Comparing the incomparable

How do you compare a solar farm — expensive to build, free to run — with a gas plant — cheaper to build, but burning paid fuel every hour? Their cost structures are opposite. The LCOE solves this by reducing them to a single figure.

What the LCOE measures

LCOE means Levelized Cost of Energy: the average cost of one MWh produced over a plant’s whole life. You divide the discounted sum of all costs by the discounted sum of all energy produced:

$\mathrm{LCOE} = \frac{\displaystyle\sum_{t=1}^{n} \frac{\mathrm{CAPEX}_t + \mathrm{OPEX}_t}{(1+r)^t}}{\displaystyle\sum_{t=1}^{n} \frac{E_t}{(1+r)^t}}$

where $r$ is the discount rate (the cost of money), $E_t$ the energy produced in year $t$, and $n$ the lifetime. The $(1+r)^t$ term expresses that a euro — and a MWh — in 20 years is worth less than today. The result is a single price in €/MWh, comparable across technologies.

Two opposite cost profiles

This opposition has two consequences:

• the LCOE of solar and wind depends mostly on the cost of money (discount rate), since almost everything is paid upfront;
• the LCOE of gas depends mostly on the fuel price, which varies sharply.

As an indication (orders of magnitude, very dependent on site and cost of capital):

Source	Indicative LCOE (€/MWh)
Solar PV (utility scale)	30 – 60
Onshore wind	40 – 80
Offshore wind	70 – 120
Gas (combined cycle)	60 – 110
Nuclear (new build)	110 – 190

The fall in module costs has made photovoltaics one of the lowest-LCOE sources where the sun is abundant.

What the LCOE does not say

The LCOE is powerful but incomplete: it ignores when the energy is produced. A solar MWh at noon, when everyone produces it, is not worth a dispatchable MWh at 7 pm in winter. That is the value of the energy, not just its cost.

You therefore complement it with the cost of the whole system (grid, storage, back-up) and the value of flexibility. A source with a very low LCOE but intermittent needs storage or back-up plants — a cost absent from its LCOE. It remains the reference for comparing production costs, as long as you remember it does not compare values delivered to the grid.