Levelized Revenue of Electricity (LROE) - Part 2

In part 1 of this post, we introduced a new concept for comparing the revenue from different energy sources and markets, called the levelized revenue of electricity (LROE). In part 2, we show some specific calculations of the LROE for solar. We show that in some markets the incentives are set properly to encourage growth in solar by having LROE>LCOE. Other markets, however, don't provide enough incentives, thus LROE<LCOE.  


In the last post, I described how the LROE is an exact analog of the LCOE by replacing the costs with revenue. The LROE is the discounted cash flows divided by the discounted energy production:

In this post we will illustrate a simple, very approximate, calculation for the LROE for two different types of solar projects in three markets: New Jersey, New Hampshire, and Germany.  For simplicity, I will make some broad assumptions about these complicated markets, so these calculations will be for illustrative purposes only. Before the calculation, however, we must briefly describe the sources of revenue in each market.

We will focus on two main sources of revenue: (1) electricity sales and (2) incentives.  For each market we will focus on two types of installations, a small, residential rooftop installation and a larger utility scale ground-mount system.  Both the revenue from electricity sales and the incentives can vary depending on the system.

Revenue from Electricity Sales: Small residential systems are typically behind the meter, that is they are eligible for net-metering and offset retail rates of electricity.  Larger utility-scale projects are considered in-front of the meter, since they pertain to the wholesale electricity market. Retail rates vary from market to market, but the average by state is collected by the EIA making it easy to incorporate into our calculation. Wholesale electricity rates are a slightly more complicated beast, they also vary from market to market, and even vary by the time of day. For simplicity, we assume a wholesale rate of $0.06/kWh for each market.  The average value in the markets we discuss are likely within a couple cents of this approximation.


Revenue from Incentives: The incentives in New Jersey and New Hampshire are based on a mandate requiring a certain percentage of electricity generation to come from renewable (including solar) sources, called the renewable portfolio standard (RPS).  For the solar component of the RPS (often called the solar carve-out), there is a market-based compliance based on Solar Renewable Energy Credits (SRECs). Solar systems in each state produce SRECs based on their energy production for which the utilities must buy (unless they own the solar generation themselves) to comply with the RPS. If the utilities don't acquire enough SRECs they are forced to pay the Solar Alternative Complicane Payment (SACP) which is set for the next 1-15 years depending on the state. The SACP servers as a celling for the market price of SRECs. However, if there are more SRECs in the market then needed by the utilities (aka, more solar generation occurred then was mandated by the RPS) than the market SREC price can fall significantly below the SACP. Calculating the LROE for this revenue source can be complicated because of the variability and risk, although the SACP does serve as a rough guide. We employ two methods based on the SACP to arrive at a high and low value in Table 1. Interestingly, SRECs are system type agnostic, so the rates apply to both residential and utility scale systems. The main financial incentive in Germany is a feed-in-tariff (FiT), which provides a constant stream of money for electricity produced from a solar project.  A rate is decided each year and projects built within that year are typically guaranteed the rate for the next 20 years, although the German government has recently been lowering the rate retro-actively. The rate depends on the type of system built, as reflected in Table 1.

With these two sources of revenue, we are able to calculate the components of LROE in Table 1. The table lists the two revenue contributions to the LROE. To calculate the total LROE for NJ or NH, simply sum up the two contributions: electricity rate and incentive. For example, a residential project in New Jersey assuming the highest possible market price for SRECs has a total LROE of the retail contribution ($.150/kWh) plus the SREC contribution ($.301) which equals $.451/kWh.

Table 1:  Calculation of the components of the LROE for different markets.  All numbers are US $/kWh unless otherwise indicated. The first column (e-) for each market is the retail rate of electricity from EIA. For NJ and NH the second and third column are a high (h-SREC) and low (l-SREC) estimate of the revenue from subsides in the SREC market.  For Germany, the 2011 residential (r-FiT) and utility scale (u-FiT) feed-in-tariff rates are listed. Assumptions: Energy output (second column) is calculated for a 100 kW system assuming solar insolation of 1000 Wh/Wp and 0.7% degradation. (Note: 100kW was chosen only for illustrative purposes.) LROE calculated for 20-yr period with a 7% discount rate.   The retail rate is increased year-on-year by 0.5%. The high and low limits on the revenue from the SREC market is based on the SACP and half of the SACP. The SACP in NJ has been set to an absolute price out to 2006, while the NH was set to $0.163/kW and will increase at the rate of inflation (we assume 1% in this table). 

Equipped with a method for calculating the LROE for each market, we can now compare to the LCOE to determine the profitability of each market and type of system (residential versus utility). Calculating the LCOE is a very difficult task and depends on a variety of factors, including the solar insolation and costs of labor. For simplicity, Table 2 uses a range for the LCOE which represents a best estimate for the two different types of installation. Because of economes of scale and ease of installation, utility scale projects have a LCOE much lower than a small residential rooftop installation.

Table 2: Summary of LROE and LCOE (in US $/kWh) for two different systems: small residential (<30kW) and utility scale (>1MW). The LROE for residential systems was calculated using the retail rates in Table 1. For utility-scale systems a wholesale of $0.06/kWh is used.  This number roughly matches data from PJM and ISONE. 

There are several important implications of Table 2. First, one sees how strongly the Germany market is subsidized. The difference between LROE and LCOE is positive and can be quite high. Part of this may be an underestimation of the LCOE (Germany has less solar insolation than NJ or even NH, and labor costs may be slightly higher).  But even given a slight underestimation, the market is well funded, and the lower risk involved with the FiT is the reason Germany has the world's most installed solar. Between NJ and NH, it appears that NJ is the better funded market because of a much higher SACP.  Since SRECs are size agnostic, utility scale is favored because it should have a lower LCOE.  The table illustrates how the NH market may be slightly underfunded, especially for smaller residential systems. But since the NH SACP does not decrease (and in fact it should slightly increase), the falling cost of solar should soon make the NH market profitable.

The example above is only for illustrative purposes, a much more rigorous approach can be taken based on the current market conditions and an exact LCOE. But with this information, the LROE becomes a powerful tool for understanding the revenue from an energy project and provides an easy metric to determine if incentives are properly set to encourage growth of renewable energy.