5.3 Levelized Cost of Energy / Electricity (LCOE)

Cost of energy production remains perhaps the single most important factor in determining whether an energy technology can reach commercialization. To properly gauge the cost of a specific energy producing technology, we need to develop a standard by which we can compare any variety of technologies. The levelized cost of electricity (LCOE) serves as such a metric. All relevant parameters are factored into the calculation and the end result is a price per kilowatt-hour.

The LCOE is a long term cost concept which accounts for all the resources and physical assets required to yield a stream of electricity output. The LCOE represents a "break-even" value that a power provider would need to charge in order to justify an investment in a particular energy project. From a high level we can express the LCOE as the following:

$LCOE=\frac{Total\:Lifetime\:Cost}{Total\:Lifetime\:Energy\:Production}=\frac{Initial\:Investment+O\&M+Depreciation^n-Residual\:Value}{Total\:Lifetime\:Energy\:Production}$

$LCOE=\frac{\sum_{t=1}^{^n}\frac{I_t+M_t+F_t}{\left(1+r\right)^t}}{\sum_{t=1}^{^n}\frac{E_t}{\left(1+r\right)^t}}$

I_t = Investment expenditures in year t (including financing)

M_t = Operations and maintenance expenditures in year t

F_t = Fuel expenditures in year t

E_t = Electricity generation in year t

r = Discount rate

n = Life of the system

(Source : http://large.stanford.edu/courses/2010/ph240/vasudev1/ Links to an external site.)
(Source : http://www.energy.gov/sites/prod/files/2015/08/f25/LCOE.pdf Links to an external site.)

LCOE of Solar and Wind

Wind energy and solar energy are notably beating out conventional generation modalities (coal, natural gas, nuclear, etc) with regard to production costs and abatement as well, according to a new study from the US investment bank Lazard. The report notes that, despite recent drops in the cost of natural gas in the US, solar and wind energy are still beating out conventional modalities in most situations — partly owing to the fact that solar and wind energy costs have dropped by 80% and 60% since 2009. Utility-scale solar photovoltaic (PV) costs have actually even fallen by 25% just over the last year, according to the new study.

(Source : https://www.lazard.com/media/2390/lazards-levelized-cost-of-energy-analysis-90.pdf Links to an external site.)
(Source : http://cleantechnica.com/2015/12/03/wind-solar-cheaper-than-fossils-nuclear-now/ Links to an external site.)

LCOE of Different Energy Sources

This graph below shows that (apart from energy efficiency) wind and solar are much cheaper than gas and coal, and less than half the cost of nuclear, and one-third the cost of peaking gas. It is interesting to note that compared to Lazard’s previous reports, wind, solar and gas costs have fallen, coal has remained static, while nuclear is the only technology to show a significant increase.

(Source : https://www.lazard.com/media/2390/lazards-levelized-cost-of-energy-analysis-90.pdf Links to an external site.)
(Source : http://reneweconomy.com.au/2015/wind-and-solar-beating-conventional-fuels-on-costs-lazard-26273 Links to an external site.)