Levelised energy cost

Levelised energy cost (LEC) is a cost of generating energy (usually electricity) for a particular system. It is an economic assessment of the cost the energy-generating system including all the costs over its lifetime: initial investiment, operations and maintenance, cost of fuel, cost of capital. A net present value calculation is performed and solved in such a way that for the value of the LEC chosen, the project's net present value becomes zero.

This means that the LEC is the minimum price at which energy must be sold for an energy project to break even.

It can be defined in a single formula [Nuclear Energy Agency/International Energy Agency/Organisation for Economic Cooperation and Development [http://www.iea.org/Textbase/publications/free_new_Desc.asp?PUBS_ID=1472 Projected Costs of Generating Electricity (2005 Update)] ] as:

$mathrm\{LEC\}\; =\; frac\{sum\_\{t=1\}^\{n\}\; frac\{\; I\_t\; +\; M\_t\; +\; F\_t\}\{left(\{1+r\}\; ight)^t\}\; \}\{sum\_\{t=1\}^\{n\}\; frac\{E\_t\}\{left(\{1+r\}\; ight)^\{t\; \}$

where
* $mathrm\{LEC\}$ = Average lifetime levelised electricity generation cost
* $I\_t$ = Investment expenditures in the year t
* $M\_t$ = Operations and maintenance expenditures in the year t
* $F\_t$ = Fuel expenditures in the year t
* $E\_t$ = Electricity generation in the year t
* $r$ = Discount rate
* $n$ = Life of the system

Typically LECs are calculated over 20 to 40 year lifetimes, and are given in the units of currency per kilowatt-hour, for example AUD/kWh or EUR/kWh or per megawatt-hour, for example AUD/MWh (as tabulated below).

When comparing LECs for alternative systems, it is very important to define the boundaries of the 'system' and the costs that are included in it. For example, should transmissions lines and distribution systems be included in the cost? Should R&D, tax, and environmental impact studies be included? Should the costs of impacts on public health and environmental damage be included? Should the costs of government subsidies be included in the calculated LEC?

Another key issue is the decision about the value of the discount rate $r$. The value that is chosen for $r$ can often 'weight' the decision towards one option or another, so the basis for choosing the discount must clearly be carefully evaluated. See Internal rate of return. The discount rate depends on the cost of capital, including the balance between debt-financing and equity-financing, and an assessment of the financial risk.

Indicative LECs for different energy sources

A table of LECs used by the California Energy Commission is available [http://www.energy.ca.gov/electricity/levelized_cost.html here] .

The following table gives a selection of LECs from two major government reports from Australia [Graham, P. [http://csiro0702.interactiveinvestor.com.au/ The heat is on: the future of energy in Australia CSIRO] , 2006] [Switkowski, Z. Uranium Mining, Processing and Nuclear Energy Review UMPNER taskforce, Australian Government, 2006] . Note that these LECs do "not" include any cost for the greenhouse gas emissions (such as under carbon tax or emissions trading scenarios) associated with the different technologies.

References

See also

* Capacity factor