Levelized Electricity Costs

Abstract

The concept of levelized energy costs responds to the necessity of disclosing the future consequences of present decisions. This incorporates what price should be charged per unit of energy sold in order to recover the total life cycle cost of energy production. This chapter charts the effectiveness of levelized cost formulas over time depicting how the perspectives for electricity generation in the UK and in France have evolved. While cost comparisons in the 1950s were almost exclusively focused on the eventuality of nuclear power catching up with the competitiveness of coal power, in the 1960s, things became thornier as nuclear hopes fell short of expectations and also because a new competitor—oil-fired power stations—made significant strides in the marketplace. The final conclusion points out that whereas in periods of relative price stability, all concerns center on reductions in the part of the formula accounting for capital costs, in periods of higher volatility, the focus switches to trends in the forecasting of fuel prices. Depending on the historical circumstances, the levelized energy costs formula was viewed either through the lens of “yesterday’s costs”—the most up-to-date estimates of existing equipment and installations—or through the lens of “tomorrow’s costs”—the likely evolution of fuel prices.