efficiency-finance inclusive financing

Are You Leaving Money on the Table by Using LCOE?

Valerie Eacret for Zondits, July 7, 2014

The levelized cost of energy, or LCOE, is often used to help guide decision makers to the most economical option for energy generation. However, using this metric leaves out what we think is the most important and often most viable option: energy efficiency. While efficiency is not technically a generation source, it can often be used in place of generation and should therefore be considered when evaluating a project’s cost-effectiveness.Unfortunately, LCOE can misrepresent the value of energy efficiency. By improving an end use’s energy efficiency, the LCOE of its generation system can rise, steering you away from the most economic option. If the LCOE is used as the determining factor in a decision, you could be leaving money on the table.

While the LCOE’s simplicity is desirable to customers who are trying to gain a clear picture of their choices, it is insufficient if you are comparing systems that have different operational profiles. Solar energy, for example, is only available during daylight hours, while energy efficiency would reduce your demand around the clock. LCOE is an insufficient metric that does not consider many important factors. See this presentation from the EIA’s 2013 energy conference for one proposed alternative.

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You Down With LCOE? Maybe You, But Not Me

RMI Outlet, May 29, 2014

Once upon a time I was infatuated with levelized cost of energy (LCOE). It has had staying power, in prevalent use for decades as a metric of choice to evaluate and compare the relative cost of different power generation sources—coal plants, natural gas combined cycle plants, rooftop and utility-scale solar PV, etc. Saying “LCOE” just rolled off the tongue. I felt like a member of the energy cognoscenti using it. But alas, the honeymoon phase of my relationship with LCOE is over. She’s lost her relevance as an energy metric of any significance. Allow me to explain.

At its most basic, LCOE is based on a simple equation, the result typically expressed in cents per kWh or sometimes dollars per MWh: the cost to build and operate a power-generating asset over its lifetime divided by the total power output of the asset over that lifetime. Media and industry reports alike are rife with updates about the LCOE for various generation sources based on the most recent available data for past years and best projections for future, such as the U.S. EIA’s Annual Energy Outlook update last month to name just one.

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