1.2 Methodology and boundaries for the analysis

The foundations of an investment decision are made based on the costs of renewable fuels and technologies. This is critical to understanding the competitiveness of renewable energy options for transport.

Road transport costs can be measured in a number of different ways, with each approach providing its own particular insights. By setting clear boundaries and methodologies for its analysis, IRENA aims to ensure transparency in the methodology and assumptions used to make cost calculations. This minimises any confusion about the comparability of data and allows the debate to focus on the underlying assumptions.

Cost analysis can be very detailed, but for comparison purposes, the approach used here is a simplified one. This allows greater scrutiny of the underlying data and assumptions and improves transparency and confi-dence in the analysis. It also facilitates the comparison of costs by country or region for the same technologies in order to identify the key drivers in any differences.

This paper focuses on the cost of renewable solutions from the perspective of investors, whether they are a public or private company, individual or a community looking to invest in renewable options for transportation. The analysis excludes the impact of government incentives or subsidies, as well as any energy system-wide costs or cost reductions except where noted (e.g. additional electricity infrastructure for EVs). Furthermore, the analysis does not take into account CO2 pricing or the benefits of renewables in reducing other externalities (e.g. reduced local air pollution or contamination of the natural environment). Similarly, there is no quantifi-cation of the benefits from renewables being insulated from volatile fossil fuel prices.

The analysis required to calculate the external costs of fossil fuel use from climate change and local pollutant emissions is important, but is beyond the scope of this report. The range of uncertainty surrounding estimates of external costs can also be a distraction from the underlying cost data, while local pollutant emission external costs obviously vary significantly regionally. However, it is clear that including these costs would improve the economics of the renewable options presented here.

The data used for the comparisons in this paper come from a variety of sources, such as governments, industry associations, business journals, manufacturers, project developers, consultancies and other private companies. Every effort has been made to ensure that these data are directly comparable and are used with the same system boundaries. Where this is not the case, the data have been corrected on a common basis using the best available data or assumptions.

It is important to note that, although this paper tries to examine costs, strictly speaking, the data available are usually prices. They are often not even true market average prices, but price indicators. The difference between costs and prices is determined by the amount above, or below, the normal5 profit that would be seen in a competitive market.

The approach used in the analysis presented here is based on a discounted cash flow (DCF) analysis. This method of calculating the cost of renewable energy technologies is based on discounting financial flows (annual, quarterly or monthly) to a common basis in time, taking into consideration the time value of money. As a result, the weighted average cost of capital (WACC- often also referred to as the discount rate) used to evaluate the project has a critical impact on the cost of the option being examined.

All costs presented in this paper are in real 2012 USD; that is to say, after inflation has been taken into account unless otherwise stated.6 A standard discount rate of 10% real (i.e. after adjusting for inflation) is used to discount all financial flows to a common basis in this report (unless explicitly noted that another value has been used). This assumption is consistent with all the previous costing analysis conducted by IRENA (IRENA, 2012a-e and IRENA, 2013).

Unlike power generation, where one relatively simple methodology was possible,7 analysis of the transport sector requires several different methodologies to accurately reflect the very different technologies. The methodologies and boundaries used to assess the costs of biofuels and biogas, PHEVs and EVs are described below.

Biofuels and biogas

The analysis of biofuels and biogas shares a common methodology and is based on a DCF analysis of the capital, operations, maintenance and fuel costs of producing biofuels and biogas. This methodology is similar to that used for power generation, but requires additional data about the process technology to determine the yields of biogas and biofuels from a given feedstock. Different processes and feedstocks will therefore have quite different final costs for the feedstock component.

The formula used for calculating the cost of biofuels and biogas is:

Biofuel or biogas cost (per litre of gasoline equivalent)

Where:

  • It = investment expenditures in the year t for the production plant;
  • Mt = operations and maintenance expenditures in the year t;
  • Ft = Net feedstock expenditures in the year t (based on process yields and feedstock prices, less revenues from co-products or gate fees for waste);
  • CPt = The value of non-feedstock co-products (e.g. surplus electricity sold to the grid);
  • Et = energy produced in the year t (based on plant capacity, availability and yields from feedstock);
  • r = discount rate; and
  • n = economic life of the system.

Given liquid biofuels and biogas are direct competitors with liquid fossil fuels, the costs are presented per litre of gasoline equivalent for ethanol and biogas, and per litre of diesel equivalent for biodiesel. This adjustment is necessary because the volumetric energy content of ethanol is around two-thirds of that of fossil fuel-based gasoline. This needs to be taken into account in order to analyse gasoline and ethanol on a comparable basis. The energy content of a litre of biodiesel is around 90–94% of conventional fossil fuel diesel. The analysis for biogas is based on a normalised cubic metre of gas, which is the volume of gas for a normalised temperature and pressure of 0°C and 1.01325 bar A respectively given that this is the standard unit for the industry. However, for the final cost of biogas the data is also presented per litre of gasoline equivalent to provide a direct comparison with the incumbent fossil fuel option.

It is important to note that in this equation for biofuels and biogas plants the feedstock costs are net of the value of co-products arising from the feedstock. This includes, for instance, dried distiller grain for grain-based liquid biofuels and any gate fees for waste disposal or revenues from fertiliser production at biogas plants. Co-products not associated with the feedstock, such as surplus electricity exported to the grid, are treated separately.

For both biofuels and biogas, the system boundary for which costs are examined are ex-plant. The rationale for this is that the transportation and distribution costs for liquid biofuels and biogas are very similar to the equivalent liquid fossil fuels and natural gas.

Plug-in hybrids and electric vehicles

PHEVs and EVs require separate methodologies. For PHEVs the cost of gasoline/diesel saved is considered. This can then be directly compared to the retail cost of gasoline or diesel to determine the competiveness of the PH EV c ompared t o an equivalent vehicle equipped with an internal combustion engine. The formula for PHEVs is:

Cost of gasoline/diesel saved =

Where:

  • It = additional investment per vehicle (over a conventional vehicle) in the year t;
  • ECt = electricity cost in the year t (as a function of km travelled using electricity and the electricity consumption per km);
  • FSt = fuel saved in litres as a result of electric km driven in the year t (based on fuel efficiency of a comparable conventional vehicle);
  • r = discount rate; and
  • n = economic life of the vehicle.

For EVs the annualised total cost of ownership for the vehicle including purchase price and electricity costs is examined and then compared to the annualised total ownership costs for an equivalent conventional vehicle. The reason for this approach is that it doesn't make sense to talk about the cost of gasoline saved when there is no internal combustion engine and that most EVs available today are purpose-designed vehicles and a direct comparison with an identical equivalent ICE vehicle is often not possible.

As far as EVs and PHEVs are concerned, this report discusses the costs of electrical charging infrastructure, but does not attempt to fully integrate this into the cost analysis. The wide range of possible infrastructure deployment strategies and their varying costs are beyond the scope of this report. Infrastructure deployment patterns and their costs, given their complexity, merit their own analysis.

5 The idea of "normal profits" is an economic concept where the level of profit results in a return on investment equal to the risk adjusted rate of return for the industry.

6 An analysis based on nominal values with specific inflation assumptions for each of the cost components is beyond the scope of this analysis. Project developers will build their own specific cashflow models to identify the profitability of a project from their perspective.

7 See IRENAs most recent analysis of power generation Renewable Power Generation Costs in 2012: An Overview for a discussion of the methodology used. This is available as a free download at www.irena.org/publications.