The levelized cost of energy (LCOE), also referred to as the levelized energy cost (LEC) or the levelized cost of electricity, is a tool used to assess and compare different energy production methods. The LCOE is a great way to compare different electricity generating assets since it can compare projects across varying lifetimes and project riskiness. This is because the LCOE output number is per unit of electricity generated. It also incorporates the concept of discounting. The concept behind the LCOE calculation is similar to a discounted cash flow analysis. The LCOE can be calculated by taking the net present value of the total costs of the project and dividing it by the net present value of electricity generated over its lifetime. This ratio can be interpreted in a number of ways. It can be thought of as the average minimum price the electricity generated by this asset must be sold at, in order to offset the total costs of production. It can also be viewed as the average total cost of the asset, per unit of electricity generated over its lifetime. In this model, we see that costs are separated into three typical categories: the initial investment, the operating and maintenance costs, and the fuel costs. In the top left corner, assumptions can be made about these differing costs, as well as the output of electricity generated by the project. Finally, assumptions can be made about the lifetime of the project as well as the discount rate that will be used in the analysis. Each of these assumptions can be altered and it will dynamically change the model inputs as well as the final calculated value for LCOE. The model can be selected in the last year and dragged to the right to adjust for the lifetime of the project.
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