Fossil Fuels Are Much More Expensive Than Thought: Analysts’ inaccurate cost estimates are creating a trillion-dollar bubble in conventional energy assets


Tony Seba and Adam Dorr, RethinkX, in Utility Dive, March 15, 2021

For the past 10 years, there has been a conventional energy bubble gathering steam. The reason is all too familiar. Just as the credit rating agencies ignored actual market data in the buildup to the subprime mortgage crisis, mainstream energy analysts have ignored market data in the valuation of new conventional power plants.

The U.S. Energy Information Administration (EIA), the International Energy Agency (IEA), Wall Street banks and other analysts all assume that a newly-built coal, natural gas, nuclear or hydro power plant will be able to generate the same amount of electricity year after year from now until 2040 and beyond, with the same consistent sales revenue. In essence, these analysts are pretending that conventional power plants will never face competition from solar, wind and battery technologies (SWB), despite all evidence to the contrary. This assumption is patently false.

By including imaginary electricity generation and sales revenue in their calculations, mainstream analysts have mispriced and overvalued not just coal, natural gas, nuclear and hydro power plants themselves, but the mines, wells, pipelines, ports and refineries that support them. Most of these assets will be stranded by solar, wind and batteries over the next 10 to 15 years.

LCOE calculation errors

Our research shows that much of the problem can be traced to a fundamental error in the calculation of levelized cost of electricity, or LCOE — a key metric that investors and policymakers use to compare energy technologies.

The value of any asset depends on how fully it is utilized. A taxi that drives 100,000 miles per year has a much lower cost per mile than one that is only driven 10,000 miles per year. And similarly, a coal power plant running all day and night at full capacity will have a much lower LCOE per megawatt-hour than one which only runs 10% of the time. This is especially true of newly-built power plants, which must repay their fixed capital costs.

Virtually all mainstream analysts assume that every conventional power plant’s “capacity factor” — and thus electricity generation and sales — will remain high and constant year after year for a power plant’s entire decades-long lifetime. This is a fundamental error. Capacity factor will not remain high or constant but will instead decline as conventional power plants are outcompeted and disrupted. We have already seen this happen to coal in the United States.

Since 2010, half of the U.S. coal fleet has been decommissioned and the market capitalization of the coal industry has fallen by more than 99% because U.S. coal has already been disrupted — first by natural gas, and now by solar and wind. Yet, despite this clear downward trajectory of disruption and collapse, the EIA’s LCOE calculations assume that any newly-built coal power plant will have a capacity factor of 85% every year, from their first year of service through 2040 and beyond.

In reality, the average capacity factor of U.S. coal power plants has declined, from nearly 70% in 2010 to just 40% in 2020. Virtually all mainstream analysts are making this error and posting similar LCOE figures as a result. By severely overestimating how much electricity conventional power plants will be able to sell during the 2020s and 2030s, they have drastically underestimated how much each unit of electricity will cost, and thereby misrepresented both the value and risk of conventional energy investments.

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When we recalculate LCOE, changing nothing but capacity factor, we see that by 2015 the real LCOE of coal was 50% higher than the EIA reported, and that by 2020 the corrected value was more than 3 times greater than the EIA claimed. Looking ahead, as capacity factor continues to fall, the LCOE of coal rises accordingly, so that by 2030 the corrected value is 9 times greater than the EIA’s current projection.

The story for gas, nuclear and hydro power is much the same. Corrected gas LCOE is 60% higher than the EIA reported for 2020, and 5 times higher than reported for 2030. Nuclear is 175% higher than reported for 2020, and 13 times higher than reported for 2030. Hydro is 230% higher than reported for 2020, and 9 times higher than reported for 2030.

The EIA, IEA and other analysts who have miscalculated LCOE are misrepresenting the value of conventional energy assets in much the same way that credit rating agencies misrepresented the value of subprime mortgage assets. We know how that ended. The value of U.S. subprime mortgages before the crash was $1.3 trillion. At least $2.2 trillion has been invested worldwide in conventional energy assets since 2010 under the false pretense that they are low risk investments, and the global financial bubble in these assets is still expanding rapidly.

