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403: The Efficiency Capacity Factor

Efficiency is defined as useful power output divided by the total electrical power consumed and is a critical determinant for project viability within the renewable energy arena. A key driver in determining efficiency is Capacity Factor: how much electricity a power plant actually produces compared to how much it would produce if it operated at full nameplate capacity 100% of the time. Clean energy distractors love to talk about capacity factor because it’s clearly a metric wind, solar, and hydro, historically have not fared well at. The wind industry norm for capacity factor is 0.30-0.35. However, capacity factor by itself is really not that important; what’s truly important is the total cost of producing electricity. In the energy field, Levelized Cost of Energy (LCOE) is one of the most important metrics. This is an estimate of total electricity cost including payback of initial investment and operating costs.

Levelized cost of electricity (LCOE) is often cited as a convenient summary measure of the overall competiveness of different generating technologies. It represents the per-kilowatt hour cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle.



TLCC = Total Life-Cycle Cost

Q = Annual Energy Output (Size of System in MW * 24 Hours * 365 Days * Capacity * Factor * 1,000)

UCRF = Universal Cost Recovery Factor

In order to further the calculations, a discount rate must be established for all Net Present Value determinations. The discount rate is an interest rate used to bring future values into the present when considering the time value of money. Determining the appropriate discount rate is subjective; conventional academic and practitioner thinking held that the more risk one took, the more one should get paid. Thus, discount rates used in determining intrinsic values should be determined by the risk of the cash flows being valued. For the purposes of calculating Net Present Value for the above mentioned project, a discount rate of 7% shall be applied (current 10-year Treasury Bond rate plus 5%, the current methodology employed by Warren Buffett).

To begin the LCOE calculation, the Total Life-Cycle Cost of the project must be established using the following formula:



I = Initial Investment or Total Project Cost

ITC = Investment Tax Credit (30%)

NPVDEP = NPV of MACRS Depreciation

NPVOM = NPV of O&M Costs

NPVSL = NPV of Site Lease Costs

The calculation for the Universal Cost Recovery Factor (UCRF) is as follows:

UCRF = [d(1 + d)N/(1 + d)N – 1]


d = Discount Rate (7%)

N = Analysis Period (Project Life Cycle = 20-Years)

In the energy field, LCOE is one of the most important metrics as it is an estimate of total electricity cost including payback of initial investment and operating costs. Currently, onshore wind energy has a median LCOE of $0.05/kWh; solar, $0.08 kWh; and natural gas, $0.057/kWh. Of all the available energy sources, ONLY hydropower ($0.03/kWh) yields a comparable LCOE.

Source: KOHILO Wind, LLC

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