New Research: Historical Data Shows Inaccurate Levelized Costs of Electricity for Conventional Power Plants Have Distorted the Market and Potentially Created A Growing Global Financial Bubble

LONDON and SAN FRANCISCO, March 11, 2021 (GLOBE NEWSWIRE) -- New research released today from RethinkX details decade-long inaccurate estimates of the levelized costs of electricity (LCOE) for coal, natural gas and hydro power plants, produced by virtually all mainstream analyses and used to direct future investment, have distorted the electricity market, potentially creating a growing global financial bubble around conventional power plants with dynamics that are similar to the subprime mortgage housing bubble that led to the Great Recession.

The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy Assets, a new report from RethinkX co-founder Tony Seba and co-author Adam Dorr, includes detailed historical data revealing that, at least since 2010, the leading analyst organizations, including the International Energy Agency (IEA), the United States Energy Information Administration (EIA), Wall Street analysts and others, that define the LCOE on which investors, policymakers, regulators and civic leaders make decisions, have systematically assumed that conventional coal, natural gas and hydro power plants would produce far more electricity than they actually have, and therefore achieve levelized costs of electricity that are far lower than they actually are, making those power plants appear to be far better investments than they turn out to be. The divergence between real costs and the incorrect LCOE, happening in conventional power markets, is so large and growing that mainstream analyses underestimate the per kilowatt-hour cost of coal, gas and hydro by up to 400%. [See Video Presentation]

“For at least a decade, mainstream energy analysts have ignored real market data, just as the credit rating agencies ignored real housing market data. As a result, over $2.2 trillion has been invested in conventional power plants worldwide based in part on erroneous assumptions about future output and therefore the cost of electricity and that number is growing,” said Seba. “What happened to coal as a result of natural gas is now happening to all conventional power as a result of the rapidly increasing adoption of near zero marginal cost solar wind and battery (SWB) – but because of erroneous assumptions that underlie levelized costs of electricity, governments, investors and ratepayers may not know it. Instead, they could continue to sink trillions into assets that will be increasingly worthless, at the expense of ratepayers and potentially our retirement funds.”

This new research reveals prospective conventional electricity power plants have become overly inflated in value likely because virtually all mainstream analysts calculate LCOE based on the false assumption that any newly-built power plant will be utilized at a high and constant rate year after year, and in the case of coal, natural gas and hydro at much higher rates than what historical market data shows. As a result, when corrected for the real output, the real levelized costs of electricity from these conventional power plants are much higher than these agencies have projected.  Specifically:

  • Coal: The EIA LCOE for coal power plants continues to assume through 2060 an unrealistically high and constant capacity factor of 85% for the entire 40-year technical life of the facility, when, in fact, the average capacity factor for coal power plants in the U.S. has declined dramatically, from 67% in 2010 to just above 40% in 2020. Corrected coal LCOE for 2020 based on accurate capacity factor figures was 32.4 cents per kilowatt hour (kWh) -- more than four times the 7.6 cents reported by the EIA.   
  • Natural Gas: In 2010, the EIA LCOE for natural gas power plants assumed an unrealistically high and constant capacity factor of 87% for the entire 20-year technical life of the facility, when, in fact, the actual capacity factor for natural gas power plants in the U.S. increased due to fracking and displacement of coal, from 44% in 2010 to 58% in 2020, but never 87%. The EIA reported a LCOE of 3.8 cents per kWh for newly built gas power plants entering service in 2020 when, in fact, the correct LCOE in 2020 was 6.2 cents per kWh -- more than 60 percent greater than the current EIA estimate. 
  • Hydro: In 2010, the EIA LCOE for hydro power plants assumed an unrealistically high and constant capacity factor of up to 70% for the entire life of the facility, when, in fact, the actual capacity factor for hydro power plants in the U.S. has grown slightly from 38% in 2010 to 42% in 2020 but at no time in the last decade has it exceeded 50%. Correcting for this discrepancy and accounting for likely declines in capacity factor during the 2020s and 2030s gives a LCOE of 17.5 cents per kWh, which is three times higher than the LCOE of 5.3 cents per kWh reported by the EIA. 

“Today the EIA and others make the untenable assumption that the capacity factor for a coal plant will be 85% through at least 2060,” said Dorr. “Our research reveals the same erroneous assumptions about the capacity factor for natural gas, hydro and nuclear power plants are showing breakeven costs for their electricity that are much lower than they actually are, making these plants appear to be better investments that they would be when considering that the actual cost of producing electricity from these plants is much higher.”

If faulty LCOE assumptions are not corrected, this global financial bubble could grow by several trillion dollars over the next decade as SWB costs continue their dramatic decline, outcompeting conventional power plants, whose output continues to decline while costs continue to rise. Because competitive wholesale electricity markets tend to clear at or near the marginal cost of electricity, prices at auction now regularly reach or even fall negative in regions such as California, Texas and Germany that have been early SWB adopters. Losses from selling electricity at zero or negative prices will accelerate the disruption of conventional power plants, making it increasingly difficult to cover their costs.

