The Economics of Renewable Energy

Abstract

Levelized cost is the preferred method of evaluating various energy technologies. Yet this ubiquitous technique is rarely questioned, and its history is poorly understood. This paper traces the history of levelized cost as a method and highlights its promise and pitfalls. The levelized cost of most energy technologies - ranging from coal and nuclear to wind, solar, geothermal, and marine energy - is calculated, with assumptions noted and sensitivities demonstrated. Included as an appendix is a summary of every renewable energy levelized cost study between 2005-2011 that was located by the author. Other methods of comparing energy technologies - such as options and a market-based approach - are also discussed. The paper concludes by using a market-based approach to determine the value of solar and wind power.

Keywords: renewable energy, levelized cost, discounted cash flow, net present value, ocean thermal, wind energy, solar energy, biomass, geothermal, carbon tax, criteria pollutants, nuclear power, energy economics, electricity, externalities

JEL Classification: B10, B20, B40, B41, G30, G31, H21, H23, Q20, Q28, Q30, Q38, Q40, Q42, Q48