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LOCE Levelized Operating Cost Energy
The Average Total Cost of a Project Per Unit of Total Electricity Generated
What is the Levelized Cost of Energy (LCOE)?
The levelized cost of energy (LCOE), also referred to as the levelized cost of electricity or the levelized energy cost (LEC), is a measurement used to assess and compare alternative methods of energy production. The LCOE of an energy-generating asset can be thought of as the average total cost of building and operating the asset per unit of total electricity generated over an assumed lifetime.
Alternatively, the levelized cost of energy can be thought of as the average minimum price at which the electricity generated by the asset is required to be sold in order to offset the total costs of production over its lifetime. Calculating the LCOE is related to the concept of assessing a project’s net present value. Similar to using NPV, the LCOE can be used to determine whether a project will be a worthwhile venture.
Summary
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The LCOE is a fundamental calculation used in the preliminary assessment of an energy-producing project.
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The LCOE can be used to determine whether to move forward with a project or as a means to compare different energy-producing projects.
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The formula to calculate the LCOE is (Present Value of Total Cost Over the Lifetime)/(Present Value of All Electricity Generated Over the Lifetime).
Why is the Levelized Cost of Energy Important?
The levelized cost of energy is a very important metric in determining whether or not to move forward with a project.
The LCOE will determine if a project will break even or be profitable. If not, then the firm will not go ahead with building the power-generating asset and will look for an alternative. Using the LCOE to assess a project is one of the first fundamental steps taken in analyzing projects of this nature.
The LCOE is also an important calculation to allow financial analysts to compare different energy-producing technologies, such as wind, solar, and nuclear power sources. It allows for these comparisons regardless of unequal life spans, differing capital costs, size of the projects, and the differing risk associated with each project.
This is because the LCOE reflects a per-unit cost of electricity generated, and the risk of each project is an implication of the specific discount rate used for each power-generating asset.
LCOE = Σ[(It + Mt + Ft) / (1 + r)t] / Σ[(Et/(1 + r)t]
Why is the Levelized Cost of Energy Important?
The levelized cost of energy is a very important metric in determining whether or not to move forward with a project.
The LCOE will determine if a project will break even or be profitable. If not, then the firm will not go ahead with building the power-generating asset and will look for an alternative. Using the LCOE to assess a project is one of the first fundamental steps taken in analyzing projects of this nature.
The LCOE is also an important calculation to allow financial analysts to compare different energy-producing technologies, such as wind, solar, and nuclear power sources. It allows for these comparisons regardless of unequal life spans, differing capital costs, size of the projects, and the differing risk associated with each project.
This is because the LCOE reflects a per-unit cost of electricity generated, and the risk of each project is an implication of the specific discount rate used for each power-generating asset.
To download this free Excel calculator, click here
Levelized Cost of Energy (LCOE) Calculator.
Overview
The levelized cost of energy (LCOE), also referred to as the levelized energy cost (LEC) or the levelized cost of electricity, is a tool used to assess and compare different energy production methods.
The LCOE is a great way to compare different electricity generating assets since it can compare projects across varying lifetimes and project riskiness.
This is because the LCOE output number is per unit of electricity generated. It also incorporates the concept of discounting.
The concept behind the LCOE calculation is similar to a discounted cash flow analysis.
The LCOE can be calculated by taking the net present value of the total costs of the project and dividing it by the net present value of electricity generated over its lifetime. This ratio can be interpreted in a number of ways. It can be thought of as the average minimum price the electricity generated by this asset must be sold at, in order to offset the total costs of production.
It can also be viewed as the average total cost of the asset, per unit of electricity generated over its lifetime. In this model, we see that costs are separated into three typical categories: the initial investment, the operating and maintenance costs, and the fuel costs. In the top left corner, assumptions can be made about these differing costs, as well as the output of electricity generated by the project.
Finally, assumptions can be made about the lifetime of the project as well as the discount rate that will be used in the analysis. Each of these assumptions can be altered and it will dynamically change the model inputs as well as the final calculated value for LCOE. The model can be selected in the last year and dragged to the right to adjust for the lifetime of the project.
https://corporatefinanceinstitute.com/resources/knowledge/finance/levelized-cost-of-energy-lcoe/