Rethinking the “Levelized Cost of Energy”: A critical review and evaluation of the concept

Abstract

The Levelized Cost of Energy (LCOE) is frequently used for policymaking worldwide, modeling and in assessing the cost competitiveness of technologies, but its formulation is deceptively simple. The result is that many caveats are obscured, but they are important to understand so that LCOE calculations can become more accurate and communicated more correctly to avoid misleading policymakers and decisionmakers. The paper discusses the approach, and how a handful of influential and reputable organizations calculate and communicate the LCOE. The conclusion is that the introduction of variable renewable energy sources into the grid has made the LCOE questionable towards it initial purpose of providing a sound basis for comparison, and most reputed organizations fail to address the issues both computationally and in their communication. However, significant improvements to regain relevance can be made by using realistic assumptions as shown by presenting a reconceptualized version of LCOE and communicate the unsolved shortcomings to stakeholders.