• RE Royalties

Lazard Energy Report - Cost of Capital and Energy

Updated: Dec 19, 2019

Earlier in November, Lazard published an insightful report detailing the total cost of different renewable and non-renewable energy types (Figure 1). The costs were levelized for federal tax incentives, cost of capital, and other subsidies such that they could be directly comparable.

Levelized Cost of Energy - Figure 1

Figure 1 above takes into account government subsidies, which differ across different technologies types. As such, to account for this difference, the following chart containing costs for unsubsidized energy is shown below (Figure 2). The unsubsidized LCOE (levelized cost of energy) contains a spread ranging from $242/MWh to a much lower $28/MWh. More noticeably, the cost of wind is much cheaper than coal and nuclear and even gas in some scenarios.

Unsubsidized Levelized Cost of Energy - Figure 2

Another detail to note is the sensitivity of coal and nuclear to fuel prices. As technologies like Wind and Solar do not require fuel to operate, they remain unaffected from fluctuating fuel prices (Figure 3).

Sensitivity Analysis - Figure 3

In terms of the cost of capital, it is evident that capital intensive projects like nuclear carry more sensitivity towards costs from debt. While technologies like wind and solar PV are viable on a much smaller scale and thus requiring much less capital commitments (Figure 4).

Cost of Capital - Figure 4

So far, we’ve seen how competitive and attractive technologies like wind and solar have gotten in comparison to traditional solutions like coal. However this has only been a recent occurrence as technological breakthroughs have significantly lowered the LCOE of wind and solar.

Furthermore, while both solar and wind costs have been decreasing over the past decade, it is noteworthy to comment on the much tighter spread that solar PV enjoys in comparison to wind (Figure 5). This is largely due to higher variability in costs of wind. For example, location is a factor that would have a sizable impact for wind but not solar, as the turbines are much more difficult to transport than solar panels.

Trends in Solar and Wind - Figure 5

The largest takeaway from the figure above is the massive decline in the cost of solar in the past decade. Solar in 2019 is almost 90% cheaper than it was in 2009.

Overall, this report completed by Lazard shows how competitive new technologies have become and that they are able to replace conventional ones.

While many assumptions were made during the compilation of this report, the debt-equity mix, capacity factors, and other assumptions can all be found in the full report.

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