LCOE Explained: How to Compare the Cost of Electricity from Any Source

A solar farm costs almost everything on day one and then runs for 30 years on free sunlight. A gas plant is cheaper to build but needs fuel every hour it runs. A nuclear reactor takes a decade to build and then runs for 60 years. To put them on one number, the industry uses the levelised cost of electricity (LCOE): the average cost per unit of energy over a plant’s whole life, with future money discounted to today. Below you’ll find the formula, two worked examples, the inputs that matter most, and what LCOE does not tell you.

What LCOE measures

LCOE answers one question: what constant price per MWh would a plant need to receive, every year of its life, to exactly cover all its costs including a target return on capital? A project that sells electricity above its LCOE beats its required return. Below it, the project loses money.

It is quoted in money per unit of energy: €/MWh, $/MWh or cents per kWh (1 €/MWh = 0.1 c/kWh). If the units are fuzzy, read kW vs kWh first.

The formula

The subtle part: energy is discounted too. A MWh doesn’t physically “lose value”. Discounting energy simply follows from the requirement that the constant price, multiplied by discounted energy, equals discounted costs.

The quick version with a capital recovery factor

When capital is spent up front and output and O&M stay roughly constant, the formula reduces to an annuity:

The capital recovery factor (CRF) turns a lump sum into the equal annual payment that repays it with interest over N years, just like a mortgage. At 6% over 25 years, CRF ≈ 0.0782; at 8% over 25 years, ≈ 0.0937.

Worked example 1: utility-scale solar

Take a 100 MWac solar farm in southern Europe:

Leaving out degradation (about 0.4% per year) understates the result slightly; a full year-by-year model would add roughly 1–2 €/MWh. The figure sits within the ranges recent IRENA and Lazard reports give for utility PV at good sites.

Now change one input at a time:

For capital-heavy renewables, capacity factor and cost of capital move the result far more than small differences in equipment price. (See what capacity factor means.)

Worked example 2: combined-cycle gas

A 500 MW CCGT:

Fuel and carbon make up about 80% of the cost. Double the gas price to €70/MWh, as happened for long stretches of 2022 in Europe, and LCOE jumps to about €166/MWh. Doubling the discount rate barely moves it. This asymmetry is what any renewables-versus-fossil comparison comes down to: one is exposed to interest rates, the other to fuel markets. It also explains why electricity prices spike when gas does.

Rerun both examples with your own numbers in the LCOE calculator.

Typical LCOE ranges

Published ranges are wide because inputs vary so much from country to country. The table shows the structure of costs, not precise figures. For current numbers in your currency, check the latest IRENA, Lazard or NREL edition.

For direction: IRENA’s Renewable Power Generation Costs in 2023 reported that the global weighted-average LCOE of newly commissioned utility-scale solar PV fell by roughly 90% between 2010 and 2023, and that most new solar and onshore wind added that year was cheaper than the fossil-fuel alternative. Lazard’s annual LCOE+ analysis for the US also puts unsubsidised utility solar and onshore wind at the low end of the range, and new nuclear and gas peakers at the high end. Offshore wind costs fell sharply through the 2010s but rose again in 2022–2024 with higher interest rates and supply-chain inflation (see offshore wind explained).

Choosing a discount rate

No input causes more arguments than the discount rate, and it can flip the rankings outright.

• Real vs nominal. A real rate excludes inflation and goes with costs in constant money. A nominal rate includes inflation and goes with escalating costs. Mixing the two is a common error.
• WACC. For a commercial project, the right rate is its weighted average cost of capital, a blend of debt interest and the equity return investors demand. For renewables in OECD countries it has often been around 4–8% real. In emerging economies it can be double that, and the IEA has repeatedly named financing cost as the biggest barrier to cheap clean power in developing countries.
• Social discount rate. Government studies sometimes use 3–5% to reflect society’s time preference. The IEA/NEA Projected Costs of Generating Electricity 2020 reports results at 3%, 7% and 10% for exactly this reason: the choice changes the answer.

Make it a habit to report LCOE together with the discount rate used, and to test at least two values.

What LCOE leaves out

LCOE measures cost at the plant. By design it leaves out several things that matter for a whole power system:

1. Timing and value. A MWh at 7 pm in winter is worth more than one at 1 pm on a sunny Sunday in May. As solar fills the midday hours, the market price it captures falls (the “cannibalisation” effect). The IEA’s value-adjusted LCOE (VALCOE) adds energy, capacity and flexibility value to correct for this.
2. Integration costs. At high shares, variable renewables need balancing, reserves, storage or interconnection; dispatchable plants need less of all that. The costs are real, but they belong to the whole system rather than to one plant.
3. Grid costs. Some countries include transmission to remote wind or solar zones, or offshore export cables, and some don’t.
4. Externalities. Air pollution and climate damage stay out unless a carbon price is added. Even then, a €70/t carbon price may sit below estimates of the social cost of carbon.
5. Risk. The discount rate captures fuel price swings, construction overruns and policy changes only in part.

For storage, the analogous metric is the levelised cost of storage (LCOS), which divides lifetime cost by lifetime discharged energy and has to include charging cost and round-trip losses (see the home battery storage guide).

LCOE for homeowners

A rooftop system works the same way. Spread the installed price and maintenance over lifetime production, discount, and compare the result with the retail tariff you avoid and the export price you get. A 6 kWp system costing €6,600 and producing 7,300 kWh per year over 25 years at a 4% discount rate (CRF ≈ 0.064), with €60/yr maintenance, works out to about (6,600 × 0.064 + 60) / 7,300 ≈ €0.066/kWh. That is far below a €0.25/kWh retail price but only a little above a €0.06/kWh export rate, so self-consumption, not export, drives payback. The solar panel calculator and net metering calculator do this year by year.

Key takeaways

• LCOE = discounted lifetime costs ÷ discounted lifetime energy. It is the constant break-even price.
• For renewables and nuclear, capital cost, capacity factor and discount rate decide the result. For gas and coal, fuel and carbon prices do.
• Always state the discount rate and test sensitivity.
• LCOE compares plants, not systems. Factor in timing, flexibility and the grid before declaring a winner. Explore real national generation mixes on our country profiles and rankings.

Figures in this guide are typical ranges drawn from the sources above; your own numbers depend on location, prices and equipment. Use the linked calculators for site-specific estimates.