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Energy Econ 101   arrow

By: Cary Weiner

It’s easy to grasp the concept of adding up the capital and operating costs of different power plants to compare expenses over their life cycles. This is referred to as the “levelized cost of energy”, or LCOE.

What is less obvious is that solar arrays, for example, may generate power during the day and prevent the need to run expensive natural gas “peaking plants”. On the other hand, if wind farms pour electricity onto the grid at night, they may offset cheaper gas or coal. These avoided costs (gas peaking plants or baseload gas/coal) are referred to as the “levelized avoided cost of energy”, or LACE.

To truly compare the financial costs and benefits of electricity generators, the U.S. Energy Information Administration subtracts the cost to build and run a future plant (LCOE) from the cost to run an existing alternative (LACE). If the net result is positive, you have a winner. Of course even this is a bit simplistic and actual figures will be region- and site-specific, but have a look at how general apples compare to general apples in the chart below.

LCOE of various energy types



U.S. Energy Information Administration, Annual Energy Outlook 2016, April 2016, DOE/EIA-0383 (2016).