Recently, Seba and other top energy scientists at some of the world’s leading research institutions issued a joint declaration, signed by dozens of preeminent scientists, stating unequivocally that the transition to a 100% renewable energy system is not only possible, it will be cheaper than any other system and can happen much faster than conventional wisdom believes.

Based on conservative assumptions of the rate of disruption (which the authors think will be much faster) and the declining capacity factors for coal, gas, nuclear and hydro, The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy Assets reveals a dramatically widening gap between the real costs of conventional power plants and the prevailing LCOEs that can drive future investment. Based on the conservative projection that capacity for each conventional technology declines to 10% by 2035, and altering nothing but capacity factor in the LCOE calculation, the report finds the following:

  • Coal: By 2030, corrected LCOE is 65 cents per kWh -- 9 times higher than the EIA’s LCOE estimate of 7.5 cents per kWh.
  • Natural Gas: By 2030, corrected LCOE is 18 cents per kWh -- 4.5 times higher than the EIA’s LCOE estimate of 4.1 cents per kWh.
  • Nuclear: By 2030, corrected LCOE is 105 cents per kWh -- 13.5 times higher than the EIA’s LCOE estimate of 7.8 cents per kWh.
  • Hydro: By 2030, corrected LCOE is 49 cents per kWh -- 9 times higher than the EIA’s LCOE estimate of 5.3 cents per kWh.

In calculating capacity factor through 2040, the authors used actual historical capacity factor data, EIA data and parameters, and recalculated the LCOE with a dynamic, declining capacity factor (i.e. utilization rate) rather than an unrealistically high and constant capacity factor each year through 2040, as the EIA and other mainstream analysts assume.

“The total cost of a new solar or wind power plant is already below just the operating cost of conventional generation such as gas, coal and nuclear. That means even if building a conventional power plant costs nothing, it is still more expensive – based on operating costs alone – than a solar or wind plant,” said Seba. “And yet the unrealistic but easily correctable levelized costs of electricity could continue to drive investment into conventional power. Once the divergence between erroneous LCOE and real levelized costs become impossible for incumbents to deny, the financial markets will be swift, and trillions invested by pension, retirement and endowment funds could become worthless. An example of this is the fact that the market capitalization of coal in the U.S. as reflected in the Dow Jones U.S. Coal Index, collapsed by over 99% from a high of 500 in 2011 to less than 5 in 2020, at which point the Index itself was quietly discontinued by S&P Global.

“Decision makers can act now to correct this market distortion and protect millions of citizens who could lose retirement savings that go into such investments. Ratepayers and taxpayers will suffer as the long-term commitments regulators and public utility commissions make on their behalf continue to commit them to increasingly uncompetitive conventional power. The first step is to correct the unrealistic assumptions about power plant capacity factor,” Seba concluded.

What Experts Say about RethinkX

“RethinkX’s work is differentiated and has caused our investment analysts to question many of their base assumptions, which drive their longer-term investment framework… RethinkX brings a fresh and different perspective, which has made us change the way we think about the impact of new technologies on companies, industries and indeed the broader societal impact. However, given the speed and magnitude of technological change, this also has relevance for the way that investors and companies allocate capital today as well as over the next several years.”
      – Nigel Bolton, Chief Investment Officer, BlackRock Active Equities

“Rethinking Humanity is seminal. Whether you run a company, a city, or a nation state, you need to understand the simple patterns that drive complexity, disruption, and change in human history. The future belongs to those societies who can both make the right technology choices and re-organize their governance and belief systems to capture the exponentially growing opportunities in front of us.”
      – Jose Cordeiro, Director, Millenium Project; Vice Chair, Humanity Plus; Candidate, European Parliament.

“Rethinking Humanity will be required reading for civic leaders, executives, and government officials.”
      – Guido Jouret, Chief Digital Officer, ABB

“It’s not easy to blow my mind, but earlier this week, I sat down and read a research report (Rethinking Transportation) by RethinkX. I’ve been picking up the pieces of my consciousness ever since.”
      The Motley Fool

About RethinkX

RethinkX is an independent think tank that analyzes and forecasts the speed and scale of technology-driven disruption and its implications across society. We produce impartial, data-driven analyses that identify pivotal choices to be made by investors, business, policy and civic leaders. Our predictions have been proven accurate consistently.

RethinkX was co-founded by James Arbib and Tony Seba. They have consulted investors with tens of trillions in assets under management including BlackRock, Goldman Sachs and J.P. Morgan, sovereign wealth funds, large businesses, and governments around the world including China, the EU, and states in the U.S. Publications include: Rethinking Transportation 2020-2030, Rethinking Food and Agriculture 2020-2030.

Tony Seba’s books include the #1 Amazon-Bestselling Clean Disruption of Energy and Transportation, Solar Trillions and Winners Take All. Both have spoken on the world stage, including Davos, COP21, Global Leaders Forum, and featured in film and television including Bloomberg’s Forward Thinking: A Sustainable World, 2040, and SunGanges.

Cortney Piper 
Christina Heartquist 
Gerald Witt