On Lazard’s LCOE reports (Energy, Storage, Hydrogen)

Lazard, the renowned investment bank, has just published its yearly Levelized Cost of Energy (LCOE) report on the cost of various Energy Sources. It is the 15th Edition.

https://www.lazard.com/perspective/levelized-cost-of-energy-levelized-cost-of-storage-and-levelized-cost-of-hydrogen/

Wikipedia defines the Levelized Cost of Energy as “a measure of the average net present cost of electricity generation for a generating plant over its lifetime. It is used for investment planning and to compare different methods of electricity generation on a consistent basis. The LCOE "represents the average revenue per unit of electricity generated that would be required to recover the costs of building and operating a generating plant during an assumed financial life and duty cycle” and is calculated as the ratio between all the discounted costs over the lifetime of an electricity generating plant divided by a discounted sum of the actual energy amounts delivered”.

As a preamble, we will never praise Lazard enough for consistently delivering their widely acclaimed reports. They are comprehensive, thorough, and have genuinely helped change the established perception that Renewables were expensive. Their reports were especially critical during the 2013-2018 period when other international organisations such as the IEA (International Energy Agency) were – purposefully or not - continuing to promote Big Fossil’s propaganda that renewables were too costly.

So, praise Lazard!

Now, let’s unpack the three 2021 reports:

1.?Energy (15th Edition)

First take away: In the US, LCOE of Wind and Solar is at price parity with running conventional sources. This is great! I quote: “Lazard’s unsubsidized LCOE analysis indicates significant historical cost declines for utility-scale renewable energy generation technologies driven by, among other factors, decreasing capital costs, improving technologies and increased competition”.

a)??????Wind and Solar LCOE have respectively declined by 70% and 90% over the past 10 years.

b)?????Yet, those progresses have plateaued in recent years (only a 4% and 8% annual improvement in the past 5 years… which is still remarkable). The recent slowdown in yearly gains demonstrates that wind and solar technologies have now fully matured and that, going forwards, the progresses will be incremental. Let’s not despair: Wind and Solar will still gain yearly, which will not be the case for gas, coal and nuclear.

c)??????Unfortunately, 2021 might be the first year where we might see LCOE moving back up. The LCOE of Fossils will increase significantly due to the current Energy Crunch. Furthermore, Solar’s 2021 LCOE is likely to increase as the price of panels has gone up 50% this year due to several supply chain issues. A similar short-term trend may also affect Wind.

d)?????Looking ahead, I see a limitation to the usefulness of the concept of LCOE: When renewables start reaching a high level of penetration in a specific grid, their VALUE to that system decreases (more price cannibalization, more volatile prices, more need for balancing, transmission and storage).

e)?????A hydro or a geothermal plant does have a higher LCOE than Wind or Solar, but they certainly have more value to any system because they can run 24/7 or are dispatchable.

f)???????In the end, it is a race between a diminishing LCOE and a diminishing value to a system. If the LCOE diminishes faster than its value, more renewables are necessary. However, when the value to the system shrinks, developers might want to reassess the need for more renewables or what type of renewables should they invest in (unless there is significant demand growth – i.e., EVs, Heat Pumps).

Is the concept of LCOE dead? Probably not, let just say there is more to it.

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2. Storage (7th Edition)?

This report is tougher to grasp than the Energy report. It is far geekier.

Lazard presents a comparative LCOS (Levelized Cost of Storage) analysis for various energy systems on $/kw-year and $/MWh basis and an overview of the Value of Storage for different uses and on different geographies.

a)??????The report produces detailed results, but it is hard to draw generic conclusions. The economics of batteries are dependent on the local grid infrastructure, market rules, and revenue models. For instance, the same battery technology will have radically different business models in say California, Ireland, or Australia. So, comparisons are tough.

b)?????The report notes that Stationary Storage for Li-Ion batteries only represents 5% of the Li-Ion market vs 70-90% for EVs (which then begs the question of V2G, V2H… but that will be the subject of another blog).

c)??????The report then states that the value chain (integration, software) is still in flux: OEM wants to go downstream while operators want to go upstream.

d)?????The technology of choice for the coming years seems to be LFP (Lithium Ferro Phosphate) rather than the more costly NMC (Nickel Manganese Cobalt). On a side note, that shift from NMC to LFP is also happening in the Automotive sector for entry-level EVs where performance is not paramount, but cost is.

e)?????Lazard then details the various uses of batteries (demand response, arbitrage, frequency, resource adequacy…), in front of the Meter vs. behind the Meter, co-located with renewables vs. stand alone. That part of the report is very informative.

f)???????There is even a first sneak peek on long duration storage.

