Table of Contents
Understanding Cost Comparisons
When comparing the costs of different energy technologies, it is essential to use consistent methods and to look beyond a single number. Technologies differ in how they produce energy, when they produce it, and what extra systems they need. A fair comparison tries to put all of them on a common basis over their whole operating life and within a specific power system context.
Cost comparison starts with metrics such as the levelized cost of energy, or LCOE, but also includes additional measures that capture flexibility, grid integration, and system value. For beginners, it is important to recognize that no single metric can fully answer the question of which technology is “cheapest.” The answer depends on what service is needed, where, and when.
Using Levelized Cost Of Energy For Comparison
The most widely used single metric is the levelized cost of energy. It expresses the average cost per unit of electricity generated over the lifetime of a plant. It combines capital costs, operating costs, fuel costs, and financial assumptions such as interest rates and plant lifetime, and divides them by the total electricity that the plant is expected to produce.
In simplified form, LCOE can be represented as:
$$
\text{LCOE} = \frac{\text{Total lifetime costs}}{\text{Total lifetime electricity produced}}
$$
In more detailed form with annual values, a common formulation is:
$$
\text{LCOE} = \frac{\sum_{t=0}^{N} \frac{I_t + O_t + F_t}{(1 + r)^t}}{\sum_{t=1}^{N} \frac{E_t}{(1 + r)^t}}
$$
where $I_t$ represents investment expenditures in year $t$, $O_t$ operation and maintenance costs, $F_t$ fuel costs, $E_t$ electricity produced, $r$ the discount rate, and $N$ the project lifetime.
Key rule: When comparing technologies using LCOE, always use the same assumptions for discount rate, lifetime, and currency, and make sure costs are expressed in the same year’s money values.
Because renewables like solar and wind have no fuel costs, their LCOE is dominated by upfront capital costs and financing conditions, while fossil fuel plants have lower capital costs but often higher ongoing fuel costs. This difference is central to how their LCOEs evolve over time.
Capital Intensity And Operating Profiles
A crucial difference across technologies is the balance between capital and operating costs, and how often the plant runs. Technologies such as solar photovoltaics, wind, hydropower, and nuclear power are highly capital intensive, which means most of their total cost is paid upfront, before any electricity is generated. Coal and gas plants usually require less upfront investment per unit of capacity, but their lifetime costs are sensitive to fuel prices.
Another differentiating factor is the capacity factor. This indicates how much a plant generates over a period compared to its maximum possible output if it ran at full power all the time. A simplified way to think of it is:
$$
\text{Annual output} \approx \text{Installed capacity} \times \text{Capacity factor} \times 8{,}760 \ \text{hours per year}
$$
A higher capacity factor usually lowers LCOE because the same upfront investment is spread over more kilowatt hours. Dispatchable plants such as gas or some hydropower can adjust their output to match demand, so their capacity factor depends partly on market conditions. Variable renewables such as wind and solar depend mainly on the resource availability and on system constraints, which limits how much they can be dispatched.
Important statement: Cost per kilowatt ($/kW) of capacity and cost per kilowatt hour ($/kWh) of electricity are different. Technologies must be compared using the same metric, usually $/kWh, to avoid misleading conclusions.
Comparing Typical Cost Structures
Although exact numbers change over time and between regions, the structure of costs for different technologies shows consistent patterns that matter for comparisons.
Solar photovoltaic systems usually have high upfront costs per kilowatt that have been declining rapidly. They have very low operating and maintenance costs and no fuel costs. Their capacity factor varies with latitude, weather, and design, usually lower than for wind or conventional baseload plants. This combination often leads to competitive LCOEs in sunny regions, especially when capital costs and financing are favorable.
Onshore wind turbines also have high upfront costs, modest operating costs, and zero fuel costs. Their capacity factors are often higher than those of solar in good wind sites, which can result in low LCOEs. Offshore wind tends to have higher capital and operating costs because of marine installations, but can access stronger and more consistent winds that raise capacity factors.
Hydropower’s capital intensity is usually very high, particularly for large dams and complex civil works. Operating costs are often comparatively low and there are no fuel costs. The capacity factor depends strongly on hydrology and reservoir management. When well sited, hydropower can deliver low LCOE and, in some designs, valuable flexibility services.
Fossil fuel plants such as coal and gas combined cycle plants tend to require less capital per kilowatt but face continuous fuel expenses. Their LCOE is therefore highly sensitive to fuel prices and carbon pricing, as well as to how often the plant runs. If a gas plant is used infrequently as a peaking plant, its capacity factor is low and its LCOE can become high, even if the capital cost is modest.
Nuclear power involves very high capital costs, long construction times, and relatively low fuel and operating costs compared to its total cost base. Its economic performance is particularly sensitive to delays, financing costs, and plant lifetime, which must all be included consistently in comparative LCOE estimates.
System Context: Beyond Simple LCOE
While LCOE is useful, it does not describe how well a technology fits into an electricity system with varying demand and existing assets. It also does not capture all integration costs and benefits, such as transmission needs, storage, or flexibility value.
One limitation is that LCOE assumes that a kilowatt hour generated at any time has the same value. In reality, electricity prices can be high during peak demand or when supply is scarce, and low when supply is abundant. A technology that can generate when electricity is most valuable, or that can ramp output up and down, may provide more value than its LCOE alone suggests.
To address this, analysts sometimes use metrics such as the levelized cost of storage for batteries, or the value-adjusted LCOE, where generation profiles are compared with time-varying prices. Another perspective is to look at system-level costs, which include network reinforcements, balancing, and backup capacity. For variable renewables, these costs can increase as their share grows, but they are often smaller than many people expect when considered at moderate penetration levels.
Key statement: A technology with the lowest LCOE is not always the best choice for the system if it cannot deliver electricity when and where it is needed, or if it creates large additional system costs.
In integrated planning, technologies are therefore compared not only by their individual costs, but also by how they reduce total system costs when combined with others, including storage, demand response, and interconnections.
Comparing Costs Under Different Scenarios
Cost comparisons are also sensitive to assumptions about future prices, policies, and technology learning. For fossil fuel plants, future fuel prices and possible carbon prices are major uncertainties. For renewables, capital cost trends, interest rates, and changes in performance have strong effects.
Scenario analysis helps illustrate how rankings can change. For example, under low gas prices and without a carbon price, gas combined cycle plants might appear cost competitive compared with renewables in some regions. Under high gas prices or with a robust carbon price, the same plants can quickly become more expensive than solar or wind when measured per kilowatt hour.
Similarly, as battery costs decline, combinations like solar plus storage or wind plus storage can supply more of the time and begin to compete with traditional peaking plants on cost and reliability. When comparing technologies, it is important to understand which assumptions drive the results and how sensitive the conclusions are to changes in those assumptions.
Interpreting Cost Comparisons For Decision Making
For practical decision making, cost comparison should serve a clear purpose. Policymakers might be interested in which mix of technologies can deliver the lowest cost electricity while meeting climate and reliability goals. Investors might focus on project-level returns within a given policy framework. Communities might care about local benefits and long term price stability.
In each case, LCOE is a starting point, not an endpoint. It should be combined with information about variability, flexibility, local resource quality, grid conditions, environmental and social impacts, and policy risks. Comparing costs of different technologies is therefore not simply about finding a single cheapest option, but about identifying cost effective combinations that together can deliver secure, sustainable, and affordable energy services.