LCOE, or levelized cost of energy, is a single number that represents the total cost of building and running a power plant over its lifetime, divided by the total electricity it produces. It’s expressed in dollars per kilowatt-hour or megawatt-hour, making it the standard way to compare the cost of electricity from completely different sources, whether that’s a solar farm, a nuclear plant, or a natural gas facility.
How LCOE Is Calculated
The core idea is straightforward: add up every dollar you’ll spend on a power plant from construction to decommissioning, then divide by every unit of electricity it will generate. Both sides of that equation are adjusted to account for the time value of money, meaning a dollar spent (or a kilowatt-hour produced) 20 years from now counts for less than one today.
The costs in the numerator break into three categories. First, capital expenditures: the upfront investment to build the plant, including financing costs. Second, operations and maintenance: the ongoing costs of running the facility, from staff to replacement parts. Third, fuel costs: whatever the plant burns to generate power, which is zero for solar and wind but substantial for gas and coal. The denominator is simply the electricity generated each year, summed across the plant’s life. A discount rate ties everything together, converting future costs and generation into present-day values.
Most LCOE calculations assume a project lifespan of 20 to 40 years, depending on the technology. The result lands in units like USD per kilowatt-hour or per megawatt-hour, giving analysts and policymakers one clean number to compare across technologies that look nothing alike on paper.
What Drives LCOE Up or Down
The balance between capital costs and fuel costs is what makes LCOE so different across technologies. Solar panels and wind turbines cost a lot to build but nothing to fuel. Their LCOE is dominated by upfront capital spending and financing. Natural gas plants are cheaper to construct but carry decades of fuel bills. Nuclear plants are expensive on both fronts: high construction costs and long, complex builds, plus ongoing operational expenses.
This split matters because it changes how sensitive each technology is to financial conditions. When interest rates rise, the discount rate used in the LCOE formula typically rises too. That hits capital-heavy technologies like solar, wind, and nuclear harder, because their costs are concentrated upfront and get discounted more aggressively. Fuel-heavy technologies like gas are somewhat insulated since their costs are spread over time. The UK government, for example, applies a discount rate of 8.9% for offshore wind projects but 7.8% for gas turbines, reflecting different risk profiles.
Capacity factor, the percentage of time a plant actually generates power, also plays a major role. A wind farm in a consistently windy corridor will have a lower LCOE than an identical one in a calm region, simply because the denominator (total generation) is larger.
Current LCOE by Technology
Lazard’s 2024 analysis, one of the most widely cited annual benchmarks, puts average LCOE values at $50 per megawatt-hour for onshore wind, $61 for utility-scale solar, $76 for natural gas combined cycle plants, and $118 for U.S. nuclear. Those are midpoint figures. The full ranges show significant overlap: onshore wind spans $27 to $73 per megawatt-hour, utility-scale solar runs $29 to $92, gas combined cycle covers $45 to $108, and nuclear ranges from $106 to $139.
That overlap matters. A solar project in an area with poor sunlight and high financing costs can be more expensive than a well-sited gas plant, even though solar is cheaper on average. Location, local labor markets, permitting timelines, and financing terms all push individual projects toward different ends of these ranges.
How Costs Have Changed Over Time
The cost trajectory for renewables has been dramatic. According to the International Renewable Energy Agency, utility-scale solar PV declined 90% between 2010 and 2023, falling from $0.460 per kilowatt-hour to $0.044. In 2023 alone, solar costs dropped another 12% year over year. Offshore wind followed a similar path, falling 63% over the same period to reach $0.075 per kilowatt-hour, with a 7% decline in 2023 compared to the prior year.
These reductions are driven by manufacturing scale, improved technology, and more competitive supply chains. Solar panel prices in particular have plummeted as global production capacity, concentrated heavily in China, has expanded far beyond current demand. Onshore wind has benefited from larger turbines that capture more energy per unit of land.
What LCOE Doesn’t Tell You
LCOE is a useful comparison tool, but it has a significant blind spot: it measures the cost of generating electricity, not the cost of delivering reliable power to the grid. A United Nations Economic Commission for Europe report puts it bluntly, noting that technology-focused cost metrics like LCOE “fail to capture system perspective.”
The costs LCOE misses become especially important as variable renewables like wind and solar grow to larger shares of the electricity mix. Solar panels produce nothing at night. Wind turbines sit idle on calm days. Integrating these sources reliably requires backup generation, energy storage, grid expansion, and balancing services that keep supply matched to demand second by second. None of those costs show up in a technology’s LCOE.
For a gas plant that can ramp up or down on command, system integration costs are minimal. For a solar farm that floods the grid at noon and disappears at sunset, those costs can be substantial. Two technologies with identical LCOEs can impose very different total costs on the electricity system.
Metrics That Go Beyond LCOE
To address these gaps, energy analysts use several companion metrics. The most common is the levelized avoided cost of energy (LACE), which measures the value a new power plant provides to the grid rather than just its cost. LACE estimates the cost of the electricity a new plant displaces. If a solar farm’s LCOE is lower than its LACE, it’s economically attractive: it costs less to build and run than the alternative power it replaces.
Comparing LCOE and LACE together gives a much clearer picture than either one alone. A technology can have a low LCOE but also a low LACE if it generates power at times when electricity is already cheap and abundant. Conversely, a plant with a higher LCOE might still be valuable if it reliably produces power during peak demand when grid prices are highest.
Broader system-level metrics go further still, incorporating curtailment (when excess renewable power is wasted because the grid can’t absorb it), transmission costs, ancillary services, and resilience against extreme weather. These fuller accounting frameworks are gaining traction among policymakers who need to plan entire electricity systems, not just evaluate individual projects.
Why LCOE Still Matters
Despite its limitations, LCOE remains the default starting point for energy cost comparisons because it’s standardized, transparent, and easy to calculate. When you see a headline claiming solar is now “the cheapest form of electricity,” it’s almost certainly referencing LCOE. That claim is accurate as far as generation cost goes, but the full picture depends on where the project is built, how the grid absorbs its output, and what backup infrastructure is needed to keep the lights on when the sun isn’t shining.
For anyone evaluating energy investments, reading policy proposals, or simply trying to understand why electricity costs what it does, LCOE is a necessary but incomplete piece of the puzzle. Treat it as the cost of producing a kilowatt-hour at the plant gate, not the cost of delivering it to your wall outlet.