Levelized Cost of Energy (LCOE)

Levelized Cost of Energy

For any power generating system, one can compute the “levelized cost of energy” (LCOE) over the predicted lifetime of the system.  It is the ratio of the present value of the total cost of operation or ownership (TCO) to the total energy generated (TEG) over the predicted lifetime of the system.  This ratio, LCOE =TCO/TEG, looks simple, but the devil is in the details (as my mother used to say.)

LCOE does have a simple interpretation.  First note the units:  Today’s cents, dollars, Euro’s, etc. are in the numerator, and kilo-watt-hours (or mega-watt-hours) are in the denominator.  Usually it is cents per kWh or dollars per MWh.  If you want to build a power plant, you definitely want to sell the power you put onto the grid at a price greater than your LCOE, or you will lose money.

You can also compare the cost efficiency of various systems, and indeed, of various types of systems.  Here’s a table of such from a respected government source [1]. It indicates how LCOE can vary by region.  E.g. Transportation charges for coal, amount of sunlight and incidence angles for solar, amount of wind for windmills all vary by region.  However interesting these tables are, there is no guarantee that the LCOE was calculated fairly in each case.  Thus before making any decisions based on LCOE numbers, be sure you really understand how they are computed.  The text after the table is a start.

Regional Variation in Levelized Cost of New Generation Resources, 2016.

Plant Type Total System Levelized  Costs
(2009 $/MWh)




Conventional Coal




Advanced Coal




Advanced Coal withCCS




Natural Gas-fired
Conventional Combined Cycle




Advanced Combined Cycle




Advanced CC with CCS




Conventional Combustion Turbine




Advanced Combustion Turbine




Advanced Nuclear








Wind – Offshore




Solar PV1




Solar Thermal
















Energy Information Administration, Annual Energy Outlook 2011,
December 2010, DOE/EIA-0383(2010)

For example, this table indicates that wind is comparable to natural gas.  This surprises me.  Also note how much more offshore wind costs.  This is particularly surprising given the large investment that is under weigh along the east coast of the U.S.  Hydro is a winner, but as my son Sam pointed out to me, it is unlikely that these numbers compute the damage done to the fishing industry (esp. salmon fishing) by these dams (environmental damage can be modeled as uninsured costs, see below).  This is another devilish detail.

Now, let’s look at the devilish details:

First the predicted or expected lifetime of the system assumes excellent maintenance and reasonable upgrades.  At the beginning of the lifetime, there is the original (capital) cost of construction and of the hook-up to the grid, and at the end of the lifetime there is the decommissioning and waste management of all the remaining materials.  The original cost needs to include things like access road improvements, right of way purchases, the installation’s fair share of grid improvements necessary for the hookup, etc.  Some towns, knowing that all the construction vehicles passing over its roads will wear on those roads, may want compensation in order to repair or refurbish them after the construction.  This should be included in the original cost.  Here the cost of financing needs to be carefully included.  The decommissioning cost is often (fraudulently in my opinion) excluded.  It must include tear down costs, land fill costs for the debris, and the safe storage of chemicals, fuels, and radioactive material.  It might include, instead, the cost of a complete refurbishing of the system to make a totally new power generation plant.  In this case, one must fairly separate the decommissioning and waste management cost of the old system from the original cost of the new system.  The residual value of the old system needs to be subtracted from its TCO.  Similarly, if waste steel is recycled, its residual value needs to be subtracted from the old system’s TCO.

Note:  Some people believe that if nuclear power plant LCOE included the total decommissioning and cost of nuclear waste removal and storage, then nuclear simply wouldn’t look very attractive economically.  As a boy, I used to think that waste nuclear fuel should be put into rockets and shot into the sun.  Sadly, this quite reasonable idea is not feasible economically.

Now during the lifetime of the system, there is a lot of operational cost, maintenance, repairs, and upgrades.  There are many of these.  Here are some:

  • Land lease costs.
  • Labor, travel, fuel, materials, etc. costs for operations and maintenance.  Note that some fuel prices, e.g. nuclear and petroleum, might have difficult-to-predict cost variations due to political considerations.
  • Large, infrequent upgrades or replacements.  A ten year replacement for inverters is often mentioned.
  • Insurance costs.
  • Property tax costs (but not income tax as that speaks to profitability not cost).
  • Utility costs, e.g. water, sewage, network communications, telephone charges.
  • Uninsured liability, theft, vandalism, disaster, and ecological damage costs.
  • Future green-house gas GHG charges.

These all have to be estimated over time and space (region), the present value of these costs needs to be calculated, and added up, we get the total cost of ownership, TCO.  As mentioned above, these costs will vary by region and of course over time. Some costs are correlated to an appropriate conflation index, and others need to be modeled.  All assumptions need to be carefully documented.

Finally, the economic assumptions for the present value calculation of all these costs must be documented.

