Levelized cost of energy - Revision history

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For Further Reading

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	[[Category:Done ~~2016~~-04-30]]		[[Category:Done 2018-05-18]]
	[[File:LCOE- Concentrated farm.jpg\|400px\|thumb\|right\|Figure 1. A concentrated solar plant.<ref>Wikimedia Commons [Online], Available: https://commons.wikimedia.org/wiki/File:Crescent_Dunes_Solar_December_2014.JPG.</ref>]]		[[File:LCOE- Concentrated farm.jpg\|400px\|thumb\|right\|Figure 1. A concentrated solar plant.<ref>Wikimedia Commons [Online], Available: https://commons.wikimedia.org/wiki/File:Crescent_Dunes_Solar_December_2014.JPG.</ref>]]
	<onlyinclude>The '''levelized cost of energy''' or '''LCOE''' is similar to the concept of the [[payback]] for [[energy system]]s. ~~Instead~~ of measuring how much is needed to recoup the initial investment the LCOE determines how much money must be made per unit of [[electricity]] ([[kWh]], MWh etc. or even other type of energy like [[home heating]]) to recoup the lifetime [[cost]]s of the system. This includes the initial [[capital]] investment, maintenance costs, the cost of [[fuel]] for the system (if any), any [[operational cost]]s and the [[discount rate]].</onlyinclude><ref>A. Sayigh. ''Comprehensive Renewable Energy''. Amsterdam: Elsevier Ltd., 2012, pp. 37.</ref>		<onlyinclude>The '''levelized cost of energy''' or '''LCOE''' is similar to the concept of the [[payback]] for [[energy system]]s. However, instead of measuring how much is needed to recoup the initial investment, the LCOE determines how much money must be made per unit of [[electricity]] ([[kWh]], MWh etc. or even other type of energy like [[home heating]]) to recoup the lifetime [[cost]]s of the system. This includes the initial [[capital]] investment, maintenance costs, the cost of [[fuel]] for the system (if any), any [[operational cost]]s and the [[discount rate]].</onlyinclude><ref>A. Sayigh. ''Comprehensive Renewable Energy''. Amsterdam: Elsevier Ltd., 2012, pp. 37.</ref>

	The LCOE is one way of determining whether or not a firm will build a project, if the project will not break even then it will not be built. The LCOE is a useful tool because it can combine both the [[fixed cost]]s and [[variable cost]]s into a single ~~measure~~ to simplify analysis.<ref>Chris Namovicz. "Assessing the Economic Value of New Utility-Scale Renewable Generation Projects". ''EIA Energy Conference'', 2013, pp. 4.</ref> To determine the LCOE, a firm will determine the necessary parameters such as the lifetime of the system, how much electricity it will produce and the input costs ~~then use this~~ equation:		The LCOE is one way of determining whether or not a firm will build a project because if the project will not break even then it will not be built. The LCOE is a useful tool because it can combine both the [[fixed cost]]s and [[variable cost]]s into a single measurement to simplify analysis.<ref>Chris Namovicz. "Assessing the Economic Value of New Utility-Scale Renewable Generation Projects". ''EIA Energy Conference'', 2013, pp. 4.</ref> To determine the LCOE, a firm will determine the necessary parameters such as the lifetime of the system, how much electricity it will produce and the input costs. All those factors will be used to form the following equation:

			::::::'''Total Lifetime Cost''' = <math>\sum_{t=1}^n{\frac{I_t+M_{t}+F_t}{(1+r)^t}}</math>

			::::::'''Total Lifetime Output''' = <math>\sum_{t=1}^n{\frac{E_{t}}{(1+r)^t}}</math>

			::::::'''LCOE''' = <math>\frac{Total \hspace{3pt} Lifetime \hspace{3pt} Cost}{Total \hspace{3pt} Lifetime \hspace{3pt} Output}</math>

			::::::'''LCOE''' = <math>\frac{\sum_{t=1}^n{\frac{I_t+M_{t}+F_t}{(1+r)^t}}}{\sum_{t=1}^n{\frac{E_{t}}{(1+r)^t}}}</math>


