Moving Beyond LCOE - Why it is time to find a better metric for the value of renewable energy in the grid

Is it a good strategy to keep judging renewable energy by the one single metric of LCOE?

It is an undeniable fact that LCOE is a useful metric, allowing for comparison of cost of each unit of energy generated by an asset. We have seen the LCOE of renewable energy falling precipitously over the past few years in comparison to fossil fuels.

However, focusing on LCOE alone as a metric can quickly become dangerous, as important characteristics like firmness, dispatchability and spinning reserves aren′t considering when judging projects. And LCOE focused strategies can slowly undermine the delicate balance of a healthy grid, causing problems in the mid and long term.

There are current discussions going on about the need to value and pay for grid services and an entire energy storage industry relying in the fact that sooner or later we are going to have to pay for these because they will be essential to keep the stability of the grid. ?

But are we currently doing enough to set up energy strategies that guarantee grid stability and reliability in the long term, or are we kicking the problem forward? The NREL and other leading research institutions are starting to pay attention to this issue, publishing papers with research on how to value technologies impact and value to the grid, as alternative measures to the LCOE only approach.

This debate is also coming the fore in a long-term electricity tender that took place these last two weeks in Chile. The tender is for delivery of 2,31GWh/year of energy from 2026 for 15 years.?

Is it possible to deliver 24/7 renewable power at 14.84 USD/MWh?

According to Chile′s tender, it is. A total of 29 companies participate in the tender, with an average price of US$23.78/MWh and a 27% discount on the previous tender. The cheapest bid was at 13.32 USD/MWh.

And this tender was particularly important because it included two very specific blocks of power that took place in the evening and at night.

The tender was structured around 3 blocks of energy supply: ?

·???????Block 1 A (between 23:00 and 8:00)

·???????Block 1 B (between 8:00 and 18:00)

·???????Block 1 C (between 18:00 and 23:00)

The cheapest bid for the full 24/7 power deliver was Canadian Solar at an average of 14.84 USD/MWh. The technology was noted simply as solar + storage, though no further information was given as to what storage technology would be used. This hybrid project would have to deliver energy with storage for at least 14 out of the 24 hours in each day, and whether this can be achieved with solar + storage is currently subject to a great deal of speculation.

The discussion around the tender started almost immediately, when voices were raised on the impossibility of delivering power 24/7 at such a low price. Since the grid survival relies on these companies delivering the promised power at the promised time and price, failure of these contracts to materialize could cause significant economic consequences for users and other companies that missed the opportunity.

About the long-term energy procurement tenders in Chile

There are some particularities to the tendering process in Chile. In the past decade the price of electricity in Chile has come down from the 150- 160USD/MWh mark to what you are seeing in this specific tender, so tendering has worked very well for Chile.

First, the tenders are always securing energy supply way into the future – in this case in 5 years, or 2026 – which means market projections, risk appetite and guesswork play a significant role in setting prices. Usually the tendering of projects last 15 years.

Also, generation technology doesn’t play any role in the process. The ONLY one metric that matters is LCOE. Upon winning a tender, it is entirely up to the winner how you deliver that power, whether it is from a fully amortized coal project or any other source, including the SPOT market.?

There are cases of companies with tenders at 100+ USD won a decade ago never even built a project, and that are now brokers in the SPOT market, and taking advantage of the huge price differentials to pocket the difference at a huge economic benefit.?

There has also been cases in which the company simply cannot deliver on the ‘promised’ power. As of late the penalties have been escalated to avoid failures to deliver power, since these can have disastrous consequences in the grid.?

According to the information from the tender, the cheapest bid of 14.84 USD/Mh is for projects of ‘solar + storage’ although no further information is given about the type of storage that is. In total, this hybrid approach would have to deliver energy with storage for at least 14 out of the 24 hours in a day, and whether this can be achieved with solar + storage is currently subject to a great deal of speculation.

Voices have been raised about the need for the Comisión Nacional de la Energía (National Energy Comission or CNE) to do more to make sure that the power that is delivered actually is firm and reliable. Due to low hydro resources and very expensive natural gas, there has been instances this past July and August when Chile had to rely on diesel to ensure continued power supply. The result was an escalation of energy prices to 119 USD/MWh, a 186% growth on the year before.

According to the Generators Association of Chile in their August 2021 newsletter:?‘To put into perspective the impact of the lack of transmission and storage, at 2:00 p.m. August 12, 2021 differences of spot prices between the north (Cruise) and south zone (Puerto Montt) of the SEN of up to 240 USD / MWh; that same day in the north zone spot price differences between day and night around 275 USD / MWh’

Unless Chile rethinks its tendering process away from focusing solely on LCOE to consider a long term strategy of decarbonization and grid firmness, the problems seen in Chile these past months will worsen in the future, making climate change abatement targets all but impossible to achieve.

A landmark cost reduction for CSP to 33.99 USD/ MWh

Concentrated Solar Power, or CSP - a dispatchable thermal solar technology with storage -?reached a landmark low price at the long-term tender in Chile.

A project currently being built in Dubai of 950MW works like a battery – producing power at night when PV electricity isn′t available. The tariff for this project was 73 USD / MWh. Likana, the new project proposed in Chile, would slash the tariff received by half.?This is an astonishing achievement in cost reduction for a technology with a worldwide deployment of under 7GW, which contributes to firm the grid and provides spinning reserves with 100% renewable energy.

Sadly this project did not make it into the winners of the tender, as the highest cost that made it has a price of USD 31.54/ MWh compared to a minimum of USD 33.99/MWh in the case of CSP.

I have, however, big hopes for CSP projects, specially in Chile. Already we know that focusing solely in LCOE is a losing strategy and the other shoe es about to drop. At a price around the 34 USD /MWh mark with firmness and dispatchability built in, the grid will be better off for it.?