Levelised Cost of Electricity

The levelised cost of electricity (LCOE) measures the average cost of producing one unit of electricity over a power plant's economic lifetime. It is calculated as the present value of lifetime costs divided by the present value of lifetime electricity generation, usually expressed per kWh or MWh.

How it is calculated

For each year, expected costs and electricity output are discounted to a common base year. In simplified form, LCOE equals the sum of discounted costs divided by the sum of discounted electricity generation.

• Lifetime costs commonly include capital expenditure, operation and maintenance, fuel where applicable, and decommissioning costs.
• The discount rate represents the time value of money and strongly affects capital-intensive technologies.
• Expected generation depends on plant life, efficiency, degradation and the assumed capacity factor.

What the measure indicates

LCOE can be interpreted as the constant average revenue per unit of electricity that would recover the plant's assumed lifetime costs. It permits comparison among technologies with different patterns of upfront and recurring expenditure.

• A lower LCOE indicates a lower estimated lifetime generation cost under the chosen assumptions.
• LCOE is a project-cost metric, not necessarily the electricity tariff paid by consumers or the market price received by generators.

Limits of comparison

LCOE comparisons are only as reliable as their assumptions and do not, by themselves, capture the full value or cost of a technology within the electricity system.

• LCOE does not adequately reflect differences in dispatchability, reliability or the timing and location of generation.
• Grid expansion, storage, balancing and backup requirements may require separate assessment as system costs.
• Environmental and social externalities are excluded unless they are explicitly assigned monetary values.

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