Billions of dollars have been and will be spent on decarbonization. How is it known where to spend the money? How are the alternatives and options prioritized? One metric is used often in determining where to invest electricity generation dollars. It is goes by the acronym LCOE which stands for Levelized Cost of Energy. Understand LCOE and you gain insight that influences the path to decarbonization.

The concept is simple. Come up with a number that shows how much it costs in today's dollars to produce a unit of electricity for a generating plant over its lifetime. While the concept is simple, the formal formula...not so much. 

where:

. PMWh = The constant lifetime remuneration to the supplier for electricity; 

. MWh = The amount of electricity produced annually in MWh

. (1+r) = The real discount rate corresponding to the cost of capital

. Capital = Total capital construction costs

. O&M = Operation and maintenance costs

. Fuel = Fuel  costs

. Carbon = Carbon costs

. D = Decommissioning and waste management costs

. t = In year t

Thankfully, “Projected Costs of Generating Electricity 2020 Edition” from the International Energy Agency (IEA.org), not only provides you with a chance to learn about LCOE but the report tabulates LCOEs from across the world for many electricity generating sources. Should you want to go deeper, you can learn what goes into their calculations to understand assumptions made, how investors see the various electricity generating sources, and what is needed to hasten decarbonization. 

For those who prefer to cut to the chase, Figure 3.4 in the report shows average global LCOEs for 28 different sources to generate electricity and Figure 3.5 shows the average LCOE for the major electricity generating sources for five different world regions. I use the word "average" as there are significant assumptions made in calculating these LCOEs. For example, LCOEs are heavily influenced by fuel costs and discount rates. Much of the report delves deeper into this sensitivity and its impact.

LCOE is ubiquitous in energy systems analysis. Understanding what it is, its components, assumptions, and shortcomings provides valuable insight into decarbonization. This makes “Projected Costs of Generating Electricity 2020 Edition” from the IEA a valuable reference and resource.