BOX 2.3

Levelized Cost of Electricity

The levelized cost of electricity (LCOE) is defined as the average cost of generating a unit of electricity over the generating facility’s service life. The LCOE is computed by dividing the present value of the estimated full life-cycle costs of the generating facility by its estimated lifetime electricity production. The result is usually expressed in terms of cents per kilowatt-hour.

The full life-cycle costs of the generating facility include:

  • Capital costs for construction

  • Financing costs

  • Operations and maintenance costs

  • Fuel costs

  • Decommissioning costs.

Facility lifetime is typically taken to be between 20 and 40 years, depending on the generating technology.

The LCOE is less than the cost of electricity to the consumer (i.e., less than the retail price) because it does not include the costs of transmission and distribution or the electricity generator’s profit. These additional costs can typically add several cents per kilowatt-hour to the wholesale cost of electricity.

ited understanding about how future events might unfold. Consequently, such estimates usually have large uncertainties. Given these uncertainties and the particular methodologies used to estimate LCOEs in this report, differences in LCOEs of 2¢/kWh or less are probably not significant.13

Figure 2.10 shows both that there is a range of LCOE values for each technology and that the ranges for many different technologies are overlapping. For comparison purposes, consider that the EIA-estimated average wholesale price of electricity14 in 2007 was about 6¢/kWh and is forecast to

13

It was difficult to obtain consensus within the committee about how to estimate LCOEs for different technologies on exactly comparable bases given the large number of assumptions that had to be made about costs, performance, and expected lifetimes for each technology. Consequently, the estimates shown in Figure 2.10 should be considered approximations.

14

The wholesale price of electricity represents the price of electricity supplied at the busbar. It does not include the prices for transmission and distribution. As noted previously, the average retail price for electricity in 2007 was about 10¢/kWh.



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement