{{Short description|Measure of lifetime average net present cost of electricity generation}} [[File:20201019 Levelized Cost of Energy (LCOE, Lazard) - renewable energy.svg|thumb|upright=1.35|With increasingly widespread implementation of renewable energy sources, costs have declined, most notably for energy generated by solar panels.<ref name=PopSciLazard_LCOE2020>{{cite magazine |last1=Chrobak |first1=Ula |others=Infographic by Sara Chodosh |title=Solar power got cheap. So why aren't we using it more? |url=https://www.popsci.com/story/environment/cheap-renewable-energy-vs-fossil-fuels/ |magazine=Popular Science |date=28 January 2021 |archive-url=https://web.archive.org/web/20210129144621/https://www.popsci.com/story/environment/cheap-renewable-energy-vs-fossil-fuels/ |archive-date=29 January 2021 |url-status=live }} ● Chodosh's graphic is derived from data in {{cite web |title=Lazard's Levelized Cost of Energy Version 14.0 |url=https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf |website=Lazard.com |publisher=Lazard |archive-url=https://web.archive.org/web/20210128105700/https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf |archive-date=28 January 2021 |date=19 October 2020 |url-status=live}}</ref><ref name=LazardLCOE_2025>{{cite web |title=Lazard LCOE Levelized Cost Of Energy+ |url=https://www.lazard.com/media/5tlbhyla/lazards-lcoeplus-june-2025-_vf.pdf |publisher=Lazard |archive-url=https://web.archive.org/web/20260412205555/https://www.lazard.com/media/5tlbhyla/lazards-lcoeplus-june-2025-_vf.pdf |archive-date=12 April 2026 |page=14 (chart: Levelized Cost of Energy Comparison—Historical LCOE Comparison) |date=June 2025 |url-status=live}}</ref><br/>Levelized cost of energy (LCOE) is a measure of the average net present cost of electricity generation for a generating plant over its lifetime.]]
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 one of several cost metrics 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''<ref name="nian-2016">[https://cyberleninka.org/article/n/710472/viewer ''A Comparative Cost Assessment of Energy Production from ...''] Nian, Energy Procedia, 2016</ref> or ''levelized cost of heating'' ('''LCOH'''), or ''levelized cost of thermal energy''.
==Definition== The cost of 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 constant price per unit of energy that would yield a net present value of zero for the project,<ref>{{cite web |title=Simple Levelized Cost of Energy (LCOE) Calculator Documentation |url=https://www.nrel.gov/analysis/tech-lcoe-documentation |website=www.nrel.gov |access-date=20 January 2026}}</ref> or, more technically, the "cost that, if assigned to every unit of energy produced (or saved) by the system over the analysis period, will equal the [total life-cycle cost] (TLCC) when discounted back to the base year."<ref name="nrel">{{cite web |author1=Walter Short |author2=Daniel J. Packey |author3=Thomas Holt |title=A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies |url=https://www.nrel.gov/docs/legosti/old/5173.pdf |website=www.nrel.gov |publisher=National Renewable Energy Laboratory |access-date=17 July 2022 |pages=47–50 |date=March 1995}}</ref>
LCOE is defined by the formula:<ref name="nrel"></ref><ref>{{cite journal |last1=Lai |first1=Chun Sing |last2=Locatelli |first2=Giorgio |last3=Pimm |first3=Andrew |last4=Tao |first4=Yingshan |last5=Li |first5=Xuecong |last6=Lai |first6=Loi Lei |title=A financial model for lithium-ion storage in a photovoltaic and biogas energy system |journal=Applied Energy |date=October 2019 |volume=251 |article-number=113179 |doi=10.1016/j.apenergy.2019.04.175|bibcode=2019ApEn..25113179L |doi-access=free }}</ref><ref>{{cite journal |last1=Lai |first1=Chun Sing |last2=Jia |first2=Youwei |last3=Xu |first3=Zhao |last4=Lai |first4=Loi Lei |last5=Li |first5=Xuecong |last6=Cao |first6=Jun |last7=McCulloch |first7=Malcolm D. |title=Levelized cost of electricity for photovoltaic/biogas power plant hybrid system with electrical energy storage degradation costs |journal=Energy Conversion and Management |date=December 2017 |volume=153 |pages=34–47 |doi=10.1016/j.enconman.2017.09.076|bibcode=2017ECM...153...34L |url=https://ora.ox.ac.uk/objects/uuid:9336ab00-8710-4002-ae45-da5d7e35d355 |url-access=subscription }}</ref>
