System LCOE: What are the Costs of Variable Renewables?

33 Pages Posted: 15 Jan 2013  

Falko Ueckerdt

Potsdam Institute for Climate Impact Research

Lion Hirth

neon neue energieökonomik GmbH

Gunnar Luderer

Potsdam-Institut für Klimafolgenforschung (PIK)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change; Technische Universität Berlin (TU Berlin)

Date Written: January 14, 2013

Abstract

Levelized costs of electricity (LCOE) are a common metric for comparing power generating technologies. However, there is qualified criticism particularly towards evaluating variable renewables like wind and solar power based on LCOE because it ignores integration costs that occur at the system level. In this paper we propose a new measure System LCOE as the sum of generation and integration costs per unit of VRE. For this purpose we develop a conclusive definition of integration costs. Furthermore we decompose integration costs into different cost components and draw conclusions for integration options like transmission grids and energy storage. System LCOE are quantified from a power system model and a literature review. We find that at moderate wind shares (~20%) integration costs can be in the same range as generation costs of wind power and conventional plants. Integration costs further increase with growing wind shares. We conclude that integration costs can become an economic barrier to deploying VRE at high shares. This implies that an economic evaluation of VRE must not neglect integration costs. A pure LCOE comparison would significantly underestimate the costs of VRE at high shares. System LCOE give a framework of how to consistently account for integration costs and thus guide policy makers and system planers in designing a cost-efficient power system.

Keywords: renewable energy, integration costs, levelized costs of electricity, LCOE, environmental economics, power generation economics, wind power, solar power, electricity market, market integration

JEL Classification: Q42, Q20

Suggested Citation

Ueckerdt, Falko and Hirth, Lion and Luderer, Gunnar and Edenhofer, Ottmar, System LCOE: What are the Costs of Variable Renewables? (January 14, 2013). Available at SSRN: https://ssrn.com/abstract=2200572 or http://dx.doi.org/10.2139/ssrn.2200572

Falko Ueckerdt (Contact Author)

Potsdam Institute for Climate Impact Research ( email )

Telegraphenberg
Potsdam, Brandenburg 14412
Germany

HOME PAGE: http://www.pik-potsdam.de/pik-frontpage?set_language=en

Lion Hirth

neon neue energieökonomik GmbH ( email )

Karl-Marx-Platz 12
12043
Berlin, 12043
Germany

HOME PAGE: http://www.neon-energie.de

Gunnar Luderer

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegraphenberg
Potsdam, Brandenburg 14412
Germany

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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