178. Why LVOE May Be a Better Decision-Making Tool Than LCOE for Power Companies
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Most POWER readers are probably familiar with levelized cost of energy (LCOE) and levelized value of energy (LVOE) as metrics used to help evaluate potential power plant investment options. LCOE measures the average net present cost of electricity generation over a facility’s lifetime. It includes capital costs, fuel costs, operation and maintenance (O&M) costs, financing costs, expected capacity factor, and project lifetime. Meanwhile, LVOE goes beyond LCOE by considering the actual value the power provides to the grid, including time of generation (peak vs. off-peak), location value, grid integration costs and benefits, contributions to system reliability, environmental attributes, and capacity value. Some of the key differences stem from the perspective and market context each provides. LCOE, for example, focuses on pure cost comparison between technologies, while LVOE evaluates actual worth to the power system. Notably, LCOE ignores when and where power is generated; whereas, LVOE accounts for temporal and locational value variations. Concerning system integration, LCOE treats all generation as equally valuable, while LVOE considers grid integration costs and system needs. “Things like levelized cost of energy or capacity factors are probably the wrong measure to use in many of these markets,” Karl Meeusen, director of Markets, Legislative, and Regulatory Policy with Wärtsilä North America, said as a guest on The POWER Podcast. “Instead, I think one of the better metrics to start looking at and using more deeply is what we call the levelized value of energy, and that’s really looking at what the prices at the location where you’re trying to build that resource are going to be.” Wärtsilä is a company headquartered in Finland that provides innovative technologies and lifecycle solutions for the marine and energy markets. Among its main offerings are reciprocating engines that can operate on a variety of fuels for use in electric power generating plants. Wärtsilä has modeled different power systems in almost 200 markets around the world. It says the data consistently shows that a small number of grid-balancing gas engines in a system can provide the balancing and flexibility to enable renewables to flourish—all while maintaining reliable, resilient, and affordable electricity. Meeusen noted that a lot of the models find engines offer greater value than other technologies on the system because of their flexibility, even though they may operate at lower capacity factors. Having the ability to turn on and off allows owners to capture high price intervals, where prices spike because of scarcity or ramp shortages, while avoiding negative prices by turning off as prices start to dip and drop lower. “That levelized value is one of the things that we think is really important going forward,” he said. “I think what a lot of models and planning scenarios miss when they look at something like LCOE—and they’re looking at a single resource added into the system—is how it fits within the system, and what does it do to the value of the rest of their portfolio?” Meeusen explained. “I call this: thinking about the cannibalistic costs. If I look at an LCOE with a capacity factor for a combined cycle resource, and don’t consider how that might impact or increase the curtailment of renewable energy—no cost renewable energy—I don’t really necessarily see the true cost of some of those larger, inflexible generators on the system. And, so, when we think about that, we really want to make sure that what we’re covering and capturing is the true value that a generator has in a portfolio, not just as a standalone resource.”