Understanding Levelized Cost of Energy

There's a term that you are sure to hear around the renewable energy industry- Levelized cost of energy (LCOE). Whether you read it in a magazine article or listen about it on the news, the LCOE is one of the most commonly used power generation metrics. Still, while this phrase is used all over the industry, it is often misused or misunderstood.

Simply stated, LCOE is a measure of the average net present cost of electricity generation for a generating factory over its existence. Calculating the LCOE is like averaging the up-front costs across production over a prolonged period of time. It measures lifetime costs, divided by energy production. This calculation is useful in comparing different technologies (such as wind or natural gas) when they have unequal life spans, project sizes, capital costs, risks, and returns.

In the energy industry, costs are one of the most challenging factors to compare. Technologies can have vastly different capital, fuel, and maintenance. They can also have additional financing costs and different utilization rates and fuel resources access.

A simple levelized cost of energy is calculated using the following formula:

sLCOE = {(overnight capital cost * capital recovery factor + fixed O&M cost )/(8760 * capacity factor)} + (fuel cost * heat rate) + variable O&M cost

This calculation doesn't include factors such as financing issues or future replacement costs, which would be needed for a more complex analysis of LCOE. Keep in mind that the variables above still leave out certain complexities that would be related to a specific energy production source.

Through our sister company SEA.O.G Offshore, GMC is committed to reducing LCOE by studying and engineering cost-effective transportation and installation concepts with the available Jones Act Infrastructure. Our team is continuously working on new solutions that will positively impact LCOE via T&I concepts, ensuring maximum economic benefit is reached.