The fundamental problem with the current approach to estimating the cost of energy by generation is that ‘levelised cost of energy’ (LCOE) is a project-level metric, and one that is easy to manipulate to deliver a desired outcome. It does not scale up to reflect the complexity of Australia’s electricity markets. Therefore, different tools are urgently needed to inform policy decisions.

Instead of trying to develop an energy system that delivers the lowest cost and highest level of reliability, policy-makers have been promoting a system, on the basis of LCOE accounting, that has had the effect of increasing cost and lowering reliability.

To assist in better understanding what sits behind the claims about renewable energy being the cheapest energy source, this paper explains:

• what LCOE actually is (i.e., a variation on the net present value calculation used in financial analysis to look at specific investments)
• its fundamental shortcomings (it does not account for the real-world costs of delivering electricity to consumers)
• how it can be easily manipulated to provide the desired conclusion
• why LCOE should not be used as the basis for designing an energy system when superior modelling tools are available.

In discussing these issues, this paper aims to clearly explain the folly behind the mantra: ‘renewable energy is the cheapest form of energy’ — and why Australian governments, renewable activists, and big renewable companies are responsible for delivering an energy system that cannot do its job, which is to provide secure, reliable and affordable power.