IEA Wind Task 26 Survey of Expert Opinions on Future Costs of Wind Energy
Supporting Information

Background on the calculation of Levelized Cost of Electricity (LCOE)

In this survey, we calculate a pre-tax revenue equivalent real LCOE. This LCOE estimate equates to the minimum power price a project must obtain in order to cover all project costs, service debt, and pay expected returns to equity shareholders. LCOE is calculated at the plant boundary and excludes the valuation of public benefits (e.g., Renewable Energy Credits, Carbon Credits, Green Certificates) as well as ratepayer, taxpayer, or other forms of project-level government support (e.g., Investment and Production Tax Credits, Feed-in-Tariff premiums).

The LCOE calculation relies on five primary inputs that you (the experts) can provide:

  1. CapEx
  2. Total capital expenditures ($/kW), in real 2014 currency. CapEx includes all up-front costs to the plant boundary and excludes all costs beyond the plant boundary. As such, CapEx as defined in this survey includes any electrical cabling within the plant, but excludes any needed substations, any needed transmission lines to access the existing grid network, and grid interconnection costs. For offshore wind projects, within-plant array cabling is included in CapEx, but CapEx excludes the offshore substation, any HVDC collector stations and associated cables, and costs for grid connection to land (e.g., subsea cables, onshore substation, and onshore transmission cables).

  3. OpEx
  4. Levelized total operating expenditures ($/kW-yr), in real 2014 currency. Levelized operating expenditures represent an annualized estimate of the total operating costs over the project design life, accounting for both the cost escalation with age (in real terms, excluding general inflation) and the time value of money. OpEx includes maintenance and all other ongoing costs (e.g., insurance, land payments, etc.). OpEx, as defined in this survey, excludes any costs associated with grid interconnection, substations, or transmission usage; for offshore wind, transmission system use charges (e.g., payments to Offshore Transmission Owner in the United Kingdom) are also excluded.

  5. NCF
  6. Average annual wind plant net capacity factor (NCF, in %), which reflects the average annual energy output of the project relative to potential output if the project operated at its maximum capacity for a full year.

  7. PDL
  8. The wind project design life (PDL, in years), defined as the design life of a project considered by investors when deciding whether to finance a project.

  9. Nom_WACC
  10. The nominal after-tax weighted average cost of capital (WACC). This represents the average return required by the combination of equity and debt investors to make a project an attractive investment opportunity, where each category of capital (equity and debt) is proportionately weighted. The after-tax WACC used here assumes that interest on debt serves as a tax deduction and that equity investor returns are indicative of the required threshold return after payment of taxes (i.e., sufficient revenue must be taken in to pay taxes and pay the threshold equity returns). WACC is calculated as: WACC = [(cost of equity in %) * (% equity in project)] + [(cost of debt in %) * (% debt in project) * (1 – tax rate)]. See brief discussion below on the relationship between nominal and real WACC, and the implication of different tax assumptions.

In addition, the LCOE calculation includes several important assumptions: a standardized tax rate (TR =25%), depreciation schedule (20-year straight-line), and long-term inflation rate (inf = 2%). 100% of capital costs are assumed depreciable.

The nominal WACC is converted to a real WACC for purposes of computing the real LCOE in 2014 currency.


The equation used to estimate LCOE is as follows:


With:




Note: Nominal and Real WACC.

In practice, after-tax WACCs may be considered either in real or nominal terms with the relative difference a function of the assumed inflation rate. Nominal values--used in this survey--are often preferred by developers and investors as they infer the actual cashflow to be observed. Real values are often preferred by economists and analysts, who are interested in trends independent of economy-wide inflation. Conversions between real and nominal WACCs can be performed based on the equation shown above.

Assuming a typical long-term central bank target inflation rate of 2%, then the following conversions between nominal and real apply:

In addition, the WACC may be defined in after-tax or pre-tax terms. Due to highly variable tax rules as well as the use of the tax code to incentivize wind energy in some countries (e.g., the United States), this survey relies exclusively on an after-tax WACC. Under these conditions, respective equity returns should reflect the (expected or actual) annual average rate of return for equity positions after expenses and taxes, independent of how the rate of equity return is impacted by the applicable tax code. Similarly, debt interest rates should account for their status as a business tax deduction where applicable.