Beyond LCOE: A Systems-Oriented Perspective for Evaluating Electricity Decarbonization Pathways

Levelized Cost of Electricity (LCOE) is a widely used standardized metric to assess electricity generation project costs per expected generation output. Often used to compare technology costs, LCOE has become a ubiquitous metric used in electricity industry literature, cost forecasts, project business cases, and policy making.

The LCOE metric is popular in part due to its simplicity and standardization and has been used widely to display LCOE declines of solar and wind. LCOE is calculated by summing the discounted project cost, primarily capital and operating expenditures, and dividing those costs by the discounted expected electricity generation over the life of the project.

While LCOE is a good metric to track historical technology cost evolution, it is not an appropriate tool to use in the context of long-term planning and policymaking for deep decarbonization. This 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.