Projected Costs of Generating Electricity - OECD Nuclear Energy ...

Appendix 5
Cost Estimation Methodology
The adoption of a standardised methodology for cost calculations is a prerequisite for a fair comparison
between different electricity generation options. This appendix describes the methodology adopted for
calculating generation costs in the present report as well as in previous studies in this series on projected
costs of generating electricity that have been carried out periodically by the OECD Nuclear Energy
Agency (NEA) and the International Energy Agency (IEA), in co-operation with the International Atomic
Energy Agency (IAEA).
This appendix explains the rationale for the approach, provides the equations used for calculating
levelised costs and highlights the main parameters needed for the calculations. However, it does not
discuss in detail the concept of discount rate or the discount rate values hat might be chosen in different
applications. More details on the methodology and its application may be found in the literature references
provided in the bibliography. Other approaches may be used for economic assessment in various contexts
to reflect the criteria and priorities of different economic actors. Appendix 6 addresses methodological
issues raised by incorporating investment risk into generation costs in the context of market liberalisation.
App.
5
The methodology adopted in the study allows calculating electricity generation costs on the basis of net
power supplied to the station busbar, where electricity is fed to the grid. It is relevant to compare single
units but may not reflect the full economic impact of a new power plant when it is connected to the grid
within an existing electricity system. Therefore, it does not substitute for the full system cost analysis
which compares alternative options to be introduced into a network. The system approach requires a
model describing the existing system including its different power plants and assumptions – which might
be derived from another model – on electricity demand pattern (load duration curves) and projected
growth. It is relevant from the producer viewpoint to estimate the cost of an addition to the system but has
not been adopted in the studies of this series because its results are essentially system specific and cannot
be interpreted readily for international comparison purposes.
The levelised cost methodology discounts the time series of expenditures to their present values in a
specified base year by applying a discount rate. The discount rate that is considered appropriate for the
power sector may differ from country to country, and, in the same country, from utility to utility. Applying
a discount rate takes into account the time value of money, i.e. a sum earned or spent in the past or in the
future does not have the same value as the same sum (in real terms) earned or spent today. The discount
rate may be related to rates of return that could be earned on typical investments; it may be a rate required
by public regulators incorporating allowance for financial risks and/or derived from national
macroeconomic analysis; or it may be related to other concepts of the trade off between costs and benefits
for present and future generations. In the present study, levelised generation costs are presented at 5% and
10% per annum discount rates, a range representative of the values adopted in most national responses to
the questionnaire upon which are based the costs presented in this report.
When this method is applied, the economic merits of different candidate power plants are derived from the
comparison of their respective average lifetime levelised costs. Technical and economic assumptions
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