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Measure of lifetime average net present cost of electricity generation From Wikipedia, the free encyclopedia
The levelized cost of electricity (LCOE) is a measure of the average net present cost of electricity generation for a generator over its lifetime. It is used for investment planning and to compare different methods of electricity generation on a consistent basis.
The more general term levelized cost of energy may include the costs of either electricity or heat. The latter is also referred to as levelized cost of heat[2] or levelized cost of heating (LCOH), or levelized cost of thermal energy.
The cost of a electricity production depends on costs during the expected lifetime of the generator and the amount of electricity the generator is expected to produce over its lifetime. The levelized cost of electricity (LCOE) is the average cost in currency per energy unit, for example, EUR per kilowatt-hour or AUD per megawatt-hour.[3]
LCOE is defined by the formula:[4][5][6]
| It | : | investment expenditures in the time interval t |
| Mt | : | operations and maintenance expenditures in the time interval t |
| Ft | : | fuel expenditures in the time interval t |
| Et | : | electrical energy generated in the time interval t |
| r | : | discount rate |
| n | : | expected lifetime of system or power station in number of time intervals of t |
LCOE is an estimation of the cost of production of electricity and not the price of electricity. The price of electricity may be influenced by additional factors including markup and price controls.
LCOE is commonly used for:
Significant caution needs to be applied to use of LCOE as outputs are highly sensitive to the selection of input values.[9] The ability to interpret and compare LCOE model outputs is dependent upon the level of detailed justification provided for input values and the results of sensitivity analysis against the selection of input values.[9] For any given electricity generation technology, LCOE can vary significantly from region to region depending on factors such as the cost of fuel or availability of renewable energy resources. For LCOE to be usable for rank-ordering energy-generation alternatives, caution must be taken to calculate it in "real" terms, i.e. including adjustment for expected inflation.[10][11]
An energy efficiency gap phenomenon exists due to observed lack of consideration of and implementation of demand-side energy conservation.[12] LCOE is typically used in support of supply-side generation capacity replacement and expansion decision making. The energy efficiency gap phenomenon suggests demand-side energy conservation should also be considered in investment strategies and energy policy.[12]
LCOE is often cited as a convenient summary measure of the overall competitiveness of different generating technologies, however, it has potential limitations. One of the most important potential limitations of LCOE is that it may not control for time effects associated with matching electricity production to demand. This can happen at two levels:
In particular, if the costs of matching grid energy storage are not included in projects for variable renewable energy sources such as solar and wind, they may produce electricity when it is not needed in the grid without storage. The value of this electricity may be lower than if it was produced at another time, or even negative. At the same time, variable 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.[9]
To ensure enough electricity is always available to meet demand, storage or backup generation may be required, which adds costs that are not included in some instances of LCOE.[14] Excess generation when not needed may force curtailments, thus reducing the revenue of an energy provider. Decisions about investments in energy generation technologies may be guided by other measures such as the levelized cost of storage (LCOS) and the levelized avoided cost of energy (LACE), in addition to the LCOE.[13]
Another potential limitation of LCOE is that some analyses may not adequately consider the indirect costs of generation.[15] These can include the social cost of greenhouse gas emissions, other environmental externalities such as air pollution, or grid upgrade requirements.
The LCOE for a given generator tends to be inversely proportional to its capacity. For instance, larger power plants have a lower LCOE than smaller power plants. Therefore, making investment decisions based on insufficiently comprehensive LCOE can lead to a bias towards larger installations while overlooking opportunities for energy efficiency and conservation[16] unless their costs and effects are calculated, and included alongside LCOE numbers for other options such as generation infrastructure for comparison.[17] If this is omitted or incomplete, LCOE may not give a comprehensive picture of potential options available for meeting energy needs.
The amount of electrical energy generated or estimated to be generated is dependent upon a large number of factors including:
For a proposed generator with only the proposed nameplate capacity known, observed capacity factor data available for similar existing generators can be used to estimate the electrical energy generated for the proposed new generator.
Investment expenditures , operations and maintenance expenditures and fuel expenditures are influenced by a variety of taxes commonly imposed by governments including tariffs impacting the cost of importing generation equipment and fuels, excises impacting the cost of production of fuels, carbon taxes for offsetting the social cost of carbon and other taxes for recouping shared industry costs of electric power transmission and research and development of energy technologies. Expenditures can also be influenced by a variety of energy subsidies.
Assumptions are required to be made due to the subjective nature of prediction of future levels of taxation and subsidies and influence of the politics of climate change.
Cost of capital expressed as the discount rate is one of the most controversial inputs into the LCOE equation, as it significantly impacts the outcome and a number of comparisons assume arbitrary discount rate values with little transparency of why a specific value was selected. Comparisons that assume public funding, subsidies, and social cost of capital tend to choose low discount rates (3%), while comparisons prepared by private investment banks tend to assume high discount rates (7–15%) associated with commercial for-profit funding.[citation needed] Assuming a low discount rate favours nuclear and sustainable energy projects, which require a high initial investment but then have low operational costs.
In a 2020 analysis by Lazard,[18] sensitivity to discount factor changes in the range of 6–16% results in different LCOE values but the identical ordering of different types of power plants if the discount rates are the same for all technologies.
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