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Word of the Day: Levelized Cost of Electricity

March 06, 2015 by Alexandra Aznar

When analysts want to compare the cost of generating electricity from various sources such as wind, solar, coal, and natural gas, they often use a metric called the levelized cost of electricity or LCOE. This amount is typically displayed as cents per kilowatt hour (kWh). In the power industry, the LCOE is also referred to as the “bus bar” cost.

The LCOE is the “per-kilowatt-hour cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle” (U.S. EIA 204). In other words, the LCOE is:

The annualized cost of a power plant or system
Energy output (kWh) during one year

The total cost of building and operating a power plant or system includes capital costs, operating and maintenance costs (some of these are fixed costs, others are variable), fuel costs, financing costs, and the utilization rate of the plant type or system. The utilization rate is a measure of performance, capturing how long a plant or system is actually used to the time it could be used. The importance of each factor that makes up the total cost of a power plant or system varies by type of energy source.

There are ongoing discussions about whether the LCOE is an appropriate metric to compare dispatchable energy sources (e.g. conventional sources like coal and natural gas) and intermittent energy sources (e.g. most renewables like solar and wind). However, the LCOE remains a common and convenient way to compare the cost-competitiveness of different energy technologies.

NREL provides a simplified LCOE calculator for utility-scale and distributed renewable energy technologies at http://www.nrel.gov/analysis/tech_lcoe.html.

Sources

U.S. Energy Information Administration (EIA). 2014. “Levelized Cost and Levelized Avoided Cost of New Generation Resources in Annual Energy Outlook 2014.” Accessed December 22, 2014. http://www.eia.gov/forecasts/aeo/electricity_generation.cfm

Tags: Financing