ECON3220/7740 Case Study Assignment in Applied Cost-Benefit Analysis, Semester 2 2019
Comparative Levelized Cost of Electricity: Renewables vs Coal
1. Introduction: The task at hand
A private mining company, Rio Blanco Corporation (RBC), which is a major electricity user, needs to
decide whether to enter into a new contract with one of the State’s main electricity retailers for the supply
of its electricity needs for the next 20 years. The dilemma it faces is that the State’s power grid is sourcing
its electricity exclusively from existing, black coal-fired power stations at a supply price, equal to the
marginal cost of electricity generation, of $60/MWh (constant 2020 prices).
It is widely acknowledged that the external costs of carbon emissions from coal-fired electricity
generation are extremely high relative to other technologies, especially renewables. It is estimated that
for every MWh of electricity generated by a black coal-fired power station, 0.8 tonnes of carbon is
emitted. There is growing recognition of the need for electricity regulatory authorities to factor in the
Social Cost of Carbon (SCC) in comparative cost calculations. To internalize such external costs the
State Government is planning to introduce of a carbon price/tax. For coal-fired electricity generation this
additional cost, over and above the current contracted supply price, could be significant. Although there
is some uncertainty as to how much and when the carbon charge will be implemented, the prevailing
view among most stakeholders is that this will happen ‘sooner rather than later’. For the purpose of this
study it should be assumed that a carbon tax, initially set at $20/tCO2 (constant 2020 prices) will be
introduced at the beginning of 2024 and will increase by $2/tCO2 per annum until it reaches a level of
$40/tCO2 (constant 2020 prices), and remains at $40/tCO2 to the end of the project life-pan of 20 years
(ie. to 2040).
The alternative to sourcing its electricity from the grid is for RBC to invest itself as producer/consumer
(a ‘prosumer’) in a new electricity generation plant, using a renewable technology. The two options
under consideration are onshore wind turbines versus solar photovoltaic (PV). The construction and
management of the preferred option is to be contracted to a private supplier: for the solar option, Sunshine
Solar (SS), a local State-based company, and for the onshore wind option, Deutsche Onshore Wind
(DOW), a Germany-based multinational company. Both companies have existing operations in the state
are considered world leaders in renewable electricity generation and will be paid a project management
fee (equal to 10% of, and included in, the estimated fixed operating and maintenance costs in Table 1).
In the case of DOW the full amount of this fee will be remitted to its parent company in Germany.