Levelized Cost of Energy (LCOE)

Definition
Levelized Cost of Energy (LCOE) - The Average Total Cost of a Project Per Unit of Total Electricity Generated
 
The levelized cost of energy (LCOE), also referred to as the levelized cost of electricity or the levelized energy cost (LEC), is a measurement used to assess and compare alternative methods of energy production. The LCOE of an energy-generating asset can be thought of as the average total cost of building and operating the asset, per unit of total electricity  generated over an assumed lifetime, usually expressed in units of cents per kilowatt hour(cents/kwh).
 
LCOE Use
• Measures lifetime costs divided by energy production;

• Calculates present value of the total cost of building and operating a power plant over an assumed lifetime. LCOE can be thought of as the average minimum price in which the electricity generated by the asset is required to be sold at, in order to break even over the lifetime of the project; it is critical to help make an informed decision to proceed with development of a facility, community or commercial-scale project.
 
• Allows the comparison of different technologies (e.g., wind, solar, natural gas) of unequal life spans, project size, different capital cost, risk, return, and capacities. Different methods of electricity generation can incur significantly different costs and these costs can occur at significantly different times relative to when the power is used. Also, calculations of these costs can be made at the point of connection to a load or to the electricity grid (ie they may or may not include the transmission costs). The costs include the initial capital, and the costs of continuous operation, fuel, and maintenance as well as the costs of de-comissioning and remediating any environmental damage. This type of calculation assists policymakers, researchers and others to guide discussions and decision making but is usually complicated by the need to take account of differences in timing by means of a discount rate.

LCOE Calculation
Simple levelized cost of electricity (LCOE) is given by:

                     

It : investment expenditures in the year t
Mt : operations and maintenance expenditures in the year t
Ft : fuel expenditures in the year t
Et : electrical energy generated in the year t
r : discount rate
n : expected lifetime of system or power station
Note: Some caution must be taken when using formulas for the levelized cost, as they often embody unseen assumptions, neglect effects like taxes, and may be specified in real or nominal levelized cost. For example, other versions of the above formula do not discount the electricity stream
 
LCOE Calculator
http://www.nrel.gov/analysis/tech_lcoe.html
The levelized cost of energy (LCOE) calculator provides a simple calculator for both utility-scale and distributed generation (DG) renewable energy technologies that compares the combination of capital costs, operations and maintenance (O&M), performance, and fuel costs.
Note that this does not include financing issues, discount issues, future replacement, or degradation costs. Each of these would need to be included for a thorough analysis.



If you are seeking utility-scale technology cost and performance estimates, please visit the Transparent Cost Database website for NREL's information regarding vehicles, biofuels, and electricity generation.
 
Falling technology costs
Capital costs and the levelized cost of electricity of renewables globally have decreased significantly and continuously over the past decade, driven by a combination of learning effects and incentive schemes. Costs are predicted to continue declining in future, which is why renewables are well positioned to play a increasing role in global regions. Renewable energy technologies have to a large extent already become competitive with fossil fuel technologies.