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Exploring the Levelized Cost of Energy (LCOE)

Written by

Tomás Oliveira

When considering different investment options for an energy-producing asset, the Levelized Cost of Energy can help you examine the feasibility of what you have at stake.

2 min

31st Jan, 2023

Insights

Read through as we help you make an informed decision by highlighting its key features and which costs it covers.

What is the Levelized Cost of Energy (LCOE)?

The minimum average price that an electricity-producing asset requires in order to offset its investment and operational costs over its lifetime.

Use Cases

To determine the feasibility on an investment
To compare the value of different energy-producing sources

Basic Formula

(Present value of total investment and operational costs) / (Present value of total generated electricity)

Calculating the LCOE

The total costs associated with the project:
It = Investment costs in year t
Mt = Operation and maintenance costs in year t
Ot = Other costs in year t

The total output of the power-generating asset will include:
Et = Electricity generation in year t

Important factors to be considered in the equation:
n = Life of the asset
r = Discount rate (the rate of return used to discount future cash flows to their present value)

LCOE formula

Key Points

The LCOE will determine the expected profitability of an asset
The LCOE is defined on a Euro per Megawatt hour basis
The risk of an energy-producing asset is reflected in the discount rate, which has a strong impact on LCOE computations

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