Your guide to Lazard’s LCOE Analysis. Part 2: The disclaimer

It helps to start our series on the Lazard LCOE analysis at the beginning of Lazard’s LCOE analysis. You can click here to access the table of contents for these articles.

Wind and solar special interest groups frequently cite Lazard’s Levelized Cost of Energy (LCOE) analysis to claim that even without taxpayer subsidies, these technologies are the lowest-cost sources of electricity. They almost always ignore the disclaimer that is located on Page 1 of the Lazard reports.

The disclaimer reads:

Other factors would also have a potentially significant effect on the results contained herein, but have not been examined in the scope of this current analysis. These additional factors, among others, could include: implementation and interpretation of the full scope of the Inflation Reduction Act (“IRA”); network upgrades, transmission, congestion or other integration-related costs; permitting or other development costs, unless otherwise noted; and costs of complying with various environmental regulations (e.g., carbon emissions offsets or emissions control systems). This analysis also does not address potential social and environmental externalities, including, for example, the social costs and rate consequences for those who cannot afford distributed generation solutions, as well as the long-term residual and societal consequences of various conventional generation technologies that are difficult to measure (e.g., nuclear waste disposal, airborne pollutants, greenhouse gases, etc.)

(Emphasis added)

In our opinion, the bolded parts represent the most important aspects of the disclaimer because they demonstrate that Lazard’s LCOE estimates are not meant to convey the cost or value of an asset to the entire electric grid as a system. 

Instead, LCOE estimates are simply an investment tool for financial institutions to determine whether an investment will be profitable. They do not consider the system costs of maintaining grid reliability, such as load balancing and other ancillary services.

The electric grid needs a constant flow of power on an instantaneous basis to meet the electricity needs of families and businesses. Wind and solar make this process much more difficult because they are intermittent energy sources, which means they only produce electricity when the sun is shining and wind is blowing. Because of this, wind and solar are not as valuable to the electricity grid as dispatchable power plants like coal, natural gas, and nuclear, which can be “dispatched” on demand to supply the grid with power.

The Energy Information Administration (EIA) makes this distinction clear in its LCOE disclaimer and even warns against comparing intermittent power plants with dispatchable ones.

The disclaimer reads:

Actual plant investment decisions consider the specific technological and regional characteristics of a project, which involve many other factors not reflected in LCOE (or LCOS) values. One factor is the projected utilization rate, which depends on the varying amount of electricity required over time and the existing resource mix in an area where additional capacity is needed. A related factor is the capacity value, which depends on both the existing capacity mix and load characteristics in a region. Because load must be continuously balanced, generating units with the capability to vary output to follow demand (dispatchable technologies) generally have more value to a system than less flexible units that use intermittent resources to operate (resource-constrained technologies). We list the LCOE values for dispatchable and resource-constrained technologies separately because they require a careful comparison.

(Emphasis added).

Additionally, Lazard testifies to this difference in value by applying “firming costs” to new wind and solar builds. These firming costs account for the cost of using either natural gas peaking facilities or 4-hour battery storage to act as backup for the intermittency of wind and solar generation. Using these estimates for wind and solar, the cost per megawatt-hour (MWh) increases by as much as $100 depending on the system operator. We discuss Lazard’s firming costs further in part 6 of this series.

Therefore, any use of Lazard’s LCOE analysis in the context of debating which electricity sources will produce the most reliable, affordable electric grid is a misuse of the estimates. Unfortunately, this is exactly what wind and solar advocates do with Lazard’s estimates.

For instance, an article from CleanTechnica titled, “Wind & Solar Are Cheaper Than Everything, Lazard Reports,” states the following:

“A US-focused report from Lazard recently reported… that wind and solar offer the cheapest electricity in the country, even significantly undercutting natural gas combined cycle power plants now.”

Other publications such as Utility Dive, pv magazine, and even Forbes have made the same mistake of using Lazard’s LCOE estimates to compare the cost of wind and solar with dispatchable power plants that have more value to the grid, without any mention of the disclaimers above.

In our next installment, we will discuss why the cost of new wind and solar should be compared to the cost of existing dispatchable power plants instead of new power plants.