What is LCOE? What is the distribution of Levelized Cost of Energy types?

LCOE stands for Levelized Cost Of Energy. LCOE is calculated by dividing the total cost of ownership over its lifetime by the total energy produced over the same lifetime. In this formula, it is important to note that both totals are converted to "Net Present Value." It is an economic evaluation of the cost of the energy-producing system that includes all costs over its lifetime.

LCOE is calculated in USD/kWh, TL/kWh, EUR/kWh, or currency per megawatt-hour (MWh) over a lifespan of 20 to 40 years. The calculation is complex, but the result is a simple number expressed as the cost per kilowatt-hour. For example, by calculating the LCOE of a solar energy installation and comparing it with the payment made to the electricity company, one can easily determine which option is more cost-effective.

Why is Levelized Cost of Energy Important?

The levelized cost of energy is a crucial measure in deciding whether to proceed with a project. LCOE determines whether a project will break even or be profitable. If the result is negative, the company will not proceed with the energy-producing project and will look for an alternative. Using LCOE to evaluate a project is one of the fundamental steps in analyzing such projects.

LCOE is an important calculation that allows financial analysts to compare different energy-producing technologies such as wind, solar, and nuclear power sources. It allows for such comparisons regardless of unequal lifespans, different capital costs, project sizes, and the various risks associated with each project. This is because LCOE reflects the cost per unit of electricity produced and the risk for each project is a result of the specific discount rate used for each energy-producing asset.

LCOE is a fundamental calculation method used in the pre-evaluation of energy-related projects.

LCOE can be used as a tool to decide whether to proceed with a project or compare it with other energy-producing projects.

It is useful for comparing similar systems in similar contexts (e.g., comparing a natural gas plant with another similar type of plant).

It overlooks flexibility versus inflexibility. Due to the variability of renewable sources, backup thermal power and/or storage is often required, which is an additional cost not accounted for in the LCOE of solar or wind.

Costs, revenues, and the availability of renewable resources vary greatly between countries. Therefore, using an average LCOE value for different locations can be misleading.

Regulatory changes may mandate reduced capacity factors for fossil fuel facilities that reduce their economic attractiveness and/or increase their emissions, which are not accounted for in an initial LCOE. The environmental benefits of using renewable sources are also not evaluated in an LCOE.

It does not account for risks. For example, fuel supply risks and volatility in oil and gas pricing are not included in an LCOE. Interest rates reflect financing rates and the weighted average cost of capital investment. This will vary based on the risk profile of the organization constructing the facility and is not reflected in the LCOE.