New important analysis of true energy costs from different sources

Posted: 12th March 2021

NEW RELEASE
The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy Assets

Today we are releasing the second in a series of reports on the dramatic disruption taking place in the energy sector. Our analysis of historical data reveals 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 have issued inaccurate estimates of the levelized costs of electricity (LCOE) for coal, natural gas and hydro power plants which are used to direct trillions in investment, 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.  

Mainstream analysts have systematically overestimated how much electricity conventional power plants will be able to generate and sell in the future, and therefore reported levelized costs of electricity that are far too low, making those power plants appear to be much better investments than they turn out to be. The cause of this error can be traced to the false assumption that capacity factor (i.e. utilization rate) will remain high and constant for a conventional power plant’s entire lifetime. Treating capacity factor as a constant rather than as a variable is a fundamental methodological error. By presuming that a coal, gas, nuclear, or hydro power plant will always be able to sell just as much electricity in the future as it can today, mainstream analysts are essentially ignoring all competition and disruption from solar, wind, and batteries.

When we recalculate LCOE based on actual market data, changing nothing but capacity factor, we see that by 2015 the real LCOE of coal was 50% higher than the EIA reported, and that by 2020 the corrected value was more than 3 times greater than the EIA claimed. Looking ahead, as capacity factor continues to fall, the LCOE of coal rises accordingly, so that by 2030 the corrected value is 9 times greater than the EIA’s current projection. The story for gas, nuclear, and hydro power is much the same. Corrected gas LCOE is 60% higher than the EIA reported for 2020, and 5 times higher than reported for 2030. Nuclear is 175% higher than reported for 2020, and 13 times higher than reported for 2030. Hydro is 230% higher than reported for 2020, and 9 times higher than reported for 2030.

Without correction, unrealistic LCOE figures will continue to drive overinvestment into conventional power. Once the divergence between erroneous LCOE and real levelized costs become impossible for incumbents to deny, the stranding of assets resulting from financial market corrections will be swift, and trillions backed by ratepayers and taxpayers and 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 United States, 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 must act immediately to correct this market distortion and protect millions of citizens who might have to bear the financial burden for the stranding. The first step is to correct the unrealistic assumptions about power plant capacity factor.

Please see our report: The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy Assets.

Our goal is to inspire a global conversation about the opportunities and threats of this technology-driven disruption and, importantly, the choices that can lead to a more equitable, healthy, resilient, and stable society. As a thought leader, your participation in this conversation is crucial.

We look forward to a robust discussion. Feel free to contact us directly, or through Twitter and LinkedIn. Please download the report here. Watch our presentation here or below.

The RethinkX Team 
This video is a synopsis of our new research report “The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy