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

cost calculation for some 130 power plants. While the number of participating countries contributing cost
information is stable as compared to previous studies, the number and types of power plants included in
the analysis have increased significantly for the present study.
The levelised lifetime cost methodology with the generic assumptions used in this study allows for a
consistent calculation of cost estimates (see Appendix 5). This in turn allows for a comparison across technologies
and countries, within the scope of the analysis. However, most of the generic assumptions will
be different in real investment projects. Moreover, other factors which may be decisive for the choice of
technology, plant size and timing are not taken into account. Because the methodology assumes a unique
discount rate for all options considered, it does not fully reflect the consequences of the liberalisation
of electricity markets. Appendix 6 elaborates on methodologies to incorporate risk into generating cost
estimates.
Prior to the liberalisation of electricity markets, energy firms were able to operate as integrated
monopolies. They were able to pass on all costs of investments to electricity consumers. There was no
market risk. In such an environment, most of the risks associated with such investments are not directly
a concern of the energy company. Increased costs, if demonstrated to be prudently incurred, can be
passed on as increased prices. Risks are transferred from investors to consumers and/or taxpayers. In this
situation, there is little incentive for companies to take account of such risks when making investment
decisions.
The introduction of liberalisation in energy markets is removing the regulatory risk shield. Investors
now have additional risks to consider and manage. For example, generators are no longer guaranteed the
ability to recover all costs from power consumers. Nor is the future power price level known. Investors
now have to internalise these risks into their investment decision making. This adds to the required rates
of return and shortens the time frame that investors require to recover the capital. Private investors’
required real rates of return may be higher than the 5% and 10% discount rates used in this study and the
time required to recover the invested capital may be shorter than the 40 years generally used in this study.
When the level of the electricity price becomes uncertain it is of relatively greater value to be flexible.
It is more important to commit capital only when needed. The flexibility of being able to build smaller
plants and adjust them in smaller incremental steps is valuable. The flexibility of being able to adjust
quickly with short construction times is of value. Prices in an electricity market tend to be volatile in
response to the inherent volatility of electricity. There is a significant value of being able to adjust the production
easily to the prices in the market. A minimum of capital commitment also makes the profitability
less exposed to lower utilisation that may result from volatile prices. With its short construction time,
modularity and low capital commitment, CCGT has been a preferred technology in many markets due to
its flexibility. The factors that determine the value of flexibility are not adequately reflected in the levelised
lifetime cost methodology. The study therefore does not signal that we are about to see a significant
change to this global trend of “gas-to-power”. The IEA “World Energy Outlook 2004” (IEA, 2004)
projects a substantial relative increase in gas-fired power generation.
Other factors that are not reflected by the methodology include the value of price stability, which may
be an important element in a risk hedging strategy by large industrial consumers competing with their
energy intensive products on international markets. In markets where a financial contract market is not
sufficiently developed to allow for proper management of risks it may be preferred to manage risks
through direct ownership of production plant. Technologies with low marginal production costs, such
as nuclear, may in such cases offer a guarantee of long-term price stability which is not provided by technologies
such as CCGT gas-fired plants with high fuel cost related marginal costs of production.
The fuel price projections used in this study are the projections collected in each data case. As the fuel
component in CCGT is very high compared to other technologies, the relative cost of CCGT compared
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