Industry Watch

Issue 7 and Volume 120.

The Economics of Hybrid Energy Systems

By Joseph D. Smith, Senior Consultant, Elevated Analytics, Inc.

Increases in environmental regulations and fuel prices evolved the muscle cars of the 1970s into today’s hybrid automobiles. These hybrid cars combine highly efficient gasoline engines with electric motors and light-weight batteries. Such hybrid systems rely on advanced control technology to actively achieve the right mix of electric and gasoline power and provide efficient operation at an acceptable price. Just as changing environmental regulations and economic conditions led to such an evolution in the automotive industry, so too are similar variables changing the power industry.

Hybridization of renewable and conventional energy offers improved efficiency and reduced CO2 emissions, allowing power generators to meet new climate regulations at an acceptable cost. Choices about which energy resources to use depend on location and availability, but hybridization of nuclear, renewable, and fossil energy appears to be the best general option.

An optimized hybrid energy system must provide the lowest electricity prices at the plant level, while maximizing the social benefits that properly account for the public’s willingness to pay associated externality and opportunity costs.

One useful metric for comparing the competitiveness of various hybrid system designs is the Levelized Cost of Electricity (LCOE), calculated from the ratio of lifetime costs to lifetime electricity generation discounted back to the present year using a discount rate that reflects the average capital cost. LCOE estimates include installed capital costs, fuel costs, fixed and variable operations and maintenance costs, financing costs, and assumed utilization rate of the hybrid system. Plant-level economic analysis must also consider the availability of existing infrastructure and resources, grid integration costs, and local labor rates, which implies that the value of hybrid projects will vary by region. Policy incentives like tax credits must be included in the broader social level analysis.

Estimates of LCOE for photovoltaic solar and wind power between 2010 and 2014 were as low as $0.08 and $0.05/kWh, respectively, without any financial assistance, but leveraging installed fossil power infrastructure. Fossil power costs during the same period were as low as $0.045/kWh. When local and global environmental costs of electricity generation by fossil fuels are considered, overall grid integration costs decline, which increases the value of hybrid energy. The environmental impact of hybrid energy can be assessed using full life-cycle assessment (LCA) to identify Greenhouse Gas (GHG) emissions considering a “Cradle-to-Wheels” boundary. Effective LCA’s must use consistent assumptions with common system boundaries to properly compare GHG/kWh for fossil, nuclear, and renewable technologies.

Just as changing environmental regulations and increasing fuel prices caused an evolution in the automotive industry, current climate regulations and economic conditions are leading the power industry toward a hybrid solution which combines fossil, nuclear, and renewable energy.