Levelised Cost of Energy
Lifetime cost per unit of energy produced.
Formula
Variables
Example
Used to compare solar, wind, gas and nuclear on a level footing.
How it works
Levelised Cost of Energy turns all of a project’s costs and outputs into present-value terms so you can compare technologies with very different lifetimes, upfront spending, and operating profiles. The capital cost is treated as a single initial outlay, while future maintenance and energy generation are discounted because a pound or kWh in the future is worth less than one today. Dividing discounted total cost by discounted total energy gives the average lifetime cost per unit of electricity produced, expressed in cost per kWh.
When to use it
Use this when evaluating or comparing generation projects such as solar farms, wind turbines, batteries paired with generation, biomass plants, or other power assets with long lifetimes. It is especially useful in feasibility studies, tariff setting, and technology comparisons where cash flows occur over many years.
Worked example, step by step
A biomass plant has capital cost C = £2,000,000. Annual running cost is M_t = £180,000 for each of 10 years. Annual energy output is E_t = 4,500,000 kWh for each of 10 years. Discount rate r = 6% = 0.06. Step 1: Discount factor for year t is 1/(1.06)^t. Step 2: Present value of operating costs: PV(M) = 180,000/(1.06)^1 + 180,000/(1.06)^2 + ... + 180,000/(1.06)^10 PV(M) ≈ 169,811 + 160,199 + 151,131 + 142,575 + 134,505 + 126,892 + 119,709 + 112,934 + 106,542 + 100,510 PV(M) ≈ £1,325,808 Step 3: Present value of energy produced: PV(E) = 4,500,000/(1.06)^1 + 4,500,000/(1.06)^2 + ... + 4,500,000/(1.06)^10 PV(E) ≈ 4,245,283 + 4,003,733 + 3,776,724 + 3,562,608 + 3,360,970 + 3,170,726 + 2,990,309 + 2,819,279 + 2,657,074 + 2,503,708 PV(E) ≈ 33,090,414 kWh Step 4: Total discounted cost: C + PV(M) = 2,000,000 + 1,325,808 = £3,325,808 Step 5: LCOE: LCOE = 3,325,808 / 33,090,414 = £0.1005 per kWh Final answer: LCOE ≈ 10.1 p/kWh.
Common mistakes to avoid
- forgetting to discount future costs and energy by the same rate
- including only running costs and leaving out the upfront capital cost
- mixing units, such as using annual energy in MWh but reporting the answer as if it were in kWh
Did You Know?
Solar PV's LCOE fell roughly 90% in the 2010s, making it the cheapest electricity in history in many regions.
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