Levelized cost of energy (LCOE) is the sum of lifetime total cost over the rate of total energy output. When dividing energy production by lifetime costs, you calculate the total cost of building and operating the energy stream over an assumed lifetime.
This allows the comparison of different technologies (e.g. wind, solar, natural gas) of unequal life spans, project size, different capital cost, risk, return, capacities, and capacity factors. This is critical to making an informed decision about project feasibility. (US Department of Energy, 2015)
Where |
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Electricity delivered by the system to the grid (and/or load if applicable) in year n |
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Analysis period, in years |
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The project's equity investment amount |
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The annual project costs in year n. This includes installation, operation and maintenance, financial costs and fees, and tax benefit or liability. It also accounts for incentives and salvage value. |
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Discount real; discount rate with inflation |
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Discount nominal; discount rate without inflation |
Note- By definition, a project's annual cost (
) is the product of the LCOE and the quantity of electricity delivered by the system to the grid and/or load in that year, Qn. (Hawkes, et al, 2019)
