Levelized Cost of Electricity (LCOE)

Updated 10 October 2025

Levelized Cost of Electricity (LCOE) is a metric that divides total lifecycle costs by discounted energy output to yield a normalized cost per unit.
It incorporates capital, O&M, financing, fuel expenses, and factors like curtailment, resource quality, and grid integration to compare generation technologies.
Researchers use LCOE to optimize technology mix and spatial resource allocation, ensuring cost-effective renewable energy deployments through improved transmission and storage strategies.

The Levelized Cost of Electricity (LCOE) is the central economic metric for comparing the cost-effectiveness of electricity generation technologies by translating total lifecycle costs—including capital investments, operations, maintenance, financing, and fuel—into a normalized cost per unit of generated electricity. LCOE incorporates fundamental drivers such as local resource quality, system design choices, grid integration, curtailment, spatial heterogeneity, and temporal output variability. It has emerged as the principal tool for system planners, researchers, investors, and policymakers to assess and optimize the deployment of existing and emerging power generation assets, with particular relevance in high-renewable and storage-integrated grid scenarios.

1. Mathematical Framework and Core Definition

LCOE is formally defined as the present value of all costs attributable to an electricity generation asset divided by its lifetime discounted energy output:

$LCOE = \frac{\sum_{t=0}^{T} \frac{C_t}{(1+r)^t}}{\sum_{t=0}^{T} \frac{E_t}{(1+r)^t}}$

where $C_t$ is the total system cost incurred in year $t$ (including capital, O&M, and financing), $E_t$ is the electricity generated in year $t$ , $r$ is the discount rate, and $T$ is the asset lifetime (Becker et al., 2014, Lai et al., 2016, Liu et al., 2019).

This formulation underpins most techno-economic studies, with several variants:

"Annuitized" or "Uniform-Output" approaches (suitable for baseload plants with constant output).
"Discounting" or "Net Present Value" (NPV) methods (necessary for technologies with variable/intermittent output).
Inclusion of degradation factors, salvage values, and system-specific extensions (e.g., marginal LCOE or effective LCOE after curtailment correction).

LCOE calculation must be adapted for energy storage technologies, requiring new metrics such as "Levelized Cost of Delivery" (LCOD) to account explicitly for storage round-trip efficiency and the partitioning of direct versus stored/delivered energy (Lai et al., 2016).

2. Regionalization, Resource Quality, and Spatial Heterogeneity

Accurate LCOE estimation must reflect spatial variation in resource quality (e.g., wind speed, solar insolation) and regional cost multipliers (labor, land, equipment). The impact of local capacity factor is incorporated as an inverse weighting in the LCOE formula:

$LCOE_n = m_n \cdot w_n \cdot LCOE_{avg}$

with $w_n = 1/CF_n$ (capacity factor), $m_n$ (regional multiplier) (Becker et al., 2014).

In the US context, for wind and solar PV, regional resource heterogeneity causes LCOE to vary by up to 35% at the FERC region level. Optimally exploiting high-capacity-factor sites (e.g., Southwestern US for solar, Midwest for wind) substantially lowers the effective LCOE (Becker et al., 2014). Analogously, in a European context, flow-based nodal LCOE employs power flow tracing to allocate generation and transmission costs to consuming nodes, providing a fairer comparison in interconnected markets and preventing net importers from being unduly penalized (Tranberg et al., 2018).

3. Impact of Technology Mix, Curtailment, and System Design

LCOE is sensitive not only to resource quality but also to the mix of technologies deployed, the degree of renewable penetration, and the system's operational strategy. In scenarios with high shares of variable renewable energy (VRE), surplus generation (leading to curtailment) and the need for balancing energy (via storage or dispatchable backup) introduce additional costs not captured in simple LCOE formulations.

To address this, the cost-per-unit of "used" energy is increased by a curtailment correction factor:

$LCOE_{mod} = LCOE_0 \times \frac{E_{generated}}{E_{generated} - E_{curtailed}}$

where $LCOE_0$ is the base mixed LCOE, and the fraction adjusts for the portion of energy not sold due to curtailment (Becker et al., 2014).

Optimizing the wind/solar mix to minimize curtailment and backup yields a lower system LCOE. In China, relocating renewables to high resource provinces (heterogeneous layout) can further reduce LCOE by up to 27%, though this increases reliance on transmission networks and may elevate regional curtailment if not paired with sufficient transmission capacity (Liu et al., 2018).

