Plant cost and LCOE
The key idea
The purchase price is one part of plant cost. LCOE combines costs over time and relates them to the energy delivered over the same economic boundary.
Start with a cost timeline
A plant has an initial capital cost. It then has operating costs such as fuel and maintenance, and may need replacement equipment during its life. Some studies also include a remaining value at the end. Define the cost boundary before you compare alternatives.
Net present cost, or NPC, expresses included costs and credits at the study's reference date. A discount rate changes the weight of future amounts relative to today's amounts.
Levelized cost of energy, or LCOE, expresses that cost per unit of energy. In this lesson the denominator is energy served to the load. Unserved demand is not delivered energy and must not inflate the denominator.
Inspect the assumptions
The example uses a 20-year life, fixed annual operating costs and one replacement in year 10. Change initial capital, real discount rate and annual served energy separately. At zero served energy, LCOE is unavailable.
- Initial capital
- $100,000
- Net present cost
- $207,445
- Cost of served energy
- $0.211/kWh
- Discounted cost by year
Read the exact values
| Time / step | Discounted cost by year |
|---|---|
| Year 0 | 100,000 |
| Year 1 | 9259.3 |
| Year 2 | 8573.4 |
| Year 3 | 7938.3 |
| Year 4 | 7350.3 |
| Year 5 | 6805.8 |
| Year 6 | 6301.7 |
| Year 7 | 5834.9 |
| Year 8 | 5402.7 |
| Year 9 | 5002.5 |
| Year 10 | 13,896 |
| Year 11 | 4288.8 |
| Year 12 | 3971.1 |
| Year 13 | 3677.0 |
| Year 14 | 3404.6 |
| Year 15 | 3152.4 |
| Year 16 | 2918.9 |
| Year 17 | 2702.7 |
| Year 18 | 2502.5 |
| Year 19 | 2317.1 |
| Year 20 | 2145.5 |
Model note · Illustrative USD in constant base-year purchasing power, not a market quotation. 20-year project, $10,000/year operating cost, $20,000 replacement at year 10, no salvage, tax, financing or sales revenue. Annual served energy is constant. Discounting occurs at year end.
Higher delivered energy can spread the same costs over more kWh in this example. In a real design, delivering more energy may also change fuel, wear, replacement and capacity costs. Keep the teaching model's fixed-cost assumption in view.
Keep LCOE and tariff separate
LCOE describes a defined energy-cost calculation. A customer tariff also depends on the utility's revenue model, connection growth, collection, funding, tax and other financial choices. It is not automatically equal to plant LCOE.
Use consistent price and discount conventions. A real discount rate pairs with costs expressed in constant purchasing power. A nominal model must account consistently for escalation. State currency, base year, project horizon and whether the energy denominator is generated, exported or served.
The math, if you want itOptional — the page reads completely without it
Discount each year's cost Cy back to the reference date at rate d and add them up, including the capital at year zero:
net present cost
NPC = Σ Cy( 1 + d )y
The example has $100,000 initially, $10,000 each year for 20 years and a $20,000 replacement in year 10. At zero discount rate the NPC is $320,000.
levelized cost, constant annual energy
LCOE = NPC · CRFE
capital recovery factor
CRF = d ( 1 + d )N( 1 + d )N − 1
At d = 0 the capital recovery factor is 1/N. At 100,000 kWh/year and zero discount the example gives $320,000 / 2,000,000 kWh = $0.160/kWh.
when annual energy changes
LCOE = NPCΣ Ey / ( 1 + d )y
The constant-energy shortcut is not enough for a changing energy series. Phasor's economics engine uses this discounted-energy denominator when annual energy factors apply.
See it in Phasor
Start from the simulated energy and fuel quantities. Review the assumptions behind costs, then use the financial model to examine the tariff, operating cash flow and funding case separately.
Continue the design path
Return to the generation plant design path to review the full sequence. For the physical quantities behind the cost, revisit power and energy and diesel dispatch strategies.