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Concept
Levelized cost of electricity
Summary
The levelized cost of electricity (LCOE) is a measure of the average net present cost of electricity generation for a generator over its lifetime. It is used for investment planning and to compare different methods of electricity generation on a consistent basis.
The more general term levelized cost of energy may include the costs of either electricity or heat. The latter is also referred to as levelized cost of heat or levelized cost of heating (LCOH), or levelized cost of thermal energy.
The LCOE "represents the average revenue per unit of electricity generated that would be required to recover the costs of building and operating a generating plant during an assumed financial life and duty cycle", and is calculated as the ratio between all the discounted costs over the lifetime of an electricity generating plant divided by a discounted sum of the actual energy amounts delivered. Inputs to LCOE are chosen by the estimator. They can include the cost of capital, decommissioning, fuel costs, fixed and variable operations and maintenance costs, financing costs, and an assumed utilization rate.
The cost of energy production depends on costs during the expected lifetime of the plant and the amount of energy it is expected to generate over its lifetime. The levelized cost of electricity (LCOE) is the average cost in currency per energy unit, for example, EUR per kilowatt-hour or AUD per megawatt-hour. The LCOE is an estimation of the cost of production of energy, thus it tells nothing about the price for consumers and is most meaningful from the investor’s point of view.
The LCOE is calculated by adding up all costs of production, divided by the total amount of energy it is expected to generate. In formula:
{|
|-
|It || : || investment expenditures in the year t
|-
|Mt|| : || operations and maintenance expenditures in the year t
|-
|Ft|| : || fuel expenditures in the year t
|-
|Et|| : || electrical energy generated in the year t
|-
|r || : || discount rate
|-
|n || : || expected lifetime of system or power station
|}
Care should be taken in comparing different LCOE studies and the sources of the information as the LCOE for a given energy source is highly dependent on the assumptions, financing terms and technological deployment analyzed.
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