. For the PV technologies,
we use capital and operating costs, capacity
factors and tax treatment equivalent to the recent
data published in the California Solar Initiative
Cost-Effectiveness Report (for smaller projects)
and E3’s 33 percent Renewable Costing Analysis
completed for the Long Term Procurement Plan.
The financing assumptions are provided in Table
2. The assumptions were validated with debt and
equity providers and vetted through public stakeholder
proceedings at the California Public Utility
Commission. 60 The LCOE model applies the
same Weighted Average Cost of Capital (WACC)
and cost of debt across all technologies. The model
then solves for the minimum equity required to
maintain a DSCR of 1.40. The model also assumes
that the project developer can take full advantage
of all available state and federal tax incentives
and depreciation. In this way, the model finds the
most favorable project-finance structure for each
technology, thus providing an equal comparison
basis.