The “levelized cost”, which is the present value of the total cost of building and operating a generating plant over its financial life, aims at making the costs of different generation technologies comparable.  The US Energy Information Administration (EIA) has developed a standard way of estimating levelized costs.  The most recent estimates of the average values of levelized costs for generating technologies are for generating facilities brought online in 2020 as represented in the National Energy Modeling System (NEMS) for the Annual Energy Outlook 2015 (AEO2015) Reference case.

The levelized cost represents the per-kWh cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle. Key inputs to calculating levelized costs include overnight capital costs, fuel costs, fixed and variable operations and maintenance (O&M) costs, financing costs, transmission costs, and an assumed utilization rate (capacity factor) for each plant type.  Plants typically built for peaking have a much lower capacity factor or utilization rate than a baseload plant.  Renewable energy generation also typically has a a lower capacity factor because wind and sun are intermittent.  

The LCOE values shown for each utility-scale generation technology are calculated based on a 30-year cost recovery period, using a real after tax weighted average cost of capital of 6.1%.  In the AEO2015 reference case, 3 percentage points are added to the cost of capital when evaluating investments in greenhouse gas (GHG) intensive technologies like coal-fired power and coal-to-liquids (CTL) plants without carbon control and sequestration (CCS). In LCOE terms, the impact of the cost of capital adder is similar to that of an emissions fee of $15 per metric ton of carbon dioxide (CO2) when investing in a new coal plant without CCS, which is representative of the costs used by utilities and regulators in their resource planning. As a result, the LCOE values for coal-fired plants without CCS are higher than would otherwise be expected.        

U.S. average levelized cost of electricity (LCOE) for plants entering service in 2020

(2013 $/MWh)

Comparing the levelized costs for dfferent generation technologies shows that natural gas-fired combined cycle and wind are the cheapest way to generate power in many parts of the country (without access to geothermal energy), recognizing that the levelized cost of coal includes the potential future cost of carbon emissions. 

There is considerable variation in different regions of the U.S. especially in the case of renewable energy sources.  The EIA has calculated levelized costs for 22 regions across the U.S.

The interesting conclusions are that wind has achieved parity with natural gas in many parts of the country and solar PV has achieved grid parity in some parts of the country(within the assumptions of levelized costs).  This represents a significant drop in the cost of non-hydro renewable energy over the past 5 years. 

When I blogged about levelized costs at the beginning of 2011, the cost of solar PV per MWh was significantly more expensive than any other generation technology.  Even in 2013 solar PV was still almost 50% more expensive than conventional coal.  But now in some parts of the U.S. it is as cheap as conventional coal, though not as cheap as natural gas combined cycle.