Environment & Energy

German consumers will pay almost €400 per megawatt hour on Thursday, the highest figure since the end of 2022

Critiques of LCOE are not scarce. Joskow is one of the first to point out that LCOE ignore the costs associated with intermittency [3]. It is easy to see the fundamental misunderstanding in LCOE: The LCOE describe the costs of generating electricity. However, the function of supply in electricity markets is not to generate electricity but to provide a specified amount of electricity to a specific place at a particular time. The locational aspect adds significant additional costs to renewables that are generally less flexible about where they can be sited than fossil fuel plants. As a result, a larger grid is required to transport the electricity from, e.g., hydropower plants to the demand in urban areas. These transmission costs are partly taken care of in some LCOE estimates when a transmission cost adder is included in the LCOE. But the timing aspect turns out to be even more crucial and the focus of this paper. Many renewables (like wind and solar) are intermittent and non-dispatchable (hereafter referred to just as “intermittent” unless further specified), and some that are not intermittent (like run-of-river-hydro) are often not fully dispatchable.2 As long as the share of intermittent generation is low, sufficient dispatchable generation capacity will usually be available to step in and replace missing intermittent generation output. Economically, the fact that intermittent generation has no obligation to meet the demand can be seen as a hidden subsidy. One can even go one step further and argue that intermittent generation is of zero value if it cannot be made available to consumers who demand a steady electricity flow.