As a financial tool, LCOE is very valuable for the comparison of various generation options. A relatively low LCOE means that electricity is being produced at a low cost, with higher likely returns for the investor. If the cost for a renewable technology is as low as current traditional costs, it is said to have reached “Grid Parity“.
>”LCOE (levelized cost of energy) is one of the utility industry’s primary metrics for the cost of electricity produced by a generator. It is calculated by accounting for all of a system’s expected lifetime costs (including construction, financing, fuel, maintenance, taxes, insurance and incentives), which are then divided by the system’s lifetime expected power output (kWh). All cost and benefit estimates are adjusted for inflation and discounted to account for the time-value of money. […]
LCOE Estimates for Renewable Energy
When an electric utility plans for a conventional plant, it must consider the effects of inflation on future plant maintenance, and it must estimate the price of fuel for the plant decades into the future. As those costs rise, they are passed on to the ratepayer. A renewable energy plant is initially more expensive to build, but has very low maintenance costs, and no fuel cost, over its 20-30 year life. As the following 2012 U.S. Govt. forecast illustrates, LCOE estimates for conventional sources of power depend on very uncertain fuel cost estimates. These uncertainties must be factored into LCOE comparisons between different technologies.
LCOE estimates may or may not include the environmental costs associated with energy production. Governments around the world have begun to quantify these costs by developing various financial instruments that are granted to those who generate or purchase renewable energy. In the United States, these instruments are called Renewable Energy Certificates (RECs). To learn more about environmental costs, visit our Greenhouse Gas page.
LCOE estimates do not normally include less tangible risks that may have very large effects on a power plant’s actual cost to ratepayers. Imagine, for example, the LCOE estimates used for nuclear power plants in Japan before the Fukushima incident, compared to the eventual costs for those plants.
An important determination of photovoltaic LCOE is the system’s location. The LCOE of a system built in Southern Utah, for example, is likely to be lower than that of an identical system built in Northern Utah. Although the cost of building the two systems may be similar, the system with the most access to the sun will perform better, and deliver the most value to its owner. […]”<