4. Role of Transmission and Grid Integration

Transmission infrastructure and grid coupling critically determine the achievable LCOE in high-renewable scenarios:

Enhancing grid transmission enables spatial smoothing of VRE and sharing of surplus generation, which reduces both curtailment and balancing needs (Becker et al., 2014, Tranberg et al., 2018).
Least-cost optimization of transmission capacities (e.g., via simulated annealing or quantile-based sizing) is shown to lower the annual cost of transmission investment by about 10% over ad hoc approaches, further driving down system-level LCOE (Becker et al., 2014).
In multi-country or multi-province networks, flow-based cost allocation ensures both system and nodal LCOEs decrease with increased interconnection and optimal siting, demonstrating the collective benefit of cross-border cooperation (Tranberg et al., 2018, Liu et al., 2018).

Table 1 summarizes exemplary factors influencing regionalized LCOE:

Region/Node	Capacity Factor (CF)	Regional Multiplier ( $m_n$ )	Impact on LCOE
High solar (SW US)	High (PV)	~1.0	Low LCOE for solar PV
Midwest (Wind)	High (Wind)	~1.0	Low LCOE for wind
Northeast (US/EU)	Low (PV/Wind)	1–1.2	Higher LCOE both types
Coastal EU (Wind)	High (Wind)	Varies	Nodal LCOE drops w/flows

5. Sensitivity to Storage, Degradation, and Discount Rates

Integration of storage fundamentally alters LCOE dynamics:

Conventional LCOE underestimates costs when substantial storage is needed. LCOD (Levelized Cost of Delivery) appropriately partitions costs of surplus generation and storage system inefficiencies (Lai et al., 2016).
Marginal LCOE (cost of an incremental system extension) provides insight into when storage or additional generation results in cost minimization (Lai et al., 2016).
Storage type and capital cost, round-trip efficiency, and degradation rates all strongly influence LCOE; for example, at low discount rates (<5%), Vanadium Redox Batteries achieve lower LCOE than lithium-ion, but this reverses at higher rates (Lai et al., 2016).

Sensitivity analysis also shows LCOE increases with higher market electricity prices, lower storage efficiency, and higher capital cost ratios (energy-to-power), and decreases with longer usage duration (higher capacity factor) (Lotfi et al., 2016). Policymakers are cautioned that retrofit storage deployments may yield higher LCOE than tailored, co-designed systems (Lai et al., 2016).

6. Comparative Applications and Policy Implications

LCOE is the standard metric for:

Spatial resource allocation and optimal siting of renewables (Becker et al., 2014, Liu et al., 2018).
Techno-economic comparison of distributed versus utility-scale assets, with adjustments for capacity factor and life-cycle costs (Liu et al., 2019).
Evaluation of off-grid and rural electrification strategies, with reported global LCOEs for decentralized systems now ranging from $0.03–1.00$/kWh and declining by 9% per year (2016–2021) for 100% renewable systems (Weinand et al., 2022).
Benchmarking policy interventions; e.g., grid-tied hydrogen electrolyzers in Kenya were shown to reduce the national LCOE by up to 30% by acting as flexible demand, improving VRE utilization, and supporting large-scale wind integration (Xi et al., 19 Jul 2025).

Transparency and fairness in local energy trading are increasingly enforced by setting LCOE as the minimum sales price for distributed prosumer generation on DLT-based platforms, replacing or supplementing Feed-in-Tariffs as these policies are phased out (Dynge et al., 2022).

7. Technical Innovations and Future Directions

Continuous LCOE reduction is the explicit goal of many technological and operational innovations:

Transitioning silicon wafer thickness from 160 µm to 50 µm can lower module LCOE by over 5% solely through capex and material savings (Liu et al., 2019).
For bifacial and monofacial PV, optimization of tilt and spacing using frameworks such as Bayesian optimization yields up to 23% LCOE reduction over conventional siting heuristics (Tillmann et al., 2019, Patel et al., 2018).
Thermophotovoltaic (TPV) systems illustrate the necessity of unifying efficiency and power density targets within the LCOE framework, with architecture-level choices (cell material, spectral management) enabling LCOEs down to $0.08/kWh-e—comparable to gas-fired or advanced nuclear generation (Verma et al., 1 Jul 2024, Lim et al., 7 Oct 2025).
In microgrid design, advanced optimization integrates system reliability, renewable variability, and economic constraints, achieving community-level LCOEs of ~$0.21/kWh with high reliability and low carbon footprint (Uddin et al., 10 Mar 2025).

A general finding is that optimal LCOE solutions are rarely homogeneous; spatial heterogeneity in both resource quality and costs, coupled with system-level design (transmission, storage, flexible demand), set strong limits on the achievable cost floor and regionally optimal configurations.

In conclusion, LCOE remains the cornerstone economic metric underpinning comparative planning and optimization of electricity systems, but it requires rigorous, context-specific adaptation to resource, technology, and policy environments. Its significance is amplified in deeply renewable or distributed grids where curtailment, transmission, and storage determine system-wide cost optimization and equitable allocation. As technology and policy continue to evolve, so too will the tailored methodologies needed to ensure LCOE remains a robust, informative, and actionable tool for the global energy transition.