LCOE (Levelized Cost of Energy) is the total cost of building and operating a power plant divided by the total electricity it produces over its lifetime — expressed as dollars per megawatt-hour ($/MWh). It's the standard metric for comparing the cost of different electricity sources: solar vs. wind vs. nuclear vs. gas.
Imagine you want to sell lemonade. You need to buy a stand, buy lemons and sugar, and pay for cups. If you add up ALL the money you spent, and divide it by how many cups you sold, you get the cost per cup.
LCOE is the same thing, but for electricity! Power plants cost money to build (like buying the stand) and money to run (like buying lemons). LCOE tells us: "How much does each unit of electricity really cost?"
This helps us figure out which way of making electricity is cheapest. Is it cheaper to use sunshine (solar), wind, or burn gas? LCOE tells us the answer!
Historical context: LCOE emerged in the 1970s during the oil crisis when policymakers needed a way to compare nuclear, coal, and emerging alternatives. Before LCOE, comparisons were messy — how do you compare a nuclear plant (expensive to build, cheap to run) with a gas plant (cheap to build, expensive to run)?
The breakthrough was "levelizing" — spreading all costs over the plant's lifetime and dividing by total energy output. This created a single number for apples-to-apples comparison.
The basic formula:
What goes into LCOE:
Solar (utility-scale): $24-96 — cheapest in sunny regions
Onshore wind: $24-75 — cheapest in windy areas
Natural gas (combined cycle): $39-101 — depends heavily on gas prices
Nuclear: $131-204 — high upfront cost, but 60+ year life
Coal: $68-166 — increasingly uncompetitive + carbon costs
The full LCOE formula:
Where: I = capital investment, M = O&M costs, F = fuel costs, E = electricity generated, r = discount rate, t = year.
The discount rate matters enormously:
The discount rate reflects the time value of money and project risk. A higher discount rate penalizes capital-intensive projects (nuclear, solar) because their costs are front-loaded. A 3% vs 10% discount rate can change nuclear's LCOE by 50%+.
Capacity factor — the hidden variable:
Capacity factor = actual output ÷ theoretical maximum output. This dramatically affects LCOE:
A solar panel in Arizona (30% CF) has lower LCOE than the same panel in Seattle (15% CF).
Solar's LCOE fell from ~$380/MWh to ~$40/MWh through: (1) Module costs dropped 99% via manufacturing scale and Chinese competition, (2) Installation efficiency improved, (3) Financing costs fell as banks got comfortable with solar risk, (4) Panel efficiency increased from 15% to 22%+. This is the fastest cost decline of any energy technology in history.
LCOE's limitations — what it misses:
LCOE is useful but incomplete. It treats all electricity as equal, ignoring crucial grid realities:
LCOS and VALCOE — better metrics:
Learning curves and experience rates:
Technologies follow predictable cost declines as cumulative production increases. Solar has an ~20% learning rate (costs drop 20% for each doubling of cumulative capacity). Nuclear historically had negative learning — costs increased over time due to regulatory ratcheting and first-of-a-kind engineering on each project.
California's "duck curve" shows net load (demand minus solar) creating a belly at midday and steep ramp in evening. As solar penetration increases, its LCOE stays low but its market value drops (selling into oversupplied hours). By 2024, California regularly curtails solar — producing electricity that earns $0 or negative prices. LCOE can't capture this value erosion.
Methodological debates in LCOE calculation:
Social vs. private discount rates: Should LCOE for policy analysis use social discount rates (2-4%) reflecting intergenerational welfare, or private rates (8-12%) reflecting actual financing costs? This choice alone can flip rankings between nuclear and gas.
System boundaries: Do you include decommissioning costs? Waste disposal (critical for nuclear)? Land use opportunity costs? Carbon externalities? Each choice is defensible; few analyses are transparent about assumptions.
Degradation curves: Solar panels degrade 0.5-1% per year; batteries degrade per cycle. Optimistic vs. conservative degradation assumptions compound over 25-year lifetimes.
Marginal vs. average LCOE:
LCOE is an average cost over lifetime. But grid planners need marginal costs — what does the next MWh cost? For renewables, marginal cost is near-zero (no fuel), creating market dynamics where LCOE and market price diverge wildly. A solar farm with $30/MWh LCOE might earn $15/MWh in oversupplied markets.
LCOE in capacity expansion models:
Modern grid planning uses optimization models (NREL's ReEDS, EPRI's US-REGEN) that capture system interactions LCOE misses. These show that optimal portfolios aren't simply "build the lowest LCOE" — reliability constraints, transmission limits, and temporal matching matter enormously.
The emerging consensus on metrics:
In 2020, IEA published LCOE figures showing solar as cheapest in most markets. Critics noted the analysis used 7% discount rate for OECD countries but 8-9% for developing nations — systematically penalizing capital-intensive renewables in countries that most need cheap clean energy. The choice of discount rate is never neutral; it embeds assumptions about risk, access to capital, and who bears the costs of climate change.
Investment bank publishing the most-cited annual LCOE analysis since 2008. Their "Levelized Cost of Energy+" report is industry standard. Free download, updated annually with technology-specific assumptions.
Leading energy research firm with comprehensive LCOE database across 140+ countries. Subscription-based but highly granular. Their data powers most corporate PPA negotiations.
US Department of Energy lab providing open-source LCOE tools. Their Annual Technology Baseline (ATB) is the go-to for US project modeling. Free, transparent methodology.
Paris-based intergovernmental organization publishing World Energy Outlook with global LCOE projections. Influential in policy circles. Criticized for historically underestimating renewables.
Energy consultancy with detailed LCOE models including storage (LCOS). Acquired Greentech Media. Strong in corporate strategy advisory.
Oxford-spinout providing power market modeling and LCOE analytics. Strong in European markets. $90M+ raised. Used by utilities and investors.
Marketplace platform for renewable energy PPAs. Their pricing data provides real-world LCOE benchmarks from actual deals. $117M raised. Seattle-based.
Policy think tank providing open-source Energy Policy Simulator including LCOE modeling. Non-profit focused on climate policy analysis. Influential in state-level policy.
Non-profit research organization publishing detailed clean energy cost analyses. Their work on "utility death spiral" and distributed energy LCOE is highly cited.
Finnish energy technology company with free LCOE comparison tools for hybrid power systems. Their modelers integrate storage and flexible generation. Useful for island/microgrid projects.