The Major Flaws in Calculating Levelized Cost of Energy

Levelized cost of energy (LCOE), or sometimes called the levelized cost of electricity, is a common metric in the world of electric utilities to measure the full lifecycle expense by its source in terms of dollars per megawatt-hour or kilowatt-hour.

Not just the cost of say, cubic feet of natural gas, it includes the cost of building and operating a natural gas plant over decades along with financial variables like the cost of borrowing money to invest.

LCOE is meant to distill all of those costs into a single comparable number to understand which fuel source is truly cheaper in the long run.

But LCOE doesn’t factor in a major aspect of an energy source’s costs: the length of a power plant’s or solar panel’s lifespan. A coal plant that lasts five years could have the same LCOE value as one that lasts fifty even though it would take ten times the investment to provide electricity for fifty years.

The distinction is a substantial one. The vast improvements in onshore wind and solar technologies have made their LCOE values much more appealing when states decide on which energy to invest in or provide subsidies to.

In particular, LCOE undervalues nuclear power. Nuclear plants cost a lot to build, but their high initial costs are offset by their long lifespans—potentially over 80 years.

But there are other issues with the numbers behind LCOE calculations. Estimates on the lifespan for natural gas turbines is conflicting. Data from the National Renewable Energy Laboratory (NREL) on LCOE has numerous issues including missing and inaccurate numbers. Data from the Energy Information Administration (EIA) lists surprisingly high values for coal plant construction costs that skew their LCOE.

Adjusting LCOE For Source Lifespan

The issue of comparing energy sources with unequal lifetimes has been known for a while. A1995 manual for evaluating energy efficiency from the National Renewable Energy Laboratory (NREL) presents a version of the LCOE equation, but it comes with caveats about unequal lifespans:

The inequity of comparing alternatives with different lifetimes using cost measures such as life-cycle cost arises because the costs of the longer-lived investment are summed over a longer period, but benefits that occur over the longer life are ignored.

The NREL report defines LCOE as the following:

Essentially, LCOE is equal to the total lifecycle costs divided by the energy output scaled by the discount rate—a financial metric that measures how much could have been earned from investing in treasuries.

Other versions of calculating LCOE essentially add up all of the separate costs after they have already been scaled across a fixed period—often thirty years (see footnote for more details on other calculations).

If one type of energy, say biomass, lasted only ten years and the other one, say a nuclear plant, was twenty, it would take two biomass plants to get the same lifespan as a nuclear plant—one built right after the other one fails. So the total lifecycle cost for biomass would double, making its LCOE cost double.

A 50-year LCOE metric would take the normal LCOE and scale it to get the energy source for fifty years of operation. The biomass plant described earlier would cost five times its LCOE to get to fifty years (5 x 10 year lifespan). The nuclear plant’s 50-year LCOE would be its LCOE times 50/20, or 5/2.

With that adjustment for lifespan, rankings change substantially. Nuclear power, which was ranked sixth below every other major energy source except biomass and offshore wind, becomes the cheapest. That’s largely because nuclear plants are anticipated to have long lifespans—80 years based on numbers from the Department of Energy. Their high initial capital expenditures are paid off in the long run.

Coal’s unadjusted LCOE is relatively expensive, only slightly below nuclear. But when adjusted for a substantial lifespan, it becomes competitive with standalone solar and combined cycle natural gas turbines—between $69 and $82 per megawatt based on its lifespan range of between 50 and 60 years.

Sources for lifespan estimates come from the following: Department of Energy (nuclear), Lawrence Berkeley National Laboratory (coal), NREL (biomass combined heat and power, wind, solar), Sargent Lundy (natural gas combined cycle).

Some caveats to lifespan estimates: the average lifespan for newer technologies is regularly in flux as improvements come on to the market, which includes newer advancements in photovoltaics, wind turbines, and nuclear reactors as well. Plants are regularly shut down for reasons unrelated to their functional lifespan.

Potential Correction to Natural Gas Turbine Lifespan

The lifespan of a natural gas turbine is estimated to be between 25 and 30 years according to engineering firm Sargent & Lundy. But an estimate by engineering firm Sulzer for rotor lifetime puts the estimate at 100,000 to 150,000 equivalent operating hours (EOH)—the total hours that the turbine is spent operating. Using an average annual operating hours of 7,000 to 8,000 EOH from Power Engineering magazine, that works out to be between 17 to 22 years—eight years less than the Sargent & Lundy estimate.

That would put the adjusted LCOE for a combined cycle gas turbine between $91 and $117, rather than $67 and $80, and make it more expensive than coal.

Potential Issues With EIA Data

EIA is the central clearinghouse for all energy-related government data, but it may have some issues with respect to LCOE calculations.

In the 2021 EIA levelized cost report, it lists nuclear power’s levelized capital expenditures—the average initial costs like plant construction spread across the years—at $60.71 per megawatt—one of the most expensive capital costs besides offshore wind and battery power. Coal is right below that at $52.11.

Such high capital costs led those power sources to having some of the highest LCOE values. Nuclear power is well known to having high initial construction costs. It’s an advanced and technologically intensive feat of engineering to build a safe and reliable plant.

But coal plants, whose technology has generally existed for much longer and is not as complex as nuclear fission, should not be that similar to nuclear. One 2019 EIA report lists average coal capital expenditures at $22.78 per kilowatt-year—less than half the value used in the LCOE calculations.

Estimates for coal plant construction supposedly spiraled out of control over the last twenty years, with a report from Synapse Energy Economics detailing how spending went from $1,500 per kilowatt in 2006 to over $3,800 in 2008.

Issues With NREL Data

NREL has its own data on LCOE and similar numbers through its Annual Technology Baseline. But the numbers in that dataset appear to have significant issues that question its reliability.

For some reason variable operations and Management (O&M) costs are listed as a positive for every fuel source except for coal, which has a maximum O&M cost of $14 per megawatt. Everywhere else in the data costs are listed as negative values and every other fuel source is strangely listed as having a non-negative O&M cost as if fuel costs were a benefit.

In the NREL data, most fuel sources have a capacity factor listed—an estimate to how much capacity the source can provide relative to a theoretical maximum output—except for coal and natural gas.

It’s odd that those numbers would be missing. Common values for those sources are regularly available from the Department of Energy. The Department of Energy lists coal plant capacity factor at 49.3 percent while an EIA report lists average coal plant average capacity at 74 percent.

Not just capacity factor, a number of other metrics are randomly missing, like LCOE values and fuel costs. NREL’s LCOE values, when available, also diverge substantially from those produced by EIA.

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¹Other Formulas For LCOE

NREL’s simplified levelized cost of electricity (sLCOE):

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

EIA’s formula for LCOE:

LCOE = (fixed charge factor × capital cost) + fixed O&M generating hours + variable O&M + fuel

In reality, the equation could be more complex than that. The second biomass plant built after ten years would incur a different discount rate whose value can’t exactly be predicted as discount rates change over time.

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