# Levelized cost of energy

The levelized cost of energy (LCOE), or levelized cost of electricity, is a measure of the average net present cost of electricity generation for a generating plant over its lifetime. The LCOE is calculated as the ratio between all the discounted costs over the lifetime of a electricity generating plant divided by a discounted sum of the actual energy amounts delivered. The LCOE is used to compare different methods of electricity generation on a consistent basis. The LCOE "represents the average revenue per unit of electricity generated that would be required to recover the costs of building and operating a generating plant during an assumed financial life and duty cycle." Inputs to LCOE are chosen by the estimator. They can include cost of capital, "fuel costs, fixed and variable operations and maintenance costs, financing costs, and an assumed utilization rate."[1]

## Calculation

The LCOE is calculated[citation needed] as:

${\displaystyle \mathrm {LCOE} ={\frac {\text{sum of costs over lifetime}}{\text{sum of electrical energy produced over lifetime}}}={\frac {\sum _{t=1}^{n}{\frac {I_{t}+M_{t}+F_{t}}{\left({1+r}\right)^{t}}}}{\sum _{t=1}^{n}{\frac {E_{t}}{\left({1+r}\right)^{t}}}}}}$
 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.[citation needed]

Typically the LCOE is calculated over the design lifetime of a plant, which is usually 20 to 40 years, and given in currency per energy unit, for example EUR per kilowatt-hour or AUD per megawatt-hour.[2] However, care should be taken in comparing different LCOE studies and the sources of the information as the LCOE for a given energy source is highly dependent on the assumptions, financing terms and technological deployment analyzed.[3] In particular, assumption of capacity factor has significant impact on the calculation of LCOE. Thus, a key requirement for the analysis is a clear statement of the applicability of the analysis based on justified assumptions.[3]

## Limitations

There are limits to the levelized cost of electricity metric for comparing energy generating sources. One of the most important limitations of LCOE is that it ignores time effects associated with matching electricity production to demand. This happens at two levels:

• Dispatchability, the ability of a generating system to come online, go offline, or ramp up or down, quickly as demand swings.
• The extent to which the availability profile matches or conflicts with the market demand profile.

In particular, intermittent renewable energy sources such as solar and wind are not dispatchable, and they may produce electricity when it is not needed in the grid. The value of this electricity may be lower than if it was produced at another time, or even negative. At the same time, intermittent sources can be competitive if they are available to produce when demand and prices are highest, such as solar during summertime mid-day peaks seen in hot countries where air conditioning is a major consumer.[3] Some dispatchable technologies, such as most coal power plants, are incapable of fast ramping. Excess generation when not needed may force curtailments, thus increasing the price of electricity generated.

Another limitations of the LCOE is that it does not consider indirect costs of generation.[4] These include environmental externalities or grid upgrades requirements. Intermittent power sources, such as wind and solar, may incur extra costs associated with needing to have storage or backup generation available.[5]

The LCOE does not consider the influence of energy efficiency and conservation (EEC).[6] EEC has caused the electricity demand of many countries[which?] to remain flat or decline. Considering only the LCOE for utility scale plants will tend to maximise generation and risks overestimating required generation due to efficiency, thus "lowballing" their LCOE. For solar systems installed at the point of end use, it is more economical to invest in EEC first, then solar. This results in a smaller required solar system than what would be needed without the EEC measures. However, designing a solar system on the basis of LCOE would cause the smaller system LCOE to increase, as the energy generation drops faster than the system cost. The whole of system life cycle cost should be considered, not just the LCOE of the energy source.[6] LCOE is not as relevant to end-users than other financial considerations such as income, cashflow, mortgage, leases, rent, and electricity bills.[6] Comparing solar investments in relation to these can make it easier for end-users to make a decision, or using cost-benefit calculations "and/or an asset’s capacity value or contribution to peak on a system or circuit level".[6]

## Levelized cost of storage

The levelized cost of storage (LCOS) is the analogous of LCOE applied to electricity storage technologies, such as batteries.[7]

6. ^ a b c d Bronski, Peter (29 May 2014). "You Down With LCOE? Maybe You, But Not Me:Leaving behind the limitations of levelized cost of energy for a better energy metric". RMI Outlet. Rocky Mountain Institute (RMI). Archived from the original on 28 October 2016. Retrieved 28 October 2016. Desirable shifts in how we as a nation and as individual consumers—whether a residential home or commercial real estate property—manage, produce, and consume electricity can actually make LCOE numbers look worse, not better. This is particularly true when considering the influence of energy efficiency...If you’re planning a new, big central power plant, you want to get the best value (i.e., lowest LCOE) possible. For the cost of any given power-generating asset, that comes through maximizing the number of kWh it cranks out over its economic lifetime, which runs exactly counter to the highly cost-effective energy efficiency that has been a driving force behind the country’s flat and even declining electricity demand. On the flip side, planning new big, central power plants without taking continued energy efficiency gains (of which there’s no shortage of opportunity—the February 2014 UNEP Finance Initiative report Commercial Real Estate: Unlocking the energy efficiency retrofit investment opportunity identified a $231–$300 billion annual market by 2020) into account risks overestimating the number of kWh we’d need from them and thus lowballing their LCOE... If I’m a homeowner or business considering purchasing rooftop solar outright, do I care more about the per-unit value (LCOE) or my total out of pocket (lifetime system cost)?...The per-unit value is less important than the thing considered as a whole...LCOE, for example, fails to take into account the time of day during which an asset can produce power, where it can be installed on the grid, and its carbon intensity, among many other variables. That’s why, in addition to [levelized avoided cost of energy (LACE)], utilities and other electricity system stakeholders...have used benefit/cost calculations and/or an asset’s capacity value or contribution to peak on a system or circuit level.