- The LCOE methodologies used in virtually all mainstream analyses contain the same critical error: they assume a high and constant capacity factor (utilization rate) for the entire lifetime of any individual power plant. In doing so, they assume both existing and newly-built power plants will be able to produce and sell the same number of kilowatt-hours each year throughout their 20+ year operational life. Widely-cited sources that commit this error include the International Energy Agency (IEA), the United States Energy Information Administration (U.S. EIA), the World Bank, the International Renewable Energy Agency (IRENA), the Department for Business, Energy & Industrial Strategy of the UK government, the Australian Energy Regulator, the National Renewable Energy Laboratory (NREL and OpenEI), Lazard, Stanford University, the University of Texas at Austin, the MIT Energy Initiative, and the Natural Resources Defense Council (NRDC).
Capacity factor of conventional coal, gas, nuclear, and hydro power plants will not remain high or constant, but will instead decline dramatically over the next 10 to 15 years as they are outcompeted and disrupted by the combination of solar photovoltaics, onshore wind, and lithium-ion batteries (SWB). In fact, capacity factor in conventional energy has been dropping since at least 2010. For instance, the average capacity factor of coal in the United States has fallen from 67% in 2010 to just 40% in 2020 – first because of competition with cheap gas from fracking, and now because of SWB. In the United Kingdom, coal capacity factor has collapsed even faster, from 58% in 2013 to just 8% by 2019.
Mainstream LCOE analyses thus artificially understate the cost of electricity of prospective coal, gas, nuclear, and hydro power plants based on false assumptions about their potential to continue selling a fixed and high percentage of their electricity output in the decades ahead. Because LCOE figures and asset valuations are very sensitive to the capacity factor parameter, these false assumptions have made conventional energy assets appear to be much more attractive than they actually are. As a result, they have attracted far more investment (over $2.2 trillion in fossil and nuclear energy in the electric power sector worldwide since 2010) than they otherwise would have based on a realistic assessment of capacity factor and LCOE.