Electricity Generation Costs and Investment Decisions: a Review

The paper first discusses estimates of the levelised costs of selected technologies and the corresponding rates of return under alternative assumptions as to prices. It then shows how such estimates can be refined to allow for the variability of demand, changes in plant dispatching schedules, storage and so forth. Next it considers the effects of environmental policies and innovation on costs and the rate of return. Finally it considers the issues posed by uncertainty and risks. By beginning with the simple cases of levelised costs and average returns, and then by gradually peeling away assumptions, the aim is to gradually reveal the fundamentally different perspective that arises when the rate of return becomes the focus of investment.