Chairman’s Message

<Main Points>

Calculating the cost of power generation using conventional LCOE is insufficient.

The integration cost of dealing with the intermittency of variable renewable energies (VRE) must be incorporated in cost evaluations.

Analysis for Japan suggests solar PV becomes very expensive when VRE penetration exceeds 50% if integration costs are reflected

Total costs are lowest at 34% VRE penetration and increase substantially at 81% VRE penetration in ASEAN.

The total cost of power generation, including integration costs, must be the basis for designing the optimal power mix.

1. Calculating the cost of power generation by conventional LCOE is insufficient

It is often said that solar PV is the cheapest source of power. The conventional approach for cost calculation, Levelized Cost of Energy (LCOE), generally shows that solar PV is the cheapest source of power. But does this approach cover all associated costs? One typical cost not incorporated in LCOE is the cost of back up facilities to accommodate the intermittency of variable renewable energies (VRE). To assess the true cost of power generation, it is essential to evaluate the total cost.

2. Integration cost of dealing with intermittency of VRE

Integration costs refer to the expenses necessary to integrate power sources to the power system. LCOE only captures the cost of power generation on a stand-alone basis. A true assessment of power generation costs must incorporate integration costs.

Integration costs generally have three pillars. The first pillar is “balancing costs”, which are the cost of operating dispatchable power sources for second- and minute-level balancing, required to address gaps between forecasts and actual performance of VRE, as well as short-term fluctuations in VRE power generation during the day.

The second pillar is “grid-related costs”. These include the costs of developing transmission and distribution lines to connect distant power sources with demand centers, as well as managing load congestion caused by VRE, including re-dispatching of power.

The third and most important pillar is “profile costs” or “utilization costs”. The third pillar has four subgroups:

Calculating the cost of power generation using conventional LCOE is insufficient.

The integration cost of dealing with the intermittency of variable renewable energies (VRE) must be incorporated in cost evaluations.

Analysis for Japan suggests solar PV becomes very expensive when VRE penetration exceeds 50% if integration costs are reflected

Total costs are lowest at 34% VRE penetration and increase substantially at 81% VRE penetration in ASEAN.

The total cost of power generation, including integration costs, must be the basis for designing the optimal power mix.

As it is not easy to calculate every element of integration costs, most analyses capture only part of these three pillars. However, it is far better to incorporate at least some elements of integration cost to come closer to capture the total cost of power generation. Cost analysis based on LCOE is simply too narrow.

3. Integration cost analysis in Japan

The Strategic Energy Plan of Japan, decided this February, has an attachment showing the cost comparison of various power sources in Japan, including integration costs. While not all the elements of integration costs are reflected, the analysis shows a very interesting result. The LCOE of solar is the lowest. Solar continues to be the lowest-cost even including integration cost, if VRE penetration is at 40%. At 50% VRE penetration, solar can become more expensive than most other power sources, including wind, nuclear, and gas fired power. At 60% VRE penetration, solar becomes very expensive. This analysis was one of the bases for the power mix in 2040 based on the Strategic Energy Plan, which put renewable energies to comprise 40-50% of the mix, without going higher.

Source: Dr. Yu Nagatomi, based on “Summary Report on Power Generation Cost Verification (2025)”, prepared by the Working Group on Power Generation Cost Verification, Advisory Committee for Natural Resources and Energy (METI, Japan).

4. Total cost analysis for ASEAN

Integration costs vary depending on location. Weather conditions, the current power mix, the potential of VRE, and the level of grid development all impact the calculation of integration costs. Dr. Yu Nagatomi and his team of IEEJ have analyzed integration costs in ASEAN. They used the IEEJ-NE model to identify the optimal power mix to minimize the cost, as well as to calculate the total cost to achieve this mix. They captured the grid related costs, back up cost, and curtailment costs in calculating integration costs. So please understand that this analysis incorporates part of the integration costs and not the full scope. The analysis has a target year of 2060, based on the Net Zero pledges made by ASEAN members.

　The analysis shows that the total cost of power incorporating integration costs will be the lowest when the VRE penetration is 34%. As VRE penetration increases, the cost for VRE, power storage, and the grid grow, offsetting the cost reductions through less fuel use and lower investment in thermal power. The increase in total cost is relatively modest when VRE penetration is 60% or less, but when VRE penetration reaches 81%, the total cost increase is substantial. The accumulated cost increase between 2030 and 2060 is estimated to reach $1.3 trillion.

Note : Real terms in year-2017 US dollars

　The cost increase varies within ASEAN depending on the specific region. Indonesia and Vietnam will face substantial total cost increases, especially when ASEAN-wide VRE penetration reaches 80%.

Note : Real terms in year-2017 US dollars

5. Total cost of power generation including integration cost must be the basis of designing the optimal power mix.

Most countries have pledged to achieve carbon neutrality by their specific target years. Broad deployment of renewable energies is unquestionably one of the major pillars of their strategies to achieve carbon neutrality. At the same time, the cost of the energy transition must be thoroughly considered. With the recent energy crisis and global inflation, people and politics are strongly demanding affordability of power everywhere.

　It is very important for policymakers not to design their future power mix based solely on LCOE analysis. The true cost of power supply incorporating integration costs must be the basis for designing the optimal power mix.

　Total cost analysis for ASEAN introduced in this message will be explained in detail in the following webinar. The webinar covers two topics, and presentation “1” corresponds to the content introduced here. Please feel free to click the hyperlink below to register. For those who miss it, a video recording will be available afterwards.