Rethinking energy investments

Policymakers, regulators, civic leaders, ratepayer and taxpayer advocates, asset managers and other investors and decision-makers must reconsider all new investment in conventional energy assets in light of increasingly formidable competition and disruption from SWB. This means they should assume that every conventional power plant will be a peaker — without the ability to charge peaking prices. Decision-makers must demand that analysts calculate LCOE on the basis of actual, market-based assumptions for capacity factor and dynamic, realistic projections for all variables of their LCOE calculations that include the reality of the disruption ahead. 

Government regulators, including public utility commissions that ostensibly approve power plant investments on behalf of the people, should not enlist captive ratepayers or taxpayers to subsidize, insure, or provide a backstop for any new or existing investments in conventional energy assets, including power plants and their value chains. 

The disruption of energy by solar, wind and batteries is inevitable. The longer we wait, the more difficult it will be to diffuse the Great Stranding of the 2020s and 2030s. The time to course correct is now.

Correction: A previous version of this opinion piece misnamed the authors’ company.


Overinflated fossil fuel investments might be a ‘worthless’ bubble waiting to trigger the next crash, while renewables seem more appealing than ever. The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy Assets by Adam Dorr and Tony Seba. NA By Nafeez Ahmed, March 11, 2021 at

A new study finds that conventional electric power plants powered by fossil fuels and hydro are massively overvalued by the world’s leading analyst organizations. The report says they are overvalued to such a degree that the trillions of dollars of investment in these industries could amount to a “bubble” similar to the subprime mortgage housing bubble whose collapse triggered the 2008 financial crash

The stunning findings imply not only that renewable energies such as solar, wind and battery storage are far cheaper than believed, but that they are already outcompeting coal, natural gas, nuclear, and hydro power. This fact, however, has been masked by distorted calculations based on a fundamentally incorrect metric: the ‘Levelized Cost of Electricity’ (LCOE). 

The new report by independent technology think tank RethinkX, titled The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy Assets is written by environmental social scientist Dr. Adam Dorr, a Research Fellow at RethinkX, and the think tank’s co-founder Tony Seba, a serial entrepreneur and Stanford University lecturer in technology disruption. 

Their new analysis, which is likely to send shockwaves across fossil fuel industries and utilities, probes into the science around a conventional power plant’s LCOE—which basically measures the average cost of generating electricity across the entire lifetime of the plant, including its building and operating costs.

Energy hype

Dorr and Seba show that mainstream LCOE assessments for conventional coal, gas, nuclear, and hydro power plants are simply false. In reality, due to the growing inefficiencies of these forms of energy, the amount of electricity conventional power plants produce falls over time, in some cases quite dramatically. So dramatically, in fact, that the divergence between real costs and the incorrect LCOE is so big that, the report concludes, mainstream analyses underestimate the per kilowatt-hour cost of coal, gas and hydro by up to 400 percent.

This is a big problem, because it means that the trillions of dollars of investment (not to mention government subsidies) being sunk into these conventional energy industries are based on vast overvaluations rooted in systematic overinflations of their actual energy generating power. These estimates, the report points out, are being upheld by the most authoritative sources of energy information in the world, including the International Energy Agency (IEA) and the US government’s Energy Information Administration (EIA). 

For instance, while the EIA tells us that coal power plants retain a capacity factor of 80 percent for the entirety of their 40-year technical lifetime through to 2060, in reality it is far lower, according to the new study. In the US, the average capacity factor for coal power plants in 2010 was 67 percent. Ten years later it plummeted further to 40 percent—this is half as much as the official LCOE assessment. This means that the real cost of electricity produced by these plants is ridiculously high—as high as 32.4 cents per kilowatt hour (kWh) when corrected, which is more than four times the EIA’s figure of 7.6 cents.

The same patterns of overinflation can be found across conventional plants. For natural gas, the official EIA estimate of an 87 percent capacity factor throughout a 20-year lifetime is contradicted by the fact that in 2020 the real figure was 58 percent. This means the cost of electricity from these gas plants is 60 percent higher than the EIA’s estimate. And for hydro power, the official estimate of 70 percent capacity flies in the face of the real figure for US hydro plants which reached just 42 percent in 2020. Which means that hydro’s real cost is three times higher than conventionally believed.


“Our research reveals the same erroneous assumptions about the capacity factor for natural gas, hydro and nuclear power plants are showing breakeven costs for their electricity that are much lower than they actually are,” said Dr Adam Dorr. “This makes these plants appear to be better investments than they would be when considering that the actual cost of producing electricity from these plants is much higher.”

