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Caspian Energy Journal Caspian European Club
Friday, 05 June 2015 17:30

Levelized cost comparisons help explain value of various electric generation technologies

When power plants are built, several factors influence the choice of fuels and technologies that will ultimately generate electricity. Cost is one of the most difficult factors to compare, as technologies can have vastly different capital, fuel, maintenance, and financing costs, as well as different utilization rates and access to fuel resources. Two measures, the levelized cost of electricity (LCOE) and the levelized avoided cost of electricity (LACE), are widely used to make cost comparisons across technologies, Caspian Energy News (www.caspianenergy.net) reports with reference to the press service of the EIA.

LCOE represents the per-kilowatthour cost of building and operating a generating plant over an assumed financial life and activity level (e.g., baseload, peaking, seasonal). Key inputs used to calculate LCOE include capital costs, fuel costs, fixed and variable operations and maintenance (O&M) costs, financing costs, and an assumed utilization rate for each plant type. These costs can vary by region and over time.

For example, technologies such as solar and wind have no fuel costs for generation and relatively small variable O&M costs, so their LCOE is mostly determined by capital costs and financing costs. Capital costs include things such as plant installation, labor, and grid-interconnection; financing costs are the costs of servicing the debt incurred during the lifetime of the plant. For generators that consume fuels such as coal and natural gas, both fuel costs and capital cost significantly affect LCOE.

LCOE values may also vary across regions because of differences in construction, fuel, and transmission costs, as well as differences in the quality of resource available for certain renewables such as solar and wind.

There are some attributes that LCOE does not capture, such as environmental considerations and grid operation constraints for maintaining system reliability. System reliability can be important, as some technologies are not dispatchable, meaning they cannot generate electricity on command at any time of day.

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