	::::::'''LCOE''' = <m>\frac{Total \hspace{3pt} Lifetime \hspace{3pt} Cost}{Total \hspace{3pt} Lifetime \hspace{3pt} Output}</m> = <m>\frac{\sum_{t=1\;}^n{\displaystyle\frac{I_t+M\;_{t\;}+\;F_t}{(1+r)^t}}}{\sum_{t=1\;}^n\frac{E\;_{t\;}}{(1+r)^t}}}</m><br />

	::::*'''I<sub>t</sub>''' = Investment and expenditures for the year (t)		::::*'''I<sub>t</sub>''' = Investment and expenditures for the year (t)
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	::::*'''n''' = The (expected) lifetime of the power system		::::*'''n''' = The (expected) lifetime of the power system

	A LCOE analysis can help firms determine the benefits and drawbacks of various energy systems. When comparing conventional fossil fuel systems such as [[coal-fired power plant]]s and [[natural gas power plant]]s with renewable systems such as solar, wind or nuclear a LCOE analysis can tell which is the most viable system to implement.		A LCOE analysis can help firms determine the benefits and drawbacks of various energy systems. When comparing conventional fossil fuel systems such as [[coal-fired power plant]]s and [[natural gas power plant]]s with renewable systems such as solar, wind or nuclear, a LCOE analysis can tell which is the most viable system to implement.

	For example:<ref>M. Bonass and M. Rudd. ''Renewables: A Practical Handbook''. London: Globe Law and Business, 2010, pp. 51.</ref>		For example:<ref>M. Bonass and M. Rudd. ''Renewables: A Practical Handbook''. London: Globe Law and Business, 2010, pp. 51.</ref>
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	As the table indicates, there are pros and cons to each system. More traditional systems have ongoing fuel costs but lower capital costs whereas renewable systems don't have fuel cost but they incur a higher capital cost. Perhaps the most important parameter is the last ~~column, the~~ full cost per ~~MWh which~~ combines all the costs to show how much the production will cost per MWh of output. The full cost for the renewable systems is much higher when compared to that of traditional systems (with the exception of nuclear and geothermal) but the availability of subsidies for low-emission renewable systems can bring this cost down. Advancements in the technology, production materials and techniques used to produce these systems can also reduce the costs of more expensive systems.		As the table indicates, there are pros and cons to each system. More traditional systems have ongoing fuel costs but lower capital costs, whereas renewable systems don't have fuel cost but they incur a higher capital cost. Perhaps the most important parameter is the last column—the full cost per MWh—which combines all the costs to show how much the production will cost per MWh of output. The full cost for the renewable systems is much higher when compared to that of traditional systems (with the exception of nuclear and geothermal) but the availability of subsidies for low-emission renewable systems can bring this cost down. Advancements in the technology, production materials and techniques used to produce these systems can also reduce the costs of more expensive systems.

	All of these factors are considered when determining how to write the LCOE equation. For example, a [[subsidy]] from the government can reduce the capital cost of building the system. A system that does not produce carbon emissions does not incur the cost of emissions under a [[emissions trading \| cap-and-trade]] system. There are a large number of other considerations which go into producing the parameters for the equation such as available technology, policy conditions, the LACE (Levelized Avoided Cost of Energy), geographical positing, utilization rate, available resource mix and others.<ref>U.S Energy Information Administration. ''Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2015''. June 2015, pp. 1.</ref>		All of these factors are considered when determining how to write the LCOE equation. For example, a [[subsidy]] from the government can reduce the capital cost of building the system. A system that does not produce carbon emissions does not incur the cost of emissions under a [[emissions trading \| cap-and-trade]] system. There are a large number of other considerations which go into producing the parameters for the equation such as available technology, policy conditions, the LACE (Levelized Avoided Cost of Energy), geographical positing, utilization rate, available resource mix and others.<ref>U.S Energy Information Administration. ''Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2015''. June 2015, pp. 1.</ref>
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	==Problems with the LCOE Analysis==		==Problems with the LCOE Analysis==