:<math>\mathrm{LCOE} = \frac{\text{discounted sum of costs over lifetime}}{\text{discounted 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=\alpha}^{n} \frac{E_t}{\left({1+r}\right)^{t}} }</math>
:Input values are: ::{| |- |'''''I<sub>t</sub>''''' || : || investment expenditures in the time interval ''t'' |- |'''''M<sub>t</sub>'''''|| : || operations and maintenance expenditures in the time interval ''t'' |- |'''''F<sub>t</sub>'''''|| : || fuel expenditures in the time interval ''t'' |- |'''''E<sub>t</sub>'''''|| : || 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'' |- |<math>\alpha</math> | : |interval in which energy production begins |}
==Applicability== 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: * Feasibility study decisions for new electricity generation projects.<ref name="cfi">{{Cite web |title=Levelized Cost of Energy (LCOE) |url=https://corporatefinanceinstitute.com/resources/valuation/levelized-cost-of-energy-lcoe/ |access-date=2025-01-24 |website=Corporate Finance Institute |language=en-US}}</ref> * Investment strategy decisions made by businesses and governments.<ref name="cfi" /><ref name="hansen">{{Cite journal |last=Hansen |first=Kenneth |date=2019-04-01 |title=Decision-making based on energy costs: Comparing levelized cost of energy and energy system costs |journal=Energy Strategy Reviews |volume=24 |pages=68–82 |doi=10.1016/j.esr.2019.02.003 |bibcode=2019EneSR..24...68H |issn=2211-467X|doi-access=free }}</ref> * Energy policy decisions made by governments.<ref name="hansen" />
Significant caution needs to be applied to use of LCOE as outputs are highly sensitive to the selection of input values.<ref name="Branker" /> 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.<ref name="Branker">{{cite journal |doi=10.1016/j.rser.2011.07.104 |title=A Review of Solar Photovoltaic Levelized Cost of Electricity |year=2011 |last1=Branker |first1=K. |last2=Pathak |first2=M.J.M. |last3=Pearce |first3=J.M. |journal=Renewable and Sustainable Energy Reviews |volume=15 |issue=9 |pages=4470–4482 |bibcode=2011RSERv..15.4470B |s2cid=73523633 |url=https://digitalcommons.mtu.edu/materials_fp/28 |hdl=1974/6879 |hdl-access=free }} [https://hdl.handle.net/1974/6879 Open access]</ref> 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.<ref>{{cite web |last1=Loewen |first1=James |last2=Gagnon |first2=Peter |last3=Mai |first3=Trieu |title=A resolution to LCOE is not the metric you think it is |url=https://www.utilitydive.com/news/LCOE-resolution-as-proper-solar-wind-cost-metric-NREL/586556/ |website=Utility Dive |access-date=7 October 2020}}</ref><ref>{{cite journal |last1=Loewen |first1=James |title=Correction to Electricity Journal papers in July 2019 issue and in July 2020 issue by James Loewen |journal=The Electricity Journal |date=August–September 2020 |volume=33 |issue=7 |article-number=106815 |doi=10.1016/j.tej.2020.106815 |bibcode=2020ElecJ..3306815L |s2cid=225344100 |url=https://www.sciencedirect.com/science/article/abs/pii/S104061902030107X |access-date=7 October 2020|url-access=subscription }}</ref>
An energy efficiency gap phenomenon exists due to observed lack of consideration of and implementation of demand-side energy conservation.<ref name="gerarden">{{Cite journal |last1=Gerarden |first1=Todd D. |last2=Newell |first2=Richard G. |last3=Stavins |first3=Robert N. |date=2017-12-01 |title=Assessing the Energy-Efficiency Gap |url=https://pubs.aeaweb.org/doi/10.1257/jel.20161360 |journal=Journal of Economic Literature |language=en |volume=55 |issue=4 |pages=1486–1525 |doi=10.1257/jel.20161360 |issn=0022-0515}}</ref> 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.<ref name="gerarden" />
===Limitations=== LCOE is often cited as a convenient summary measure of the overall competitiveness of different generating technologies, however, it has potential limitations. Decisions about investments in energy generation technologies may need to 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.<ref name=":0" />
