Interactive Levelised Cost of Electricity Comparison Tool
This tool calculates an estimate of the levelised cost of electricity generation (LCOE) for each potential generation project in MBIE’s Generation Stack. The Generation Stack is used by MBIE in energy and climate modelling such as Electricity Demand and Generation Scenarios (EDGS).
How the Interactive Levelised Cost of Electricity Comparison Tool works
The Interactive Levelised Cost of Electricity Comparison Tool ranks the projects from lowest to highest LCOE and the resulting curve is a simplified representation of the long-run marginal electricity generation costs in New Zealand. It is important to note that this simplified long-run marginal electricity cost curve does not take into account additional capital cost of meeting peak demand. The long-run marginal cost is the incremental cost incurred when additional electricity generation capacity is added to the system in the long run.
Using default assumptions, the tool says that for the current point in time, the next generation plants likely to be built are either wind or hydro. The combination of declining wind technology costs and low discount rates caused the LCOE of wind to reach as low as $54 per MWh. However, the tool does not allow for the falling cost of both wind and solar in the future.
Note: The LCOE is the average minimum price at which the electricity generated by the asset is required to be sold for in order to offset the total costs of production over its lifetime.
Pre-tax discount rates
As of 18 September 2020, the Treasury recommended real pre-tax discount rates in the range of 5% to 6% per annum to be used in economic analyses.
The default value of real post-tax discount rate in the calculator is 4.5% per annum. As the LCOE is sensitive to key assumptions such as discount rates and carbon tax, the tool allows users to perform sensitivity analyses by adjusting key assumptions.
As there are no utility-scale solar installations in New Zealand, assumptions used in calculating LCOE for utility solar are based on overseas studies and hence the estimates are subject to large uncertainty.
In future MBIE is planning to build a Shiny app for this interactive tool and update the TWAP/GWAP parameter.
Graph showing the Levelised Cost of Electricity Comparison of new generation projects