	The LCOE analysis is not to able to cover all considerations and loses ~~some effect~~ due to its standardized nature. ~~Because it~~ projects over ~~the whole of the lifetime of a system~~ it is ~~not able~~ to fully estimate the changes in [[variable cost]]s such as the cost of fuel and dramatic ~~shocks that can change these parameters~~. In less regulated markets with more dynamic pricing models the LCOE is not as accurate. While maintenance costs are included there are other considerations over the lifetime of a plant which can affect the stability of the price of the generated output.<ref>International Energy Agency. ''Projected Costs of		The LCOE analysis is not to able to cover all considerations and loses due to its standardized nature. This means that since these projects operate over several decades, it is difficult to fully estimate the changes in [[variable cost]]s such as the cost of fuel and the dramatic fluctuations in price. In less regulated markets with more dynamic pricing models the LCOE is not as accurate. While maintenance costs are included, there are other considerations over the lifetime of a plant which can affect the stability of the price of the generated output.<ref>International Energy Agency. ''Projected Costs of
	Generating Electricity'' Paris: OECD and IEA, 2010, pp. 164.</ref> In addition it is not the best method for comparing vastly different generation methods due to the different considerations around each type such as the the level of [[regulation]] in a [[market]].<ref>VGB Powertech. ''Levelised Cost		Generating Electricity'' Paris: OECD and IEA, 2010, pp. 164.</ref> In addition it is not the best method for comparing vastly different generation methods due to the different considerations around each type such as the the level of [[regulation]] in a [[market]].<ref>VGB Powertech. ''Levelised Cost
	of Electricity''. Essen: VGB Powertech e.V., 2015, pp. 17.</ref>		of Electricity''. Essen: VGB Powertech e.V., 2015, pp. 17.</ref>

			== For Further Reading ==
			For further information please see the related pages below:
			*[[Capital]]
			*[[Payback]]
			*[[Discount rate]]
			*[[Operational cost]]
			*Or explore a [[Special:Random\|random page]]

	==References==		==References==
	{{reflist}}		{{reflist}}
			[[Category: Uploaded]]

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[[Category:Done 2016-04-30]]
[[File:LCOE- Concentrated farm.jpg|400px|thumb|right|Figure 1. A concentrated solar plant.<ref>Wikimedia Commons [Online], Available: https://commons.wikimedia.org/wiki/File:Crescent_Dunes_Solar_December_2014.JPG.</ref>]]
<onlyinclude>The '''levelized cost of energy''' or '''LCOE''' is similar to the concept of the [[payback]] for [[energy system]]s. Instead of measuring how much is needed to recoup the initial investment the LCOE determines how much money must be made per unit of [[electricity]] ([[kWh]], MWh etc. or even other type of energy like [[home heating]]) to recoup the lifetime [[cost]]s of the system. This includes the initial [[capital]] investment, maintenance costs, the cost of [[fuel]] for the system (if any), any [[operational cost]]s and the [[discount rate]].</onlyinclude><ref>A. Sayigh. ''Comprehensive Renewable Energy''. Amsterdam: Elsevier Ltd., 2012, pp. 37.</ref>

The LCOE is one way of determining whether or not a firm will build a project, if the project will not break even then it will not be built. The LCOE is a useful tool because it can combine both the [[fixed cost]]s and [[variable cost]]s into a single measure to simplify analysis.<ref>Chris Namovicz. "Assessing the Economic Value of New Utility-Scale Renewable Generation Projects". ''EIA Energy Conference'', 2013, pp. 4.</ref> To determine the LCOE, a firm will determine the necessary parameters such as the lifetime of the system, how much electricity it will produce and the input costs then use this equation:

::::::'''LCOE''' = <m>\frac{Total \hspace{3pt} Lifetime \hspace{3pt} Cost}{Total \hspace{3pt} Lifetime \hspace{3pt} Output}</m> = <m>\frac{\sum_{t=1\;}^n{\displaystyle\frac{I_t+M\;_{t\;}+\;F_t}{(1+r)^t}}}{\sum_{t=1\;}^n\frac{E\;_{t\;}}{(1+r)^t}}}</m> 

::::*'''It''' = Investment and expenditures for the year (t)
::::*'''Mt''' = Operational and maintenance expenditures for the year (t)
::::*'''Ft''' = Fuel expenditures for the year (t)
::::*'''Et''' = Electrical output for the year (t)
::::*'''r''' = The discount Rate
::::*'''n''' = The (expected) lifetime of the power system

A LCOE analysis can help firms determine the benefits and drawbacks of various energy systems. When comparing conventional fossil fuel systems such as [[coal-fired power plant]]s and [[natural gas power plant]]s with renewable systems such as solar, wind or nuclear a LCOE analysis can tell which is the most viable system to implement.