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: * Dispatchability, the ability of a generating system to come online, go offline, or ramp up or down, quickly as demand swings.<ref name=":1">{{Cite journal |last=Idel |first=Robert |date=2022-11-15 |title=Levelized Full System Costs of Electricity |url=https://www.sciencedirect.com/science/article/pii/S0360544222018035 |journal=Energy |volume=259 |article-number=124905 |doi=10.1016/j.energy.2022.124905 |issn=0360-5442|url-access=subscription }}</ref><ref name=":2">{{Cite journal |last=Ueckerdt |first=Falko |last2=Hirth |first2=Lion |last3=Luderer |first3=Gunnar |last4=Edenhofer |first4=Ottmar |date=2013-12-15 |title=System LCOE: What are the costs of variable renewables? |url=https://www.sciencedirect.com/science/article/pii/S0360544213009390 |journal=Energy |volume=63 |pages=61–75 |doi=10.1016/j.energy.2013.10.072 |issn=0360-5442|url-access=subscription }}</ref> * The extent to which the availability profile matches or conflicts with the market demand profile.<ref name=":0">{{Cite web |last=U.S. Energy Information Administration |date=March 2022 |title=Levelized Costs of New Generation Resources in the Annual Energy Outlook 2022 |url=https://www.eia.gov/outlooks/aeo/pdf/electricity_generation.pdf}}</ref> 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.<ref name="Branker" /> Additionally, LCOE may significantly overvalue a dispatchable power plant if the value of '''''<math>E_t</math>''''' in the calculation assumes a constant utilisation rate for the lifetime of the plant when in reality for fossil fuel and nuclear plants, this "capacity factor" may decline as they are outcompeted by rising solar, wind, and battery adoption.<ref>{{Cite web |last=Anderson |first=Jared |date=15 Mar 2021 |title=Miscalculated levelized cost of electricity data has overvalued power plants: study |url=https://www.spglobal.com/energy/en/news-research/latest-news/electric-power/031521-miscalculated-levelized-cost-of-electricity-data-has-overvalued-power-plants-study |website=S&P Global}}</ref>
Response to the LCOE ignoring intermittency of most renewable sources has been proposed in System LCOE<ref name=":2" /> and Levelized Full System Costs of Electricity (LFSCOE) metrics, which factor in the cost of required grid energy storage or redundant dispatchable power plants for balancing demand during intermitency periods.<ref name=":1" />
{{Excerpt|Cost of electricity by source#Levelized avoided cost of electricity|only=paragraphs|paragraphs=2|hat=no}}
Another potential limitation of LCOE is that some analyses may not adequately consider the indirect costs of generation.<ref>{{cite journal |last1=Hwang |first1=Sung-Hyun |last2=Kim |first2=Mun-Kyeom |last3=Ryu |first3=Ho-Sung |title=Real Levelized Cost of Energy with Indirect Costs and Market Value of Variable Renewables: A Study of the Korean Power Market |journal=Energies |date=26 June 2019 |volume=12 |issue=13 |page=2459 |doi=10.3390/en12132459 |doi-access=free }}</ref> These can include the social cost of greenhouse gas emissions, other environmental externalities such as air pollution, or grid upgrade requirements. On the other hand, the LCOE often ignores other potential co-benefits of a power source.<ref name="sciencedirect.com">{{Cite journal |last1=Hayibo |first1=Koami Soulemane |last2=Jamil |first2=Uzair |last3=Pearce |first3=Joshua M. |date=2025-10-01 |title=Additional value of non-electricity generating services (co-benefits) provided by non-conventional dual use solar photovoltaic systems: A PRISMA review |url=https://www.sciencedirect.com/science/article/pii/S136403212500694X |journal=Renewable and Sustainable Energy Reviews |volume=222 |article-number=116021 |doi=10.1016/j.rser.2025.116021 |bibcode=2025RSERv.22216021H |issn=1364-0321|doi-access=free }}</ref> For example, solar photovoltaic systems provide electricity but systems for agrivoltaics can produce more food,<ref>{{Cite journal |last1=Widmer |first1=J. |last2=Christ |first2=B. |last3=Grenz |first3=J. |last4=Norgrove |first4=L. |date=2024-03-01 |title=Agrivoltaics, a promising new tool for electricity and food production: A systematic review |url=https://www.sciencedirect.com/science/article/pii/S1364032123011358 |journal=Renewable