Understanding the Falling LCOE in Renewables: A Deep Dive into Cost Competitiveness

The transformation in the renewable energy sector over the past decade, from 2010 to 2021, is nothing short of extraordinary. With wind and solar technologies at the forefront of this shift, it’s essential to understand the metrics that have tracked this change, with Levelized Cost of Electricity (LCOE) being one of the most critical. With data from IRENA providing insights into the astounding decline in LCOEs, let’s explore what this means, how LCOE is calculated, and its implications for the renewable energy sector.

What is LCOE?

LCOE, or Levelized Cost of Electricity, represents the per-unit cost (per kWh or MWh) of building and operating a generating plant over an assumed financial life and duty cycle. It’s a crucial metric used to assess the cost competitiveness of different generating technologies. LCOE offers a snapshot of the direct comparative costs between technologies and, when falling, indicates greater competitiveness and viability in the energy market.

How is LCOE Calculated?

The formula for LCOE is:

LCOE = Total lifetime costs of the project/ Total electrical energy output over its lifetime

Where:

• Total lifetime costs include capital expenditures (CAPEX), operational expenditures (OPEX), fuel costs, and any decommissioning or waste management costs.
• Total electrical energy output is the aggregated electricity generation over the project’s lifespan.

An Example: