Levelized Cost of Energy (Annualized Capital plus Operating Cost over Annual Energy)

The levelized cost of energy is the price per unit of energy at which a plant just covers everything it costs over its life. The numerator is the cost of one year: the capital cost $C_{cap}$, turned into a level annual payment by multiplying it by the capital recovery factor $\mathrm{CRF}$, plus the operating and maintenance cost $C_{om}$ of a year. The denominator is the energy $E$ the plant delivers in that year, so the result is a cost per unit of energy, such as dollars per megawatt-hour, and different plants can be compared.

The formula is short because of an assumption: that the yearly energy and the yearly costs are level. Then the discounted lifetime cost over the discounted lifetime energy collapses to one line, and the capital recovery factor, found from the discount rate and the life, does the discounting. The page checks this by two routes: for 1 000 000 dollars of capital, 20 000 a year to run and 2 500 megawatt-hours a year over 30 years at 6.2 percent (a factor of 0.0742), the closed form and the discounted sums both give 37.68415 per megawatt-hour. Note where each input acts: the factor multiplies only the capital, so a capital-heavy plant feels the cost of money more than one whose cost is mostly running cost, and the energy divides everything, so a plant that produces less costs more for each unit.

The recovery period and the rate in the example come from the United States EIA, whose levelized costs for plants entering service in 2027 use a 30-year recovery period and a nominal after-tax weighted cost of capital of 6.2 percent; the method itself is the standard one of the NREL manual by Short, Packey and Holt (1995). The page's example uses the EIA's table 1a for onshore wind in 2021 dollars per megawatt-hour: levelized capital 27.45 plus fixed operating and maintenance 7.44, with no variable cost, is 34.89, before 2.91 for transmission. To enter those published components, the page takes one megawatt-hour with a recovery factor of 0.1, capital 274.5 and operating cost 7.44.

The simple form leaves things out. Fuel is not a separate term, so add its yearly cost to the operating cost. Taxes and subsidies, degradation of the output, and the cost of transmission and of the other plants needed to back up an intermittent one are not in it either. Use it to compare plants on one footing, not to price a contract.