and Sustainable Energy Reviews |volume=192 |article-number=114277 |doi=10.1016/j.rser.2023.114277 |bibcode=2024RSERv.19214277W |issn=1364-0321|doi-access=free }}</ref><ref>{{Cite journal |last1=Jamil |first1=Uzair |last2=Pearce |first2=Joshua M. |date=2025-05-23 |title=Regenerative Agrivoltaics: Integrating Photovoltaics and Regenerative Agriculture for Sustainable Food and Energy Systems |journal=Sustainability |language=en |volume=17 |issue=11 |page=4799 |doi=10.3390/su17114799 |bibcode=2025Sust...17.4799J |doi-access=free |issn=2071-1050}}</ref> floating solar (floatovoltaics) reduces water evaporation,<ref>{{Cite journal |last1=Exley |first1=Giles |last2=Armstrong |first2=Alona |last3=Page |first3=Trevor |last4=Jones |first4=Ian D. |date=2021-05-01 |title=Floating photovoltaics could mitigate climate change impacts on water body temperature and stratification |url=https://www.sciencedirect.com/science/article/pii/S0038092X2100116X |journal=Solar Energy |series=Special Issue on Floating Solar: beyond the state of the art technology |volume=219 |pages=24–33 |doi=10.1016/j.solener.2021.01.076 |bibcode=2021SoEn..219...24E |issn=0038-092X|hdl=1893/32443 |hdl-access=free }}</ref><ref>{{Cite journal |last1=Hayibo |first1=Koami Soulemane |last2=Mayville |first2=Pierce |last3=Kailey |first3=Ravneet Kaur |last4=Pearce |first4=Joshua M. |date=2020-11-28 |title=Water Conservation Potential of Self-Funded Foam-Based Flexible Surface-Mounted Floatovoltaics |journal=Energies |language=en |volume=13 |issue=23 |page=6285 |doi=10.3390/en13236285 |doi-access=free |issn=1996-1073}}</ref> building integrated photovoltaics (BIPV)<ref>{{Cite journal |last1=Yang |first1=Rebecca Jing |last2=Zou |first2=Patrick X.W. |date=2016-01-02 |title=Building integrated photovoltaics (BIPV): costs, benefits, risks, barriers and improvement strategy |url=https://www.tandfonline.com/doi/full/10.1080/15623599.2015.1117709 |journal=International Journal of Construction Management |volume=16 |issue=1 |pages=39–53 |doi=10.1080/15623599.2015.1117709 |issn=1562-3599|url-access=subscription }}</ref> and solar canopies<ref>{{Cite journal |last1=Golden |first1=Jay S. |last2=Carlson |first2=Joby |last3=Kaloush |first3=Kamil E. |last4=Phelan |first4=Patrick |date=2007-07-01 |title=A comparative study of the thermal and radiative impacts of photovoltaic canopies on pavement surface temperatures |url=https://www.sciencedirect.com/science/article/pii/S0038092X06002908 |journal=Solar Energy |volume=81 |issue=7 |pages=872–883 |doi=10.1016/j.solener.2006.11.007 |bibcode=2007SoEn...81..872G |issn=0038-092X|url-access=subscription }}</ref> produce shade to cool buildings/cars, all of which have an economic value. While LCOE remains the dominant tool for assessing solar photovoltaics and other energy source economics due to its simplicity, it fails to account for these non-electricity-related co-benefits, leading to an undervaluation of emerging solar technologies.<ref name="sciencedirect.com" />
The LCOE for a given generator also 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<ref name="Bronski2014">{{cite web|last1=Bronski |first1=Peter |title=You Down With LCOE? Maybe You, But Not Me:Leaving behind the limitations of levelized cost of energy for a better energy metric |url=http://blog.rmi.org/blog_2014_05_29_you_down_with_lcoe |website=RMI Outlet |publisher=Rocky Mountain Institute (RMI) |access-date=28 October 2016 |archive-url=https://web.archive.org/web/20161028152421/http://blog.rmi.org/blog_2014_05_29_you_down_with_lcoe |archive-date=28 October 2016 |date=29 May 2014 }}</ref> unless their costs and effects are calculated and included for comparison alongside LCOE numbers for other options such as generation infrastructure.<ref name="Lazard2020">{{cite web |title=Levelized Cost of Energy Analysis Version 9.0 |date=17 November 2015 |url=https://web.archive.org/web/20220901032812mp_/http://www.lazard.com/media/2390/lazards-levelized-cost-of-energy-analysis-90.pdf |access-date=24 October 2020|website=Lazard}}</ref> If such comparison is omitted or incomplete, LCOE may not give a comprehensive picture of potential options available for meeting energy needs.
