Shared Capacity and Levelized Cost with Application to Power-to-Gas Technology
Ambiguity in calculating unit cost continues to spur debate on how to account for operating assets in managerial decisions, especially when capacity is shared. Here I show that the concept of levelized cost yields a simple and definite allocation of historic cost and relevant unit cost for different perspectives of a potential investor. Crucial to the allocation is that levelized cost reflects the constant payment required over the life of a capacity to break-even on the initial investment. A common application of the concept is to compare the competitiveness of clean versus fossil energy sources in potential pathways to a decarbonized economy. Contrary to previous work, I find that the levelized cost of new Power-to-Gas technology can be low enough to compete with fossil-based alternatives. Central to this finding is that the ability to reversibly convert electricity to hydrogen and trade both outputs in the market leads to an effective sharing of sizable joint cost.
Keywords: unit cost, capacity investment, product prices, renewable energy, energy storage