Levelized cost of electricity

For LCOE to be usable for rank-ordering energy-generation alternatives, caution must be taken to calculate it in "real" terms, i.e. including adjustment for expected inflation.

[12] LCOE is often cited as a convenient summary measure of the overall competitiveness of different generating technologies, however, it has potential limitations.

One of the most important potential limitations of LCOE is that it may not control for time effects associated with matching electricity production to demand.

At the same time, variable sources can be competitive if they are available to produce when demand and prices are highest, such as solar during summertime mid-day peaks seen in hot countries where air conditioning is a major consumer.

[9] To ensure enough electricity is always available to meet demand, storage or backup generation may be required, which adds costs that are not included in some instances of LCOE.

[15] These can include the social cost of greenhouse gas emissions, other environmental externalities such as air pollution, or grid upgrade requirements.

Therefore, making investment decisions based on insufficiently comprehensive LCOE can lead to a bias towards larger installations while overlooking opportunities for energy efficiency and conservation[16] unless their costs and effects are calculated, and included alongside LCOE numbers for other options such as generation infrastructure for comparison.

[17] If this is omitted or incomplete, LCOE may not give a comprehensive picture of potential options available for meeting energy needs.

Assumptions are required to be made due to the subjective nature of prediction of future levels of taxation and subsidies and influence of the politics of climate change.

Comparisons that assume public funding, subsidies, and social cost of capital tend to choose low discount rates (3%), while comparisons prepared by private investment banks tend to assume high discount rates (7–15%) associated with commercial for-profit funding.