| Abstract |
There are a number of ways of assessing the value of power projects from simple return on investment, simple payback, net present value (pre and post tax) to a calculation of levelised costs. The industry has, in general, adopted a levelised cost approach to demonstrating the attractiveness to investors of geothermal power projects compared with alternative generation options. This approach is in line with general practice in the power sector. There are a number of ways of determining levelised costs ($/kWh). One of the more robust approaches, preferred by investment banks, uses a full financial model based on discounted cash flows to calculate levelised costs. This can be used to determine a sale price for energy at a level that drives net present value to zero for a given discount rate. However, levelised costs are not only used by project developers and investors/funders in determining which projects to develop or invest in. They are often used by policy makers in comparing the relative merits of different power generation technologies, particularly renewable energy technologies. In this respect, the use of levelised cost as a comparator undervalues the benefits of geothermal energy projects as it does not recognize the important benefit that geothermal energy projects have over most other renewable technologies, that is base load power potential. Further, geothermal energy provides other benefits such as protection against possible future fuel price increases or carbon cost imposts. As such, geothermal energy is often undervalued by policy makers leading to the potential for ill informed decision making and inappropriate treatment in terms of government support mechanisms. This paper describes and proposes an alternative to use of levelised costs to value geothermal project options compared to other, intermittent, renewable energy and other fossil fuel technologies, using the GENCHOICE framework. This framework captures the benefits of geothermal energy as being base load, a major contributor to carbon emissions reduction and an efficient user of the electricity grid. The framework measures levelised cost at a common point of comparison, in this case the regional reference nodes. The framework derived $/kWh cost is estimated as a function of capacity utilisation and explicitly includes system costs as a function of intermittency, in addition to breaking down capital and operating costs into major components. The framework uses a probabilistic framework to provide a value for the hedge against future fuel and carbon price rises. The approach has been used to determine the advantages of geothermal relative to other fossil fuel and renewable technologies and suggests that the cost difference is much narrower when all these other factors are taken into account. The approach also provides guidance on which aspect of the technology would benefit from further research and development. |