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Calculating the Cost of Onsite Energy Generation

November 18, 2014 By Linda Hardesty

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In a comparison of different electricity supply options and prices, World Resources Institute says behind-the-meter generation is cost-competitive for end-use consumers when the average cost of energy is lower than or equal to the retail electricity price over a project’s lifetime.

For end-use consumers, behind-the-meter generation, sometimes referred to as “onsite” or “distributed” generation, replaces retail electricity supply. Thus, behind-the-meter generation costs are most accurately compared to retail electricity prices ($/kWh) paid on consumers’ utility bills, according to a fact sheet entitled “Understanding Renewable Energy Cost Parity.”

World Resources Institute says in order to make cost comparisons, the average cost of energy for a behind-the-meter project should be calculated using information from past projects or the levelized cost of energy (LCOE), that is, the projected total system and operating costs divided by total kWh produced over the lifetime of the project or contract.

In addition to the average cost of energy, any system charges for behind-the-meter generation in a given market (for example, backup power and interconnection fees) must be taken into account.

Key to any LCOE calculation are project lifetime, timing of generation, and capacity factor – the percentage of time a project is expected to produce electricity. Several other variables may be considered, depending on the precision of the calculation, including subsidies and “net metering” policies, project finance, and fuel prices (depending on the technology).

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