Policymakers and industry need to move beyond LCOE to build reliable, affordable, and clean energy systems, finds new CATF report
A new report from Clean Air Task Force (CATF) urges policymakers and energy sector leaders to move away from a narrow reliance on Levelized Cost of Electricity (LCOE) when planning power systems for a decarbonized future. While LCOE can be useful for tracking individual project costs, the report explains why LCOE fails to reflect the full complexity of electricity systems and can lead to decisions that jeopardize reliability, affordability, and clean generation.
“Levelized Cost of Electricity has become a go-to metric for comparing energy technologies, but it paints an incomplete and often misleading picture that we still see driving policy and reporting in this space,” said Kasparas Spokas, Director, Electricity Program at CATF. “We need to shift those conversations to focus on total system costs and value, which can better inform energy systems designs that are clean, reliable, and affordable.”
“Policymakers need to start asking different questions,” said Malwina Qvist, Director, Nuclear Energy Program, at CATF. “Instead of asking what’s cheapest per megawatt-hour, they should ask what mix of resources will deliver reliable power at the lowest total system cost while transitioning to clean generation. That’s the shift this report is designed to support.”
The report, Beyond LCOE: A systems-oriented perspective for evaluating electricity decarbonization pathways, outlines how overreliance on LCOE can lead to underinvestment in technologies that provide critical system services, like dispatchable clean firm power from nuclear energy, next-generation geothermal, or carbon capture. It also underscores the importance of using long-term, regionally tailored system modeling to inform policy and investment decisions.
Key takeaways include:
- LCOE does not reflect total system cost. Customer electricity bills are shaped by a combination of generation, storage, transmission, and distribution costs. LCOE captures only a small portion of this total.
- Technologies with higher LCOEs can reduce total system costs. Including clean firm and flexible technologies in electricity portfolios can reduce the need to overbuild renewables, and reduce grid expansion needs – ultimately lowering overall system cost.
- LCOE omits critical attributes like reliability and dispatchability. These qualities are essential in systems with high penetration of renewables and are undervalued or ignored in LCOE-based comparisons.
- Better planning tools are available. Jurisdiction-specific system modeling offers a far more accurate and actionable basis for decision-making than LCOE alone.
The report also highlights how LCOE-focused decision-making often overlooks financial realities such as varying cost of capital across regions and technologies, and fails to account for variables like land use, water consumption, and local economic benefits that could be relevant to local decision makers. These omissions are particularly problematic in emerging markets or where capital-intensive technologies are disadvantaged by high and uncertain costs of capital.
Read the report here for more detailed guidance on alternative planning approaches, as well as recommendations for how governments, regulators, and utilities can better assess the full value of energy technologies and support more effective energy decarbonization.
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About Clean Air Task Force
Clean Air Task Force (CATF) is a global nonprofit organisation working to safeguard against the worst impacts of climate change by catalysing the rapid development and deployment of low-carbon energy and other climate-protecting technologies. With more than 25 years of internationally recognized expertise on climate policy and a fierce commitment to exploring all potential solutions, CATF is a pragmatic, non-ideological advocacy group with the bold ideas needed to address climate change. CATF has offices in Boston, Washington D.C., and Brussels, with staff working virtually around the world. Visit catf.us and follow @cleanaircatf.
