EIA Assumptions Lead to Reliance on Natural Gas and Renewable Energy

The Energy Information Administration’s (EIA) Annual Energy Outlook (AEO) 2016 shows a sizable increase in generation from natural gas, wind, and solar in both its major cases—i.e., with and without EPA’s so-called “Clean Power Plan (CPP)”. After comparing the levelized costs of competing generating technologies that EIA publishes, that forecast is no surprise. Levelized costs represent the cost of building and operating a generating plant over an assumed financial life and duty cycle. The levelized costs for these renewable and gas technologies are much lower in this year’s Annual Energy Outlook than in last year’s Outlook. Generally, the levelized costs for the natural gas technologies are 20 to 25 percent less than last year’s costs; the levelized costs for wind are about 25 percent less; and the levelized costs for solar PV are over 40 percent less. The reasons for the lower costs vary from lower capital cost assumptions to larger tax credits for the renewable technologies and lower fuel prices for the natural gas generators.

Capital Cost Assumptions

EIA’s capital costs assumptions for Annual Energy Outlook 2016 show large reductions for hydropower and solar PV generators compared to those used in last year’s report. Capital costs for hydropower generators are about 12 percent lower; and for solar PV, they are about 24 percent lower. The capital costs are shown in the graph below. These capital costs represent a typical facility and are overnight costs, which exclude interest accrued during plant construction and development. EIA uses regional cost adjustment factors to represent regional differences in labor and construction costs. Variability in cost is also based on project size, location, and access to key infrastructure (such as grid interconnections, fuel supply, and transportation).

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For wind, EIA states “the cost favorability of the lowest-cost regions compound the underlying variability in regional cost and create a significant differential between the unadjusted costs and the capacity- weighted average national costs as observed from recent market experience.”  To correct for this, the average capital cost that EIA provides for wind in AEO 2016 is “a weighted average cost… based on the regional cost factors assumed for wind in the AEO2016 and the actual regional distribution of wind builds that occurred in 2014.”

Source: Institute for Energy Research
Date: Aug 15, 2016