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1.4.2 Levelized Cost of Energy (LCOE)

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Figure 1.8 [1] shows the relative costs in $/kWh for a number of generating options over the plant lifetime.

For instance, everything including a large hydro generation costs $0.04/kWh compared to an offshore wind farm priced at $0.19/kWh during the lifetime of the plant. The graph also shows the range of the cost for other alternatives. Clearly, the utility may have a hard time selling the wind power in this situation.

(1.1)

The units of LCOE are money/energy (usually $/MWh or c/kWh1).

Figure 1.8 Typical LCOE cost ranges and weighted averages for electricity generation.

Source: Courtesy of IRENA Publications (2014).

As the name suggests, the “money” part of this equation consists of costs: specifically a summing up of all the costs spent over the whole lifetime (from year 1 to year n) of the project. So this is the money spent building a power plant – at the start, capital expenditure (capex), and a long list of operational expenditure (opex), for example fuel, maintenance and repairs, land lease, insurance, tax, and interest on bank loans. If you can sell your system for something at the end of the project lifetime, you can knock this residual value off your list of costs.

Some projects, such as solar PV and hydro, will involve considerable up‐front capex, but followed by years of very low operating cost. Others, such as a gas‐fired power plant, will see the majority of spending over the project lifetime during the operating years of burning fuel.

Indeed, levelized cost analysis is all about comparing different energy systems with very different cost structures on a “fairer,” long‐term basis. Comparing the two examples mentioned earlier, the revenue of the solar PV will depend on how sunny it is and by how much the output of the solar panels degrades over time. On the other hand, the revenue for the gas plant will depend on the capacity factor and how often it runs. The later will be more difficult to predict though, as it will depend on the interplay between electricity sale and gas purchase prices.

Practical Power Plant Engineering

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