When we calculate the costs of different generation technologies, we use the LCOE (levelised cost of electricity), which makes it easier to compare costs across generation types.
Basically, you take the output over the lifetime of the asset, and divide it by the cost of construction and operation, PV-ing that back to the present. To calculate the output, it is usual to use a 'capacity factor'. For example, solar has a capacity factor of around 25%, which means its output is about 25% of its nameplate capacity. The capacity factor for fossil fuels is assumed to be flat over time, determined by technological (downtime for maintenance and repair reducing capacity, for example) rather than demand constraints. But falling demand as renewables increase their market share means that fossil fuel capacity factors are falling. This increases their LCOEs, making them even less competitive.
From IEEFA:
The Australian government may be relying on inaccurate financial assumptions for its gas-fired recovery as most gas- and coal-fired power plants in Australia, the UK, the U.S. and China are being operated less and less – what’s called a declining capacity factor, finds a new report by the Institute for Energy Economics and Financial Analysis (IEEFA)
Report author and LNG/gas analyst Bruce Robertson says a declining capacity factor poses serious risks to investors in fossil fuelled power plants if they have relied on financial modelling which anticipates power plants having a constant capacity factor throughout their lifetime, meaning they expect a plant to produce electricity at a constant level, every year, until the end of its life.
“Far from being constant, our research shows that the capacity factor for coal-fired power plants has been declining globally since before the beginning of last decade – with many soon to become stranded assets,” says Robertson.
“Similar to the downward trend in coal, the capacity factor of gas-fired power plants’ is also forecast to decline.
“Yet financial modellers are still basing their calculations on the assumption power plants are producing ‘constant’ power over their lifetime. This leads to an underestimation of the cost for each unit of electricity to be produced over the power plant’s lifetime – what’s called levelized cost of energy (LCOE). And this cost underestimation causes a financial overvaluation of the energy asset, which can mislead potential investors.
“Investors should take note.”
[The report] found widely cited energy authorities including the U.S. Energy Information Administration (EIA), the International Energy Agency (IEA) and the Commonwealth Scientific and Industrial Research Organisation (CSIRO), in addition to financial institutions, continue to rely on a ‘constant’ rate of capacity factor in their LCOE calculations.
IEEFA’s research however demonstrates a declining (not constant) capacity factor of fossil-fuelled power plants in four key regions across the globe: Australia, China, the UK and the U.S.
The capacity factor of coal-fired power plants operating in Australia’s National Electricity Market (NEM) has declined by about 24% since 2008, and by about 19% in China since 2007.
“Linear forecasting shows the capacity factor of coal-fired plants in China will fall below 40% in the next 4 years,” says co-author and energy analyst Milad Mousavian.
The UK’s collapse in capacity factor has caused numerous stranded assets, with the UK’s coal era now forecast to end in 2022.
In the U.S., research from think tank RethinkX shows the capacity factor of coal-fired power plants is forecast to drop to 10% by 2035, while a huge drop in capacity factor for gas-fired power plants is forecast to begin from 2022.
Australia’s NEM data shows an even more severe drop than that occurring in the U.S.
Gas peakers and combined cycle gas turbines (CCGT) power plants have been experiencing falls in capacity factor since 2010 and the average capacity factor of all gas-fired power plants in the NEM has fallen from 27% to just 16% in the last decade.
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