Economic competitiveness evaluation of the energy sources: Comparison between a financial model and levelized cost of electricity analysis

Abstract

The levelized cost of electricity (LCOE) is used widely to compare the economic competitiveness of the energy mix. This method is easy to understand and simple to apply, which makes it preferable for many energy policymakers. However, the method has several disadvantages from the energy business perspective. First, the LCOE approach does not consider revenue, and a high-interest rate usually correlates with the tariff growth rate. Thus, if a high-interest rate increases the cost, that high rate increases the revenue, which can affect economic competitiveness. Second, the LCOE does not consider different stakeholders. Equity investors and loan investors have different interests depending on different financial indicators, which influence the same energy sources' differential economic attractiveness. This study analyzes and compares the LCOE, Project Internal Rate of Return (Project IRR), Equity Internal Rate of Return (Equity IRR), and Debt Service Coverage Ratio (DSCR) of an illustrative wind, coal, and nuclear power project using Monte-Carlo simulations. The results show that energy sources' economic competitiveness can vary depending on financial indicators. This study will help energy policymakers develop more economically realistic energy portfolios.