But that’s just the beginning. The report looks at what’s likely to happen to these power plants by around 2030, based on the continuing rates of decline of their capacity based on historical capacity factor data and EIA data, to produce more realistic calculations. 

It projects that the costs of electricity generation in 10 years will be nine times higher for coal, nearly five times higher for gas, nearly 14 times higher for nuclear, and nine times higher for hydro. This not only means that trillion dollar current—and future—investments in these industries are vastly overvalued, but that these energy systems are vastly more expensive than we are being told. 

This means alternative solar, wind and battery energy systems are even more attractive than conventionally believed.

Tipping point

“Coal, gas, nuclear, and hydro power are no longer competitive with the combination of SWB [solar, wind and battery], even using inaccurate mainstream LCOE calculations,” the RethinkX report observes. “Solar and wind power reached cost parity and became cheaper than coal, gas, nuclear, and hydro power several years sooner than mainstream analysts reported.”

According to report co-author Tony Seba, “The total cost of a new solar or wind power plant is already below just the operating cost of conventional generation such as gas, coal and nuclear. That means even if building a conventional power plant costs nothing, it is still more expensive—based on operating costs alone—than a solar or wind plant,” said Seba. “And yet the unrealistic but easily correctable levelized costs of electricity could continue to drive investment into conventional power. Once the divergence between erroneous LCOE and real levelized costs become impossible for incumbents to deny, the financial markets will be swift, and trillions invested by pension, retirement and endowment funds could become worthless.” 

The Dow Jones US Coal Index fell by over 99 percent from 2011 to 2020. The same fate could be in store for other fossil fuels and utility companies. 

There is a way out of this unfortunate conundrum—correcting the faulty LCOE assumptions. This could help correct market distortion and protect millions of citizens at risk of losing retirement savings that go into such investments (it won’t make fossil fuels any more sustainable, however). But if that doesn’t happen, the consequences could be devastating. 

According to former Obama administration energy advisor Jed Dorsheimer, head of global sustainability research at financial services firm Cannacord Genuity and president of the Biophysical Economics Institute, the RethinkX report “does a very good job articulating how the debt fueled economy has actually led to many bubbles in asset valuations.” But he added that this was not exclusive to fossil fuels. “Since 1974 the shift to a fiat based currency under the auspices of the neoclassical economics has created bubbles in almost all assets classes.” 

A fossil fuelled-global financial bubble could grow by several trillion dollars over the next decade as a result of the LCOE inflation according to the new RethinkX report. Meanwhile, as solar, wind and battery cost curves continue to dramatically decline as RethinkX has presciently forecast elsewhere, they will continue outcompeting conventional power plants with their declining output and rising costs. 

Bright future?

The outlook for renewables, then, could be a lot brighter than many assume—especially given the think tank’s estimate that the cost to build a 100 percent solar, wind and battery system in the US would be less than $2 trillion over the course of the 2020s (just 1 percent of GDP), due to exponentially declining cost curves which most forecasters overlook.

Dorsheimer cautioned that there is a need to account for the “embodied energy” required to produce renewable power which can still come from carbon emitting sources, and argued that the report’s criticisms of the LCOE of conventional power should not be used to wrongly inflate the value of renewables.

 Yet RethinkX has made surprisingly accurate forecasts on a number of counts in previous studies which lend credence to its new conclusions. From creating an investment portfolio that returned more than 2,500 percent over 15 years, to correctly anticipating the declining costs of solar panels and electric cars, the think tank’s researchers have been ahead of the curve across a range of technology disruptions. Its founders, Seba and technology investor James Arbib, are regularly sought out for their insights by investors with trillions in assets under management, including BlackRock, Goldman Sachs and JP Morgan. 

 Their latest report also dovetails with warnings that have come from other sources. Last year, Motherboard reported on the conclusions of an internal study commissioned by the Geological Survey of Finland which warned of how rapidly mounting oil production costs combined with surging debt levels across the industry would shatter the economic viability of the entire global oil market within just a few years.

 The new analysis by RethinkX now throws further fuel on the fire, suggesting that the next biggest, and potentially cataclysmic, market correction will not be in the housing markets—but in the conventional energy sector. TAGGED:ECONOMICSCLEAN ENERGYGREEN ENERGYRENEWABLE ENERGYMOVEABLE