Equivalence Analysis of LCOE and IRR for New Energy Projects

Abstract

[Introduction] With the development of domestic renewable energy industry, the recession of governmental subsidies and the implementation of policies such as competitive allocation of resources, Levelized Cost of Energy (LCOE) is gaining more and more attention and application, but its calculation method is inconsistent in domestic energy industry. In this paper, the relationship between Internal Rate of Return (IRR) and LCOE is analyzed to improve understanding of LCOE and standardize its application. [Method] The characteristics and application scenarios of LCOE and IRR were analyzed, and then their calculation formulas were simplified and transformed to analyze the difference and relation between them in models. Finally through the case analysis of an offshore wind power plant, the actual difference between the results was calculated, and the factors causing the difference and their sensitivities were analyzed. [Result] From the perspective of results, the simplified calculation models are very similar except for the income tax. According to the case analysis, the factors causing the difference between IRR and LCOE include the VAT deduction, after-tax incentives of VAT and income tax, additional taxes, and financing during the construction period, and influenced different directions to different extent. It can be considered that IRR and LCOE are similar in principle, but they become different under the influence of domestic fiscal policy, tax system and increased boundary conditions. [Conclusion] It is suggested that LCOE is properly localized and revised by competent departments, industry associations, etc. In combination with environmental impact costs and power system impact costs, the economy of different power generation approaches can be compared, and the rapid comparison of the economy of different schemes can also be achieved in specific projects.

Keywords

• levelized cost of energy (lcoe)
• electricity price model
• internal rate of return (irr)
• sensitivity analysis
• economic index