The Levelized Cost of Energy (LCOE) is a calculation measure of the costs of a power system which allows policy makers & researchers to compare various methods of electricity generation on a consistent basis. It is an economic assessment of the average total cost to build and operate a power-generating asset over its lifetime divided by the total energy output of the asset over that lifetime. The various electricity generation methods, are also different in costs. Calculations of these costs could be made at the point of “connection to a load” or “to the electricity grid”. The costs are typically given per kWh or MWh units. It includes factors such as the initial capital, discount rate, as well as the costs of continuous operation, fuel, & maintenance. Some factors could be not applicable to some electricity generation methods.
The LCOE could also be regarded as the average minimum price at which electricity must be sold in order to break-even over the lifetime of the project. This type of calculation assists policymakers, researchers and others to guide discussions & decision making about investment in a power system project or not.
In the calculations above, we have following parameters.
- It = Investment and expenditures for the year (t)
- Mt = Operational and maintenance expenditures for the year (t)
- Ft = Fuel expenditures for the year (t)
- Et = Electrical output for the year (t)
- r = The discount Rate
- n = The (expected) lifetime of the power system