Levelised cost of energy (LCOE) is a good way to compare generically the costs of energy from different energy systems and the impact of different innovations. It is a key tool for decision makers in renewable energy economics. There are five main levers that determine the LCOE:
- Energy production. Increasing this is a powerful way to drive down LCOE.
- Capital cost (CAPEX). Typically, along with related finance cost, it contributes 65-85% of lifetime cost.
- Operating cost (OPEX). Typically in renewables, it contributes the remaining 15-35% of lifetime cost.
- Lifetime. A longer operating life reduces LCOE by spreading the capital cost across more years.
- Finance cost (or weighted average cost of capital (WACC)). Reducing risk reduces the cost of finance. Removing the cost of finance (0% WACC) would halve the LCOE.
We have been at the heart of modelling levelised cost of energy for offshore wind and other energy systems for almost a decade. We deliver landmark analyses, reports and LCOE tools for governments and a wide range of enabling bodies. Much of this work stemmed from our ground-breaking “Offshore wind cost reduction pathways: Technology work stream” study for The Crown Estate, the first (and still the deepest) pan-industry exploration of future cost of energy in offshore wind.
We also deliver strategic LCOE analysis looking many years ahead for major developers and energy companies, taking into account new technologies (such as floating foundations) and supply chain effects (such as large project pipelines).
Our analysis of the spatial variation of LCOE across multiple national waters, coupled with merit order modelling addresses challenging questions, such as where to develop projects, and the future market for new technologies.
Our analyses of the LCOE impact of specific innovations successfully guides technology suppliers and investors in areas as diverse as installation processes, offshore foundations, condition monitoring technology, advanced blade designs, new wind turbine concepts and airborne wind systems.
Our approach is now the industry standard, and is used by BEIS (formerly DECC), Energy Technologies Institute, Innovate UK, ORE Catapult, in France and USA for offshore wind, and by KIC InnoEnergy for onshore and offshore wind, solar power (PV and STEG) and other technologies.