Levelized Costs per Produced kWh

In 2020, renewable energy costs compete or even overtake the costs of fossil fuel driven power plants. And according to the latest Renewable Power Generation Costs outlook from IRENA, onshore wind and solar PV offers the most promising numbers for investors for the future.

While there are various ways to calculate the price of energy – and as mostly, different studies find different results – the most common way is by calculating the Levelized Cost of Electricity (LCOE). The LCOE is the cost of converting energy from a primary form of energy into electricity, usually expressed in euros or dollars per megawatt hour. The electricity production costs are derived from the cost of capital (including the financing costs of borrowed capital), fixed and variable operating costs, fuel costs and the targeted return on capital over the operating period. On this site, we present the numbers published by IRENA (International Renewable Energy Agency) which were also featured in the Forbes Magazine.

Hydroelectric power cheapest source of electricity

Today and at an average of $0.05 per kilowatt hour (kWh) produced energy, hydroelectric power is, according to IRENA, the cheapest way to produce electricity. Hydropower is followed by onshore wind, solar PV, biomass and geothermal energy. All those energy sources can result in costs of less than $0.10/kWh. Since fossil fuel driven power plants usually range from $0.05/kWh to $0.15/kWh, it is fair to say that renewables are highly competitive. Offshore wind lacks slightly behind but is coming closer with estimated costs of $0.13 per kWh produced energy.

Costs may vary significantly

While all those findings sound to be very precise, it is important to understand that the costs may vary significantly. As for biomass, for instance, the costs range between $0.05/kWh to almost $0.25/kWh – a factor of five. Figures for nuclear power plants, too, are highly variable. According to the world nuclear association, the LCOE range between $0.03 in Korea to $0.14 in the UK. The average lies probably somewhere in the middle. The explanation for this fluctuation is in the age of the power plants, the contracts between the plant operator and governments, the prices at the commodity market, and for renewables also in the economics of scale. As the demand for renewable energy rises, more development takes place and larger scaled project become feasible. This will eventually further drop the costs for wind, solar, biomass and maybe even hydropower. IRENA supports this argument and estimates that the costs for onshore wind and solar panels may come down to $0.03-0.04/kWh. There are examples in Latin America and in Saudi Arabia, where the levelized costs of renewable electricity were already as low as $0.03/kWh. Be cautious again, though, as those numbers were only achievable because the governments supported the bidding processes.

Dropping costs for renewables

The main reason for the competitiveness of renewables is the falling costs for their production. Over the last years, bioenergy, solar PV, onshore wind as well as hydropower has experienced dropping costs between 11% and 14%. Even the more complex Solar CSP plants slowly but steadily get competitive, caused by a 26% drop of production costs last year alone. Critics may argue, though, that all those numbers presented do not consider incentives and subsidies given out by governments. However, IRENA says that as early as in 2021, 75% to 80% of onshore wind and solar PV farms will produce power at cheaper costs than the most modern coal, oil or natural gas options without any financial assistance.