For example:<ref>M. Bonass and M. Rudd. ''Renewables: A Practical Handbook''. London: Globe Law and Business, 2010, pp. 51.</ref>
{| class="wikitable"
! Type of System !! Plant Size (MW) !! Capital (Investment)(€m) Cost !! Initial Investment per unit of Capacity ($m/MW) !! [[Fixed cost | Fixed Cost]] FC ($/MWh) !! Fuel Cost ($/MWh) !! Operational and Maintenance Cost ($/MWh) !! Carbon Emission Cost ($/MWh) !! Full Cost ($/MWh)
|-
| [[Geothermal energy | Geothermal]] || 50 || 1932.7 || 38.65 || 26.4 || - || 22 || - || 48.4
|-
| Coal || 1600 || 1210 || 0.75 || 14.3 || 23.1 || 5.5 || 9.9 || 52.8
|-
| [[nuclear energy | Nuclear]] || 1000 || 3300 || 3.3 || 39.6 || 5.5 || 7.7 || - || 52.8
|-
| [[Combined cycle gas plant]] || 750 || 770 || 1.02 || 9.9 || 37.4 || 4.4 || 5.5 || 57.2
|-
| [[Wind farm | Wind]] (Onshore) || 100 || 1430 || 14.3 || 50.6 || - || 13.2 || - || 63.8
|-
| Wind (Offshore) || 200 || 2618 || 13.09 || 81.4 || - || 26.4 || - || 107.8
|-
| [[Solar collector | Solar]] (Concentrated) || 10 || 5170 || 517 || 210.1 || - || 19.8 || - || 229.9
|-
| [[Solar array | Solar]] (Photovoltaic) || 10 || 3025 || 302.5 || 231 || - || 16.5 || - || 247.5
|-
|}
'''Note:''' Numbers converted to USD ($) form the original Euro (€) at 1:1.1. Also, this computation doesn't take into consideration how [[Dispatchable source of electricity|dispatchable]] or [[reliability|reliable]] the source is.

As the table indicates, there are pros and cons to each system. More traditional systems have ongoing fuel costs but lower capital costs whereas renewable systems don't have fuel cost but they incur a higher capital cost. Perhaps the most important parameter is the last column, the full cost per MWh which combines all the costs to show how much the production will cost per MWh of output. The full cost for the renewable systems is much higher when compared to that of traditional systems (with the exception of nuclear and geothermal) but the availability of subsidies for low-emission renewable systems can bring this cost down. Advancements in the technology, production materials and techniques used to produce these systems can also reduce the costs of more expensive systems.

All of these factors are considered when determining how to write the LCOE equation. For example, a [[subsidy]] from the government can reduce the capital cost of building the system. A system that does not produce carbon emissions does not incur the cost of emissions under a [[emissions trading | cap-and-trade]] system. There are a large number of other considerations which go into producing the parameters for the equation such as available technology, policy conditions, the LACE (Levelized Avoided Cost of Energy), geographical positing, utilization rate, available resource mix and others.<ref>U.S Energy Information Administration. ''Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2015''. June 2015, pp. 1.</ref>

In short, subsidies, [[tax break]]s, [[tax abatement]]s and other government programs can help lower the LCOE for firms to encourage them to build [[sustainable]], [[low-emission]], renewable energy systems. For example, if a government gave a 25% subsidy for the capital investment of a [[photovoltaic system]] then the initial cost of building the system drops from $3025m to $2268.75m and the full cost will drop accordingly.

==Problems with the LCOE Analysis==

The LCOE analysis is not to able to cover all considerations and loses some effect due to its standardized nature. Because it projects over the whole of the lifetime of a system it is not able to fully estimate the changes in [[variable cost]]s such as the cost of fuel and dramatic shocks that can change these parameters. In less regulated markets with more dynamic pricing models the LCOE is not as accurate. While maintenance costs are included there are other considerations over the lifetime of a plant which can affect the stability of the price of the generated output.<ref>International Energy Agency. ''Projected Costs of
Generating Electricity'' Paris: OECD and IEA, 2010, pp. 164.</ref> In addition it is not the best method for comparing vastly different generation methods due to the different considerations around each type such as the the level of [[regulation]] in a [[market]].<ref>VGB Powertech. ''Levelised Cost
of Electricity''. Essen: VGB Powertech e.V., 2015, pp. 17.</ref>

==References==
{{reflist}}