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The Mystery of The Levelized Cost of Energy, Revealed

By Chase Weir, CEO of Distributed Sun

This past month marked an unusual increase in chatter about LCOE --the levelized cost of energy. If the National Security Administration bothered to monitor signals for this traffic, the threat (read: opportunity) alert just rose. If measured against Nielsen Ratings, the audience (read:understanding) multiplied. Certainly, in search engine parlance, hits and rankings for LCOE spiked-- recently running apace three times the two year monthly average. Now, only the most sensitive ear picks up the sound of this chatter faintly come rapping, tapping at the door of power and finance. Faint whispers give way to slight murmurs. Something is there, something meaningful. The momentum behind the LCOE concept has the power to broaden renewable energy deployment and adoption.

From greenhorns to green gurus, this insiders' vernacular--"the language of financing power"--is becoming strangely popular. The term LCOE is still wildly misunderstood and misapplied, but a bit more popularly so in recent months. LCOE as a discipline can be most simply described as the cost range at which various technologies produce a unit of energy given certain sensitivities that include, but are not limited to: fuel costs, cost of capital, federal and state energy policy, and location specific costs and benefits.

All the while, the levelized cost of renewable electricity generation continues to enjoy a declining forward price curve. And while it is true, the levelized cost of conventional plant construction has nearly doubled in recent years, it is not true that the incremental, finite resource inputs of fossil sources are stable or currently declining. And no, renewable resource inputs are not unstable because they are just that--renewable, and essentially free. If we, as an industry, can accept these prima facie we can move along to the good stuff --reimaging the LCOE.

A few months ago, Distributed Sun began sharing confidential previews with industry analysts about a new way to apply the LCOE formula and making it usable and actionable. Today, LCOE is underutilized as process and method for project selection and banking. A more rigorous look reveals a powerful business intelligence tool combined with a rare opportunity to distribute competence and accelerate pace.

Questions remain to be answered; for instance, what about LSOE, the levelized subsidy of energy, and how it varies from state to state? When paired with LCOE, what does it mean to look at net LCOE comparisons among projects? What does levelized revenue and profit tell us in the context of different segments within solar? And, is anyone looking at the combined levelized impact to all counterparty balance sheets over the lifetime of a renewable energy facility? These are simple concepts, begging adoption. They pull us away from strict dollar and per watt conventions, take us around the corner from IRR and yield, and are deployed with a Rosetta Stone for translation. In order to use them effectively, old questions are asked in new ways. And, that's much of the point. The answers could be surprising, relevant and poignant.

Rumor has it that Levelizing the Field, a whitepaper exploring levelized metrics applied as business science, will be released later this year. Published in cooperation between industry policy and finance teams, with contributions from some of the leading thinkers and doers in the field, the work will be paired with two significant events at a public, nationwide webinar hosted by one of the leading media outlets for the clean economy, and a special-invitation, roundtable among the foremost practitioners in LCOE. We welcome this emerging discourse as it will foster better policy results, reveal new bankable approaches to reneweable energy, lower costs of capital, and brighten the prospects for renewable energy.

 Chase Weir is co-founder and Chief Executive Officer of Distributed Sun, and Managing Director at sunONE. Mr. Weir led the design of the company's proprietary financial and analytical tools, which evaluate risk and performance criteria during solar project selection and operations.

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