As time passes and editions evolve Lazard’s LCOS reports will get better, even if the value of each battery and its optimal use (which can vary over time) might remain a black box for most investors that will have to rely on battery experts.

Finally,

3. The report of Hydrogen (2nd Edition)

“Lazard had undertaken an analysis of the Levelized Cost of Hydrogen (“LCOH”) in an effort to provide greater clarity to Industry participants on the potentially disruptive role of hydrogen across a variety of economic sectors”. I have highlighted ‘potentially’ on purpose; it is a wise choice of word.

It is brave for Lazard to have put this report out considering the general buzz (if not misinformation) around the “Hydrogen Economy”. It is nevertheless useful bearing in mind the thoroughness of their approach.

Lazard states that a key parameter facing the potential users of Green Hydrogen is that “Electricity represents ~40% – 70% of the levelized cost to produce hydrogen from electrolyzers with a capacity of 20+ MW”.

Namely, it takes a fuel (in this case electricity, but it could be gas or coal) to produce another fuel (hydrogen). Overall, it appears that Lazard has aligned their findings to those of my friend Paul Martin (see reference at the end of the article).

The first problem I immediately see is that CAPEX is calculated ex-factory and does not account for transportation, EPC, grid connection, permitting. Let see if those CAPEX assumptions hold.

The second problem is encompassed in a very important statement: H2 costs are calculated at the production site, hence “Applications which require minimal additional steps (e.g., conversion, storage, transportation, etc.) to reach the end user will achieve cost competitiveness sooner than those that do not”. This is an elegant way to say that if you want to move or store hydrogen, the costs calculated by Lazard might balloon.

The first pages of this report are just a poor rendition of the Hydrogen Council’s brochures, so you can skip them (H2 usages in maritime, aviation, light duty, train… blah blah blah). The reader should jump directly to page 8 where things start to get very interesting.

So, what are Lazard’s key findings?

a)??????Alkaline and PEM electrolyzers deliver by and large the same economics.

b)?????The most notable numbers are for 20MW electrolyzers (even if those machines are yet to be manufactured at an industrial scale). My initial comment on the CAPEX evolution would be: Please don’t be fooled by the idea that just because solar and wind technologies went down 70-90% in the past decade then the price of electrolyzers will follow the same path. Certainly, mass production will reduce the CAPEX (probably not by 90%; I still need to be convinced that Swanson’s law can be applied to Electrolyzers), but scale won’t impact the cost of permitting, EPC, digital, etc.…

c)??????Utilisation rates at 75% to 90% are required to reduce the price of Hydrogen. However, these utilisation rates are far superior to the capacity factor of renewables, hence a need for batteries, balancing, firming… however you want to call it.

d)?????Lazard’s assumption of prices for round-the-clock power are quite optimistic. Very few regions can produce 24/7 power at a price of 20USD/MWh, especially when you compare with the current prices say in Europe EEX Cal 23 above 100USD/MWh or US-PJM above 50USD/MWh or China where prices are under government control by but certainly closer to 100USD/MWh than to 50USD/MWh. Let’s be generous and stick to 50USD/MWh.

e)?????Well, the corresponding prices of H2 are eye-watering! We are in the 4-5USD/kg zone (not the 1-1.5USD/kg H2 invented by hydrogen lobbyists). That level of price might work in a very carbon taxed environment (with border mechanism) and for a few applications in Chemistry and Industry, but as a fuel, that simply won’t fly. Electricity is so much cheaper to use (just because of energy efficiency). There is no way that processes with a 30% round trip efficiency can compete with processes with a 70%-85% round trip efficiency.

f)???????Grey H2 LCOH ranges between 1.3-2.4USD/kg according to Platts: even in an environment of high gas prices and high carbon taxes, grey hydrogen might still remain cheaper than the Green Hydrogen at 4-5USD/kg.

g)??????By calculating the LCOH, Lazard clearly demonstrates that, except for a few selected sectors where electrification is impossible, Hydrogen is simply a NO NO.

In conclusion, Lazard’s continuous efforts deserve our universal approbation. Whether it is for clean generation, storage or especially Hydrogen, one should consider Lazard’s reports an excellent starting point, but much more detailed analyses are needed to justify any investment.

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Reference:

https://www.dhirubhai.net/pulse/distilled-thoughts-hydrogen-paul-martin/

?Please follow Gerard Reid and myself on the Redefining Energy podcast

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