Energy Costs Vary Across Technologies

How do you compare the cost of energy from building and operating various generation technologies?

Energy analysts, economists, researchers, and other decision makers commonly refer to the Levelized Cost of Energy (LCOE) as one metric to compare electricity generation technologies. The LCOE is the average total cost to build and operate a power-generating asset over its lifetime divided by the total energy output of the asset over that lifetime.

The LCOE can be thought of as average price that the generating asset must receive in a market to break even over its lifetime.

Recently, Lazard Ltd released the annual Levelized Cost of Energy Analysis 10.0 and the Levelized Cost of Storage Analysis 2.0. Lazard Ltd. is a financial advisory and asset management firm that dates back to 1848. In addition to the two studies from Lazard Ltd, the U.S. Energy Information Administration annually updates its Levelized Cost and Levelized Avoided Cost of New Generation Resources in its Annual Energy Outlook.

While the LCOE is a common metric used in decision making, plant investment decisions are specific to technology and regional characteristics and other metrics such as capacity value, marginal costs, the Levelized Avoided Cost of Electricity, external costs and benefits, and even the lifecycle costs. Caution should also be taken when comparing dispatchable resources like coal and natural gas generation with non-dispatchable resources like solar and wind.

Highlights from Lazard’s two studies:

  • Even though alternative energy is increasingly cost-competitive and storage technology holds great promise, alternative energy systems alone will not be capable of meeting the baseload generation needs of a developed economy for the foreseeable future. The U.S. will continue to benefit from a balanced generation mix, including a combination of alternative energy and conventional generation technologies.
  • “Behind-the-meter” merchant energy storage systems, which are sited at factories, universities and hospitals, among other high energy use locations, show great promise. However, their economic viability depends greatly on local market structure and incentives, among other factors.
  • Industry participants continue to expect increased demand for energy storage to result in enhanced manufacturing scale and ensuing cost declines. If industry projections materialize over the next five years, cost-effective energy storage technologies will have increasingly broad applications across the power grid, such as providing an alternative to conventional gas-fired peaking plants in certain areas, as well as extending the usefulness over the course of the day of renewable generation such as wind and solar farms.
  • Very large-scale conventional and renewable generation projects (e.g. Integrated Gasification Combined Cycle, nuclear, solar thermal) continue to face number of challenges, including significant cost contingencies, high absolute costs, competition from relatively cheap natural gas, operating difficulties and policy uncertainty.

The two studies are posted at