LCoE - an alternative measure of energy cost?

By Anna Louie on June 22 2011

The shortfall of $ / Wp

The most commonly quoted measure of cost or price in the solar energy industry has been $ per Watt peak ($/Wp). This is a relatively easy to calculate measure that is readily understood. However, its shortcoming is that it only refers to the installed capital equipment price; it fails to capture a plant’s full lifecycle costs including operating and maintenance.

An even playing ground

To understand the total electrical generation cost over the life of a power plant, the following three aspects need to be considered:

1. Capital cost of the power plant
2. Operating and maintenance costs
3. How much energy is generated over the plants life

Many industry associations, e.g. Australian Geothermal Energy Association, the US Department of Energy, the US National Renewable Energy Laboratory and the Asian Development Bank, have now adopted a cost metric for decision making (especially in the solar and other renewable energy fields), called the Levelised Cost of Energy (LCoE).

What is LCoE?

The LCoE is defined as

present value cost of Total Life Cycle Cost / Total Lifetime Energy Production.

…and can be calculated using

Effectively the LCoE allocates the average cost of every unit of energy produced by a generator across its entire lifetime, accounting for the timing of the cost and the energy generated. This gives an effective price per each unit of energy ($/kWh) determined at the time of the analysis.

LCoE takes into account the installation and commissioning costs, operations and maintenance, degradation and lifetime, and the output.

Why is LCoE a better measure?

The merits of LCoE are

1. It gives a single metric that provides a common basis for real comparison between different electricity generation systems – from renewable projects, where the up-front capital cost is high and the fuel cost is near zero, to a natural gas plant, where the capital cost is lower, but the fuel cost is higher.
2. What is more useful is that it can be compared against the utility price charge on bill ($/kWh) for measuring government’s policy incentives.

The downside is that it requires the availability of assumptions used for the calculation.

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