Editorials

How the Levelized Cost of Electricity Impacts Global Energy Policy

There is no escaping the impact of climate change on global events. Hurricanes, droughts, flash floods, and other so-called “natural disasters” all-cause, or contribute to migration, crop failure, and other effects.

And, while most countries have woken up to it, it is important that they act together. One way to do that is by applying LCOE calculations to energy generation. Here you will learn what LCOE is and how it impacts global energy policy.

LCOE Definition

LCOE refers to the Levelized Cost of Electricity (or Energy, or Electrons, depending on the author). It is the price at which electricity can be sold to make sure that the power generator’s asset breaks even over its lifetime.

Why Global Energy Policy is Affected by LCOE

LCOE helps those involved consider all the costs of building and operating power plants, not just the start-up costs. This means that break-even time periods are added to the calculation. They vary, but for renewable energy projects, they are usually between 20-35 years.

Armed with this extra data, generators, buyers, policymakers, and others can establish a benchmark cost per MWh for power generation.

This affects global energy policy by helping countries, continents, and global regions compare different power sources.

One example of this can be found in a recent report by the International Energy Agency.

Insight from the International Energy Agency

The IEA’s mission statement says it works with governments and industries globally to “provide secure and sustainable energy for all”. It includes different fuels and technologies in its analysis of power production, including nuclear, coal, gas, solar, wind, battery, and hydroelectric, among others.

In June 2022 the IEA produced its Africa Energy Outlook. The Agency analyzed energy requirements on the continent of Africa and applied LCOE to different energy production methods. This information could be used to help policymakers and energy producers plan how best to produce electricity

In a disappointing note for advocates of net zero carbon emissions, the IEA found that, by 2030, cheap local coal will continue to dominate in South Africa, while oil and gas will provide 85% of North Africa’s energy needs.

But more positively, it reported that, by 2030, solar power will be considerably cheaper to produce than wind ($0.018/kWh compared to $0.049/kWh). And, reflecting the competitive nature of global fuel production, African nations could lead the way in hydrogen production. The IEA anticipates that, by 2030, the continent could produce 5,000 megatons of hydrogen power per year at less than $2/kg. This amount compares favorably with other regions, such as the Middle East, meaning that Africa could sell on a global scale, which is especially important given its proximity to southern Europe.

And this energy production also means jobs. The IEA anticipates that 4 million energy-related jobs could be produced on the continent by 2030. Many of these are technical and high paying, especially in the renewable fuel source field. This is yet another reason for policymakers to consider LCOE and its impact when considering how to develop global energy policy. 

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