Assessing the costs of electricity

Abstract

We review the economics of electricity generated, or conserved, from a diverse range of fossil-fuel, nuclear, and renewable energy sources and energy efficiency options. At the same time, we survey the methods used to compute the costs of generated and delivered electricity and power, including bus bar costs; wholesale and retail marketplace costs; life-cycle accounting systems; premiums associated with political, social, and environmental risks; costs that reflect explicit and implicit subsidies; costs inclusive of externalities calculated by a variety of means; and net costs, including a range of proposed and potential environmental tax regimes. These diverse and at times conflicting analytic methods reflect a wide range of assumptions and biases in how the inputs for energy generation as well as how the subsidies and social and environmental costs are computed or, is often the case, neglected. This review and tutorial provides side-by-side comparisons of these methods, international cost comparisons, as well as analysis of the magnitude and effects of a range of technological, market-based, and subsidy-driven costs on the final price of electricity. Comparability of costs between supply and conservation technologies and methods in the energy sector has consistently been a problem, and the diversity of energy cost accounting schemes provides significant opportunity for very different arguments to be made for specific technologies, regulatory and market regimes, and a wide range of social and environmental taxes. We provide a review of the tools and a commentary on how these methods are used to determine the cost of energy services. The conclusion contains an analysis of how these methods of energy valuation are similar, how they differ, as well as an analysis of the explicit and implicit assumptions that underlie each approach.