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Annual Energy Outlook 2021

Release Date: February 3, 2021  |  Next Release Date: January 2022  |  AEO Narrative

The cost-competiveness of solar photovoltaic and natural gas combined-cycle units leads to capacity additions

Declining costs of intermittent renewable technologies, particularly solar photovoltaic, make solar cost-competitive with natural gas combined cycle

Levelized cost, avoided costs

Figure data

In the AEO2021 Reference case, natural gas-fired combined-cycle and solar photovoltaic generators are the most economically attractive generating technologies when considering the overall cost to build and operate, as well as the value of the plant to the grid.

The levelized cost of electricity (LCOE) reflects the cost to build and operate a power plant per unit of generation, annualized over a cost-recovery period. The levelized avoided cost of electricity (LACE) represents a power plant’s value to the grid, which is a proxy for a plant’s potential revenues from the sales of electricity generated from displacing another marginal asset.

Both the levelized cost and levelized avoided cost of electricity, when used together, simplify the factors contributing to the capacity expansion decisions modeled. The value-cost-ratio (the ratio of LACE-to-LCOE) shows combined cycle and solar photovoltaic are the most economically competitive generating technologies.

In the AEO2021 Reference case, expected revenues from electricity generated from both natural gas-fired combined-cycle units and solar photovoltaic with single axis tracking units are generally greater than or equal to their respective projected costs across most of the electricity market regions in 2026. Correspondingly, these two technologies show the greatest projected growth throughout the projection period. The value of wind approaches its cost in several regions. These regions see new wind capacity builds in the AEO2021 Reference case, primarily in advance of the phaseout of the production tax credit (PTC).

LACE accounts for both the variation in daily and seasonal electricity demand in the region where a new project is under consideration and the characteristics of the existing generation fleet where the new generating capacity will be added. The prospective new generation resource is compared with the mix of new and existing generation and capacity that it would displace. For example, a wind resource that would primarily displace existing natural gas-fired generation will usually have a different value than one that would displace existing coal-fired generation.

Expected revenues from electricity generated from both natural gas-fired combined-cycle units and solar photovoltaic with single axis tracking units are generally greater than or equal to their respective projected costs across most of the electricity market regions in 2026.