Five reasons why power system strategies need more than LCOE
Levelized Cost of Electricity (LCOE) is a widely used and standardized metric for comparing the cost of generating electricity from different technologies. It plays an important role in tracking technology cost trends and informing investment decisions at the project level. But as electricity systems evolve to meet growing demands for reliability, affordability, and deep decarbonization, LCOE on its own cannot provide the full set of insights needed for effective policymaking.
Clean Air Task Force’s new report, Beyond LCOE, explores how system-level needs are increasingly outgrowing the limits of LCOE as a stand-alone tool for evaluating cost-effective electricity resources. While LCOE still offers value in certain contexts, the report outlines practical alternatives – including jurisdiction-specific system modeling – that better reflect the cost, reliability, and emissions implications of different technology pathways. It offers a path forward for policymakers and other stakeholders seeking to build energy systems that minimize the costs to the rate and tax payers.
Total system cost is a more accurate measure of what consumers pay
LCOE focuses on the cost to generate electricity at the project level, but consumers do not pay only for generation. In regions like California and the United Kingdom, generation accounts for only a fraction of total electricity bills. The rest includes transmission and distribution costs, decarbonization policy costs, as well as investments in grid stability, administrative overhead and taxes.
While LCOE helps compare generation technologies, it does not show how different resource choices can influence other system components and, ultimately, customer costs. A low LCOE technology may lead to higher total system costs if it requires large investments in storage, balancing, or transmission. Using LCOE alone risks overlooking those connections and underestimating real-world cost impacts.
Some higher-LCOE technologies can reduce total system and customer costs
Technologies such as nuclear energy, geothermal, and gas with carbon capture tend to have higher LCOEs than wind and solar. But these resources can reduce the need for backup infrastructure, limit overbuild of renewable capacity, reduce transmission buildout as well as reliance on costly long-duration storage. They also support reliability and flexibility, which become increasingly important as more weather-dependent generation comes online.
In other words, a technology’s value to the system is typically not reflected in its LCOE. Clean energy discussions and analyses that rely too heavily on LCOE may overlook the broader benefits of clean firm power and other resources that play a stabilizing role in the grid. This reinforces the need for more holistic approaches to cost and value assessment.
Effective strategies requires a broader perspective
LCOE does not account for when or where electricity is generated, or whether that electricity is dispatchable when the system needs it most. It does not reflect a resource’s ability to provide grid stability services like inertia or ramping. Nor does it account for location-based siting constraints or system congestion.
These factors are critical for designing electricity systems that are reliable, cost-effective, and capable of meeting growing demand. Policymakers should weigh these attributes alongside cost metrics to ensure that policy decisions reflect operational realities.
System-level modeling offers a more complete picture
System-level modeling provides insights that LCOE cannot. Although complex, it captures the interaction between technologies, infrastructure, and electricity demand across time and geography. These models help simulate the costs and tradeoffs of different technology portfolios under a range of scenarios.
Jurisdiction-specific modeling is particularly useful for policymakers and regulators, as it incorporates local conditions, infrastructure constraints, policy targets, and economic drivers. Many such models already exist in academic and industry literature and can offer actionable insights for national and regional energy planning.
Planning for a clean, reliable, and affordable grid requires multiple tools
LCOE will continue to be useful, particularly for comparing functionally similar technologies and tracking cost reductions over time. But it should not be the only input into planning processes, especially when those processes have long-term implications for energy security, affordability, and climate progress.
Policymakers and other stakeholders can make more informed and effective decisions by complementing LCOE with broader system-level analysis. By doing so, they can help ensure that the energy systems of the future are not only cost-efficient on paper, but resilient, flexible, and aligned with long-term public goals.
