Governments throughout Europe are facing challenges to identify the optimal mix of generation technologies to meet energy security, carbon emissions, and renewable energy targets. Typically, when considering the costs of competing technologies, a cornerstone of the analysis undertaken by investors and governments is a comparison of competing technologies’ Levelised Cost of Energy (LCOE). However, such comparisons of LCOEs are imperfect because they ignore so-called “system integration costs.”

System integration costs exist because, when a change in the generation mix occurs, optimal generation dispatch to meet energy demand changes, the generation capacity required to maintain security of supply changes, network infrastructure requirements change, and the requirements for ancillary services change. Hence, the LCOE of competing technologies is not the only consideration governments face when estimating the costs of alternative generation mixes.

In a recent report for the UK Committee on Climate Change (CCC), a team from Imperial College London estimate the system integration costs of adding alternative low carbon generation technologies to the British power system. Alongside this Imperial study, a NERA team led by Richard Druce and Alon Carmel prepared a report that advises the CCC on regulatory and policy measures that would better account for system integration costs in decisions (1) by government on the mix of generation technologies to support, and (2) by private investors on which projects to pursue.

The Imperial study also considers the value of “flexibility” in supporting the integration of low carbon plant to British power system, which comes from sources such as electrical storage, flexible power generation, demand side response, and interconnection. The NERA study also considers the extent to which the value of flexibility is reflected in current market arrangements, and makes recommendations for improvement.