Calculating Levelized Cost of Electricity
Compare the true lifetime costs of different power generation technologies and understand what drives electricity pricing.
What is LCOE?
Imagine you want to buy a car. You could buy a cheap gasoline car for $20,000 or a more expensive electric car for $40,000. Which one is truly cheaper over its lifetime? To figure that out, you can't just look at the sticker price. You have to include the total cost of fuel, insurance, and maintenance over all the miles you plan to drive.
LCOE is the exact same idea, but for a power plant.
It represents the average price per unit of electricity (in $/MWh or €/MWh) that the power plant must receive to break even over its entire lifetime. It's the ultimate "apples-to-apples" comparison metric that answers the question: "If we build this plant today, what will the electricity from it cost, all things considered?"
The Core Formula
"The present value of all lifetime costs divided by the present value of all lifetime energy production"
The Key Ingredients
Capital Expenditures (CAPEX)
The upfront cost to build the plant. This is the biggest cost for solar and wind.
Operating Expenditures (OPEX)
The fixed annual costs for maintenance, salaries, insurance, etc.
Fuel Costs
The cost of fuel needed to generate electricity. Zero for renewables!
Capacity Factor
The percentage of time the plant actually produces power over its lifetime.
Interactive LCOE Calculator
Compare the LCOE of a utility-scale solar farm versus a natural gas peaker plant. Adjust the parameters to see how different assumptions change the final cost of electricity.
Utility-Scale Solar Farm
How much it costs to build (€ per kW)
Percentage of time it generates power (based on sun availability)
Annual maintenance costs (€ per kW per year)
Natural Gas Peaker Plant
Cheaper to build than solar (€ per kW)
Can run whenever needed, but often used for peaks
Higher maintenance needs (€ per kW per year)
The cost of natural gas and any carbon tax (€ per MWh)
Cost Comparison
Try These Experiments
Raise Gas Fuel Costs
Watch how sensitive the gas plant's LCOE is to fuel price volatility. The solar LCOE remains unchanged.
Lower Solar Capital Cost
See how technological improvements that make solar panels cheaper drastically reduce its LCOE.
Change Capacity Factors
Notice how even though gas plants can run more often, fuel costs often make their LCOE higher.
Why LCOE Isn't the Whole Story
While LCOE is a fantastic tool, an expert knows its limits. It doesn't capture everything:
Value of Flexibility
LCOE doesn't show that a gas plant can be turned on at 8:42 PM on a calm evening, whereas a solar plant cannot. This dispatchability has immense value to the grid.
Grid Integration Costs
It doesn't include the cost of new transmission lines or grid-scale batteries needed to support intermittent renewables.
Despite these limitations, LCOE is the starting point for nearly every major energy investment and policy decision around the world.