Let’s turn to the denominator, the total energy generated over the predicted lifetime of the system.  For very stable sources of energy, e.g. nuclear, hydro, coal, natural gas, etc., one can reasonably assume a policy of steady consistent energy production, e.g. a certain number of kWh per day.  For wind, solar, geothermal, tidal, etc, there are simple models for energy generated, say per year, and there are more detailed models that would depend on weather and warming trends.  These latter can be quite sophisticated.  There are some additional subtleties to consider.  For example, not all of the power rating of the system gets onto the grid as energy, i.e. as electricity.  Some of this difference is standard due to energy conversions and efficiency of equipment.  For wind and solar farms, not all of the equipment is 100% operational; for example, some of it may be down for routine maintenance or repairs.  (PV systems need to be cleaned regularly, and the system will degrade as its solar cells or lenses slowly get dirty.)  Some reasons are more subtle, e.g. time shifting energy production via the use of an energy storage mechanism (CAES, liquid salt, MgH2, batteries, etc.)  Conversion both to and from the storage mechanism produces an energy loss.  Thus the algorithm for time shifting needs to be considered in the calculation for LCOE.

Given that some of the variable components of both TCO and TEG are “random”, i.e., depend on random events such as weather and politics over time, it is often appropriate (and easier) to make assumptions on these random event distributions and run Monte Carlo simulations for the calculations.  Argonne Laboratories has written a paper on this.

Note that the calculation of LCOE avoids (except for the reasons for time shifting) what the electric companies will pay for energy put onto the grid.  LCOE is one massive average over a long (20-30 year) lifetime.  Electrical rates are quite another thing.

Electrical rates vary across the day, with utilities charging commercial enterprises more for electricity during “peak hours” than during “off hours”.  The differences can be considerable.  Solar systems generate most of their power during peak hours.  If a solar system is directly substituting for utility company power during peak hours, then the value to the owner of that system will be, during these hours at least, equal to the peak rate the electric company charges. This type of logic is not directly factored into LCOE calculations; however, a favorable power provider agreement (PPA) between the generator owner and the utility can improve the deal for financing charges.  Residential and most commercial installations of solar power will not get a favorable agreement with the utility company.  Per the California Public Utility Commission, excess electricity generated and not used, i.e. put back onto the grid, is to be compensated annually at the average spot rate for the year – better than nothing, but far less than peak rates and not a real incentive to install solar power on your roof for the purpose of making money by selling the excess energy.

As explained before in these notes (here) irregular sources of utility scale energy such as wind and solar may well be more profitable with local energy storage.  This would allow a base level of energy to be put onto the grid, and also some additional energy for peak times.  To model this, a revenue model needs to be created in parallel with the LCOE model.  This can be done in a spreadsheet, but it can also be done with Monte Carlo methods.  These models need to be part of the pro forma economic analysis done at site selection and system design time.  The PPA negotiation with the utility company needs to conform with the model results.

Finally, NREL publishes a simple LCOE calculator here, which can be used to test any LCOE calculation for reasonableness.


[1] Levelized Cost of New Generation Resources in the Annual Energy Outlook 2011


Tags: , , , , ,

4 Responses to “Levelized Cost of Energy (LCOE)”

  1. Bob Travis Says:

    Excellent article! Nice to have found your blog, Gayn. I’ll try to keep up… 🙂


  2. sam winters Says:

    Very nice details, they sure are the devil. I can see why hydro is so appealing with the lowest LCOE on the list. It is a big deal around here. These dams have caused so much devastation to wildlife and the livelihood of local communities that they are now starting to tear them down. (that’s gotta raise the LCOE)
    Also, you’re correct about having to clean the PV panels, we’ve noticed a significant difference that dirt and bird poop will have on production, even after just one month!

    • sam winters Says:

      PS – check out the Elwha River Restoration Project, going on right now!

  3. Gayn Winters, Ph.D. Says:

    In today’s LA times (9/22/11) there is an article on the removal of the Copeo No.1 dam near Hornbrook CA on the Klamath River. The estimated cost to the PacifiCorp utility company (and ultimately its customers) is $291.6M for just the demolition. The federal government will fund up to $1B (yeah, that Billion) for “water management, habitat restoration and monitoring programs.”

    Potentially three more dams could be destroyed freeing up 400 miles of spawning grounds for Steelhead and Chinook Salmon. Analysts point out that just knocking down the dams isn’t enough. High water temperatures and low oxygen content will remain problems, and the Chinook will have to be trapped and trucked around the polluted waters.

    It appears that the dams are being removed because they are essentially at their end of life, or at least at the end of their licensing period. In other words, the dam demolition isn’t being driven totally by altruistic environmental reasons.

    Another benefit in these tough economic times, this effort is estimated to generate 5,000 jobs – for awhile at least.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: