# Levelized Cost of Energy: Page 4 of 10

To add further confusion, there are two different types of LCOE that can be calculated: nominal and real. Which of these is calculated depends on whether the nominal or real discount factor is used in the energy production term of the LCOE equation (the left side of Equation 5). The nominal LCOE is higher than the real LCOE because the nominal LCOE is a current value calculation that is not adjusted for inflation, whereas the real LCOE is a constant-value, inflation-adjusted calculation. The real LCOE is generally preferred for long-term analysis.

### The Relative LCOE of PV Systems

If you make some assumptions and do some algebra with the LCOE formula, you can derive a very useful rule of thumb for evaluating changes to a PV project, specifically determining whether a change that has a cost implication is beneficial.

If you assume that variables other than performance, capital and operating costs in the LCOE equation remain proportional to the capital cost or system size, then the following can be shown: If a change to a project increases the energy production by a greater percentage than it increases the cost, then that change decreases the LCOE.

A caveat to this conclusion may be the O&M cost. In general, the O&M cost is small relative to the capital cost, or proportionally it differs little between two systems and as such has little influence. As capital costs decline or more expensive O&M is required, then O&M cost becomes more significant, which may affect the applicability of this rule of thumb.

In practice, this rule of thumb means that if a tracking PV system that yields 15% more energy than a fixed-tilt system can be built and operated for 10% greater capital and O&M cost, the LCOE of the tracking solution is lower than that of the fixed-tilt solution. Conversely, if buying higher-efficiency modules that produce a 3% increase in yield requires an increase of 5% in total system cost, then the LCOE of the system with the more-efficient modules is reduced.

Essentially this rule of thumb holds that performance, capital cost and O&M cost are proportional to each other and that the relative LCOE of two systems is independent of all variables other than these.

## Different Generating Technology LCOEs

One of the most widespread uses of LCOE has been in comparing the cost of energy delivered from different sources, such as conventional fossil fuel, nuclear and renewable materials. These different energy sources have very different cost structures and performance characteristics. For example, coal plants have significant capital and operating costs and a consistent generation profile, as evidenced by a high capacity factor (the ratio of a power plant’s actual output over time to its potential output based on its nameplate capacity). In contrast, PV systems are characterized by high capital costs, low operating expenses and a low capacity factor, due to the nature of the solar resource. The LCOE metric takes these differences into account and enables direct comparison.

The US Department of Energy’s Energy Information Administration regularly analyzes and publishes the LCOE of a wide range of generation technologies (see Resources). Figure 1 (below) is based on data published in December 2010, which looks forward to plants coming on line in 2016. The purpose of this article is not to discuss the relative merits of the different technologies; rather, it is to explore the usage of LCOE. However, it is notable that the current low-cost electricity source is a natural gas plant, either a conventional or an advanced cycle. The assumptions made in producing this data are not presented here; however, we note that incentives were not considered in the analysis and that the LCOE of carbon-intensive technologies such as coal-fired plants is increased in an attempt to account for potential future costs of carbon emissions.

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