1.1 Different Measures of Cost

Cost can be measured in a number of different ways, and each way of accounting for the cost of power generation brings its own insights. The costs that can be examined include equipment costs (e.g. wind and hydropower turbines, PV modules, solar reflectors), replacement costs, financing costs, total installed cost, fixed and variable operating and maintenance costs (O&M), fuel costs and the levelised cost of energy (LCOE).

The analysis of costs can be very detailed, but for purposes of comparison and transparency, the approach used here is a simplified one. This allows greater scrutiny of the underlying data and assumptions, improved transparency and confidence in the analysis, as well as facilitating the comparison of costs by country or region for the same technologies in order to identify what are the key drivers in any differences.

The three indicators that have been selected are:

» Equipment cost (factory gate "free on board" and delivered at site "cost, insurance and freight");

» Total installed project cost, including fixed financing costs2; and

» The levelised cost of electricity LCOE.

The analysis in this paper focuses on estimating the cost of hydropower energy from the perspective of an individual investor, whether it is a state-owned electricity generation utility, an independent power producer, an individual or a community looking to invest in renewables (Figure 1.1). The analysis excludes the impact of government incentives or subsidies, system balancing costs associated with variable renewables and any system-wide cost-savings from the merit order effect3. Further, the analysis does not take into account any CO2 pricing, nor the benefits of renewables in reducing other externalities (e.g. reduced local air pollution, contamination of natural environments). Similarly, the benefits of renewables being insulated from volatile fossil fuel prices have not been quantified. These issues are important but are covered by other programmes of work at IRENA.

It is important to include clear definitions of the technology categories, where this is relevant, to ensure that cost comparisons are robust and provide useful insights (e.g. small hydro vs. large hydro, run-of-river vs. pumped hydro). It is also useful to identify any additional functionality and/or qualities of the renewable power generation technologies being investigated (e.g. the ability to store water for later generation and provide ancillary grid services). It is vital to ensure that system boundaries for costs are clearly set and that the available data are directly comparable.

The data used for the comparisons in this paper come from a variety of sources, such as business journals, industry associations, consultancies, governments, auctions and tenders. Every effort has been made to ensure that these data are directly comparable and are for the same system boundaries. Where this is not the case, the data have been corrected to a common basis using the best available data or assumptions. It is planned that these data will be complemented by detailed surveys of real world project data in forthcoming work by the Agency.

An important point is that, although this paper tries to examine costs, strictly speaking, the data available are actually prices, and not even true market average prices, but price indicators. The difference between costs and prices is determined by the amount above, or below, the normal profit that would be seen in a competitive market.

The cost of equipment at the factory gate is often available from market surveys or from other sources. A key difficulty is often reconciling different sources of data to identify why data for the same period differs. The balance of capital costs in total project costs tends to vary even more widely than power generation equipment costs as it is often based on significant local content, which depends on the cost structure of where the project is being developed. Total installed costs can therefore vary significantly by project, country and region depending on a wide range of factors.

FIGURE 1.1: RENEWABLE POWER GENERATION COST INDICATORS AND BOUNDARIES

2 Banks or other financial institutions will often charge a fee, usually a percentage of the total funds sought, to arrange the debt financing of a project. These costs are often reported separately under project development costs.

3 See EWEA, Wind Energy and Electricity Prices, April 2010 for a discussion