No single energy source is carbon-free. Despite that, no metric that offers insights into comparative costs across multiple energy types includes carbon emission costs.
In order to account for these emission costs, the Electrifying team has derived a factor that can be added to existing metrics such as levelized costs of energy (LCOE), levelized avoided costs of electricity (LACE), and value adjusted levelized costs of energy (VALCOE), among others.
In this blog, we will introduce the factor, discuss its underlying assumptions, identify potential limitations, and suggest its versatile applicability. This factor is based on estimates and median values gleaned from other studies that served as a primary database for the following calculations. Links to these sources are provided at the end of this blog.
Because of the current difficulty in accurately pricing carbon emissions, the Electrifying founding team has developed a factor, called the EW-Factor (electrifying.world-Factor), that adds the costs of carbon emissions to any sort of levelized costs calculation by adding the EW-Factor to the other metrics’ outcome. This results in what can be referred to as carbon emissions-adjusted levelized costs. The factor includes all emissions that a particular source emits over its life cycle, from primary supply chain and production, planning, production, installation, operation, maintenance, to decommissioning and waste management (especially for nuclear waste).
Below, we explain how specific numbers have been chosen and where they were sourced.
Research by a coalition of leading energy companies and major corporations has found that taxing carbon could lead to a 57% emissions reduction by 2035 compared to 2005.
A report by the Climate Leadership Council (CLC) examines the consequences of taxing carbon at $43 per ton starting in 2021, roughly corresponding to what the CLC proposed in 2017. An increase of 5% above inflation annually will result in a CO2 tax of $112 by 2035. The German Government proposed an even more drastic carbon tax, which would rise to $180 until 2030. Nevertheless, we have chosen a more conservative approach, as we do not want to be overambitious and present the CO2 costs as even more severe. This approach is also in line with the European Union Emissions Trading System (EU ETS).
Social Discount Rate (SDR)
Social Discount Rates in climate policies are an essential measure to assign a present value on societies’ costs and benefits of the impacts of climate change in the future. The rates are calculated because of: (i) the assumption that communities will grow wealthier over time and (ii) time preference (which is somewhat controversial given uncertainties over whether people’s time preferences should be included in policymaking).
According to a study conducted by the Graham Research Institute on Climate Change and Environment, an SDR of 2.27% represents the mean recommended value of more than 200 experts. We use this recommended SDR to discount any future values (FV) to obtain present values (PV) that can be used for comparisons and may be integrated into any levelized costs calculations (LCOE, LACE, VALCOE, …).
The IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation, in combination with World Nuclear Association Report Comparison of Lifecycle Greenhouse Gas Emissions of Various Electricity Generation Sources, serve as sources related to lifecycle emissions for our calculations. In the latter study, between five and 14 different literature sources for each of the energy sources were sought out.
Information on hydrogen, on the other hand, was gathered from a number of sources (linked below); their median values been taken into account for all calculations.
Life cycle analysis of nuclear power includes uranium mining, enrichment and fuel fabrication, plant construction, use, decommissioning and long-term waste management. For all other sources (reflecting varying scopes of different reports), the definition of lifecycle varied a little, which is why we chose the median values of all these reports for our calculations.
Most central governments and banks set an inflation target of 2% so we too use this rate as an average inflation rate for the upcoming years.
General Assumptions made for this calculation include, but are not limited to:
- Future Inflation rates will be constant at the Inflation Rate Target of 2%.
- Growth Rates of Emission Certificates (carbon tax) will remain constant after the initial scope period provided.
- Median values of carbon emissions from numerous reports have been chosen for the calculation.
- A decrease in absolute emissions for the various energy generating sources has not been included, as technological advancement remains uncertain, yet is likely to cause emission reductions for less mature technologies.
- The definition of “green hydrogen” is any hydrogen produced with lifecycle emissions of < 10 tCO2e/MWh. Therefore, 10 tCO2e/MWh has been chosen as the value of emissions for green hydrogen.
- All prices are in US Dollars (USD).
- The Social Discount Rate (SDR) has been selected to discount Future Values to Present Values as it is usually chosen for policymaking and represents a standard metric in climate policy.
- The prices of Carbon Certificates are based upon a proposal from CLC and are similar to many other proposed/existing carbon emission tax rates.
- The most common average lifetimes have been chosen for each energy-generating power source as a guideline for life cycle emissions; for example, solar PV has lifecycle emissions of 0.048 tCO2e/MWh over a lifetime of 25 years. To theoretically assume lifecycle emissions over the course of 100 years, we have divided the emissions by 4. This is only an estimation, yet is perceived as reasonable, as any error is marginal at best and results that deviate from the standard lifespan serve for a hypothetical scenario only.
The following graph shows the median emissions in tCO2e/MWh across the different power sources. Note that lignite, coal, natural gas and oil have massive amounts of emissions. Consequently, they are most affected by the emission adjustments in terms of costs.
The table below illustrates the effect of the EW Emission Adjusted LCOEs. Looking closely, lignite, coal, and natural gas still seem reasonable in the LCOE calculation. However, if emission costs are included, they are in no way justifiable anymore, as costs per megawatt-hour more than double.
By contrast, wind power becomes even more attractive after adjusting costs in relation to other energy sources. So does solar PV.
Unsurprisingly, green hydrogen is not yet economically feasible. However, after adjusting to account for the EW calculation, green hydrogen comes pretty close to gray hydrogen.
You can find all calculations as well as a more detailed graph that shows the ‘Emission costs in USD/MWh across Energy Sources by Lifespan’ in the Excel sheet provided.
One possible limitation to the EW factor is the accuracy of data, as we were only able to use existing data and had to trust its reliability. Second, only median values have been taken into account when looking at emissions per kilowatt-hour for the different sources. This suggests that a broader range of EW emission-adjusted costs exists. Due to the general assumption 9., a possible decrease/increase in lifecycle emissions can be expected, which will result in slightly diverging values from what our calculations show.
Please share your thoughts on the EW Factor with the team by either commenting in the comment section below, or send us an email to email@example.com. We appreciate all the input and will seriously take it into consideration.