The levelized cost of electricity (LCOE) is fundamentally a break-even sales price (in dollars per kWh) needed to justify an investment in a particular power generation facility. It is the primary measure used to compare the cost-effectiveness of different electricity sources.
In its most basic form, the LCOE formula is:
For the more comprehensive formula on LCOE check out this article.
Why do we need LCOE? The reason is that traditional methods of determining electricity costs from fossil fuel power plants unfairly represents the cost of renewable energy. Renewable energy such as solar power have a very different capital cost, operating cost, and tax structure than fossil fuels.
Comparing LCOE Values
Here’s an example for your consideration. The ongoing fuel cost for a natural gas plant is around $0.40/kWh while the fuel cost for a solar panel power plant is $0/kWh. However, the capital cost of a solar panel power plant can be over $2/Watt while the capital cost of a natural gas plant is around $0.90/Watt.
The LCOE calculation allows us to make a useful economic comparison between the natural gas power plant and the solar power plant over their lifetimes.
So how do renewable energy sources stack up to fossil fuels when we compute their LCOE? It depends on the location and local tax regulations, but in general it is very competitive. See the table below for LCOE values for the United States. The numbers are a simple average of regional values for plants entering service in 2022.
Furthermore, the cost of renewable technologies is dropping while the cost of traditional fossil fuel power plants is holding steady. In 2010, Dick Swanson (the founder of sunpower) proposed that the solar photovoltaic industry follows the 80% experience curve. This means that the price drops by roughly 20% every time the cumulative volume of something doubles.
If this trend holds, then solar photovoltaics will soon be able to match the cost of a natural gas power plant in most areas of the country – without subsidies.