Levelized cost represents the present value of the total cost of building and operating a generating plant over an assumed economic life, converted to equal annual payments and expressed in terms of real dollars to remove the impact of inflation. Levelized costs, which reflect overnight capital costs, fuel cost, fixed and variable O&M cost are a useful indicator of the competitiveness of different generation technologies. For technologies such as solar and wind generation tha have no fuel costs and relatively small O&M costs, levelized cost changes in rough proportion to the estimated overnight capital cost of generation capacity.
For technologies with significant fuel cost, both fuel cost and overnight cost estimates significantly affect levelized cost. For instance if natural gas supplies improve, then the levelized cost of gas fired generation will be improved and thus this type of technology will be more attractive to operate and the tendency will be to add more gas-fired generation technologies.
However, it is also important to note that actual investment decisions are affected by numerous factors other than levelized costs. The projected utilization rate which depends on the load shapre and the existing resource mix in an area where additional capacity is needed, is one such factor. The existing resource mix in a region can directly affect the economic viability of a new investment through its effect on the economics surrounding the displacement of existing resources. A wind resource that would primarily back out existing natural gas generation will generally have a higher value than one that would back out existing coal generation under fuel price conditions where the variable cost of operating existing gas fired plants exceeds that of operating existing coal fired plants.
The lifetime cost per KWh before subsidiaries. The calculation of the levelized cost of electricity (LCOE) provides a common way to compare the cost of energy across technologies because it takes into account the installed system price and associated costs such as financing, land, insurance, transmission, operation and maintenance, and depreciation, among other expenses.
Carbon emission costs and solar panel efficiency can also be taken into account.
The LCOE is a true apples-to-apples comparison. The levelised cost includes all the costs over the project’s lifetime: initial investment, operations and maintenance, cost of fuel, cost of capital.