==Selection of input values== ===Electrical energy generated=== The amount of electrical energy generated <math>E_t</math> or estimated to be generated is dependent upon a large number of factors including:
* '''Natural resource economics''' and the availability of economically viable resources required for generator operation is variable per generation technology. For variable renewable energy generators, wind resource assessment and solar potential assessment are examples of methods used to assess the availability of resources required for wind turbines and solar panels to generate energy. For non-renewable generators, fuel availability over the lifespan of a generator may be temporarily impacted by geopolitical factors (an example being the 1970s energy crisis) or impacted by gradual depletion of and discovery of new non-renewable resource reserves. Oil and gas reserves and resource quantification is an example of a method used to assess long term availability of economically viable fuel resources for non-renewable generators. * Electricity market effects of '''grid balancing''' may require a load-following power plant to curtail generation of energy if the grid does not demand energy (negative spot prices) or allow a generator with high variable costs to be brought online to dispatch into a grid with significant unmet demand and high spot prices. Battery, run-of-the-river hydroelectricity with pondage, variable renewable energy and natural gas turbine generators are examples of dispatchable generators. Seasonal diurnal cycles and climatology, as well as short term meteorological events have significant impacts to grid balancing from both supply and demand perspectives. The geographical region within which LCOE is being assessed, the mix of generators in a grid, the proportion of demand flexibility (or conversely firm power demand) within a grid and transmission capacity limits within a grid also significantly influence required generation curtailment. * The cost of '''operational availability''' <math display="inline">A_o</math> (known as availability factor for electricity generators) is variable per generation technology. Different generator technologies require differing levels of planned and unplanned maintenance preventing nameplate capacity output being achieved continuously for the lifespan of the generator. As an additional external influence, governments differ in their willingness to accept risks of power outages and lack of resilience against natural disasters and military attack on electricity grids. Examples of historical events impacting grid resilience are the 1991 Gulf War air campaign against civilian infrastructure, 2015 Ukraine power grid hack, 2021 Texas power crisis and Russian strikes against Ukrainian infrastructure (2022–present). Low risk tolerance may require electricity grids to be more significantly overbuilt to mitigate the potential costs of electricity grid interruptions and outages, impacting on a technology-by-technology basis the amount of generation curtailment necessary under normal grid conditions.
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.
===Expenditures=== Investment expenditures <math>I_t</math>, operations and maintenance expenditures <math>M_t</math> and fuel expenditures <math>F_t</math> 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.
===Discount rate=== Cost of capital expressed as the discount rate <math>r</math> 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|date=June 2022}} 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,<ref>{{cite web |date=19 October 2020 |title=Lazard's Levelized Cost of Energy Version 14.0 |url=https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf |url-status=live |archive-url=https://web.archive.org/web/20210128105700/https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf |archive-date=28 January 2021 |website=Lazard.com |publisher=Lazard}}</ref> 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.
==See also== * Cost of electricity by source * Levelized cost of water
==References== {{Reflist}}
Category:Electricity economics