What is levelized cost of energy?

Levelized cost of energy, often written LCOE, is a single number that puts different kinds of power plants on the same footing. It spreads the plant's total lifetime cost over the total energy it will produce, so a cheap-to-run plant with a costly build can be compared with a cheap-to-build plant with costly fuel. It is widely used in investment and policy decisions.

How it works

The formula is LCOE = (sum of costs in each year, discounted to today) / (sum of energy produced in each year, discounted in the same way). The costs include construction, fuel, operation and maintenance. Discounting matters because money and output that arrive later are worth less than those that arrive now.

LCOE is sensitive to the discount rate and the capacity factor. A plant with a large upfront cost, such as solar or nuclear, becomes much more expensive per unit when money is costly. It also leaves things out: it does not say when the energy is produced, or what it costs to balance the grid, so a low value does not always mean a good investment.

Example

Say a plant costs 1,000 to build today, has no other costs, and produces 100 MWh a year for 20 years. Ignoring discounting, the cost per MWh is 1,000 / (100 x 20) = 0.50. With a 5% discount rate, the 20 years of output are worth about 12.46 times one year's output, so the discounted output is 1,246 MWh and the cost per MWh is 1,000 / 1,246, roughly 0.80. Raising the discount rate to 10% shrinks the output factor to about 8.5 and the cost per MWh rises to 1.17. These numbers are illustrative.

How to model it in Machinations

Use a Pool for cash spent on the build and a Source for energy produced each year. Registers compute the discount factor for each year and the discounted sums, and a final Register divides cost by energy. Make the discount rate, lifetime and capacity factor Levers, then Play and compare the LCOE of two plant types.