What is the levelized cost of energy (LCOE)?
The levelized cost of energy (LCOE) divides the present value of all costs of building and operating a generation asset over its lifetime by the total electricity it produces. Lazard’s 2025 analysis finds unsubsidized utility-scale solar and onshore wind to be the most cost-effective forms of new-build generation in the US, while the cost of building a new gas combined-cycle plant has reached a ten-year high. The metric is useful for comparing similar technologies but misleads when comparing dispatchable to intermittent generation without including firming costs.
In this article
The short answer
LCOE answers a simple question: what is the average cost of one megawatt-hour of electricity, accounting for all upfront and ongoing costs across the asset’s life? The numerator includes capital expenditure, fuel, operations and maintenance, and taxes. The denominator is the total MWh delivered. The result is expressed in dollars per MWh.
Lazard’s annual analysis is the most-cited reference. Its 2025 edition finds that unsubsidized utility-scale solar and onshore wind are the cheapest new-build generation in the US, ahead of gas combined-cycle and coal. The IEA and IRENA publish their own global cost series.
The crucial limitation: LCOE does not include the system-level costs of integrating intermittent generation, and those costs change the comparison materially.
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What the data shows
LCOE estimates from Lazard, IEA, and IRENA converge on similar ranges with technology-specific variation. According to Lazard’s 2024 and 2025 LCOE+ editions and IEA data:
- Utility-scale solar US: among the lowest unsubsidized costs of new generation in Lazard’s 2025 edition
- Onshore wind US: in the same low-cost group, with a wide spread by site and wind resource
- Offshore wind: costs rising on recent projects (Dominion CVOW project)
- Gas combined-cycle: cost of new build at a ten-year high in 2025, depending on capacity factor and gas price
- Vogtle nuclear (units 3-4): a first-of-a-kind build whose capital cost far exceeded early estimates, with a high capacity factor and a very long operating life
- Fuel assumptions: gas is the most price-sensitive input, ahead of coal and nuclear fuel
- Battery storage 4-hour: costed separately from generation, as a standalone service
The exception worth noting: when Lazard calculates total system LCOE including firming costs to provide reliable supply, onshore wind plus firming can cost markedly more than its standalone LCOE in CAISO and similar markets. Solar plus firming can be higher still in winter-peaking grids. The LCOE of the technology itself is not the LCOE of the delivered, reliable kilowatt-hour.
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Why it happens: the macro mechanism
LCOE is sensitive to three families of inputs that shape its interpretation.
Channel 1: Cost of capital sensitivity. Renewables are capital-intensive upfront with near-zero marginal cost. The Lazard methodology assumes a blend of debt and equity financing. Higher rates push LCOEs up disproportionately for capital-intensive technologies. Lazard’s sensitivity analysis shows that a higher after-tax IRR/WACC raises solar LCOE far more than gas combined-cycle LCOE. Real yields drive the relative cost structure of generation choices more than headline technology cost.
Channel 2: Capacity factor and firming. A 100 MW solar farm at 23% capacity factor (US average per EIA 2024) delivers the same annual MWh as a 23 MW gas plant at 100% capacity factor. The LCOE divides by total MWh, so it accounts for capacity factor differences. But it does NOT account for the cost of providing the same dispatchable, reliable supply that the gas plant delivers. This is the most underappreciated dimension: comparing renewable LCOEs to thermal LCOEs without firming costs is comparing different products. Lazard introduced “LCOE plus firming” precisely because this comparison was being misused in policy debates.
A short note on subsidy treatment. Lazard reports both subsidized and unsubsidized LCOEs. The Investment Tax Credit (30% for solar) and Production Tax Credit ($27.50/MWh for wind) materially lower subsidized LCOEs and have driven much of the deployment growth in the US since 2022.
Channel 3: Fuel price assumptions. Gas-fired generation LCOE is highly sensitive to gas price assumptions. Lazard tests a range of gas prices around its baseline. At the gas prices Europe saw in 2022, gas combined-cycle LCOE rises sharply. Coal LCOE is similarly fuel-sensitive but with smaller swings. Renewable LCOE has near-zero fuel cost and therefore offers volatility insurance: a feature LCOE does not directly capture.
Synthesis by regime: in the 2010-2020 cost-decline regime, renewable LCOE fell sharply, driving deployment globally; in the 2022-2024 high-rate regime, capital cost increases offset falling technology costs and slowed deployment in some markets, especially offshore wind; in scenarios with significant carbon pricing, gas combined-cycle LCOE rises by EUR 15-25/MWh per EUR 50/tCO2 of carbon price, materially closing the gap with solar plus firming.
The LCOE of a technology is not the LCOE of a reliable kilowatt-hour delivered to a grid in real time.
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What it means for different economic actors
Savers. LCOE shapes wholesale electricity prices and ultimately retail rates. Falling renewable LCOE has compressed wholesale power prices in many markets during midday solar peaks, with implications for utility revenues and consumer bills.
Investors. LCOE drives expected returns for project developers and financiers. Equity returns on solar/wind projects depend critically on the cost of capital, the contracted PPA price, and the curtailment risk. As the LCOE of building new capacity falls below the marginal cost of operating existing capacity, retirement decisions accelerate for older thermal plants.
Industrial firms. Large industrial energy users increasingly sign virtual PPAs at long-dated LCOE-based prices, locking in input costs for 10-20 years. This contractual structure has become a major channel of corporate decarbonization independent of explicit carbon pricing.
A common error is to use LCOE as a single metric to declare a “winner” technology. LCOE is one input into resource adequacy planning, alongside capacity factor, dispatch profile, transmission availability, and firming requirements. Treating it as the bottom line oversimplifies the planning problem.
Practical observation
What the data suggests for understanding your situation:
- Question to ask yourself: When I read an LCOE comparison, is it for the technology alone or for delivered firm energy? The two metrics can differ substantially for intermittent renewables.
- Data to monitor: The Lazard LCOE+ annual report provides updated assumptions; the IEA Renewables annual outlook tracks deployment-cost dynamics.
- Historical parallel: The aviation industry’s pre-deregulation “cost-per-seat-mile” metric was similarly used as a one-dimensional comparator until network economics and load factor became dominant, a closer parallel to today’s LCOE-vs-system-cost debate.
- What the literature documents: Lazard (annual, since 2008), IRENA Renewable Power Generation Costs (annual), and IEA Renewables outlook jointly establish that pure technology LCOE has fallen sharply and consistently for solar/wind, while system-level costs have become the binding integration variable.
This is descriptive information to help you frame your own analysis. Eco3min does not provide investment advice.
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Related questions
Frequently asked questions
Why is LCOE different from the wholesale electricity price?
LCOE is the average cost over an asset’s lifetime, while wholesale prices reflect the marginal cost of meeting demand at each moment. In markets with significant renewable penetration, wholesale prices fall during high-output periods (sometimes negative during midday solar peaks) and rise during low-output periods (evening, no wind). A solar farm with $40/MWh LCOE may sell at much lower or higher wholesale prices depending on dispatch timing, which is why merchant developers increasingly seek long-dated contracts (PPAs) rather than spot exposure.
How does LCOE include firming costs in newer Lazard versions?
In its recent LCOE+ editions, Lazard publishes a “total LCOE including firming” that adds the cost of capacity needed to ensure resource adequacy. The methodology uses Effective Load Carrying Capability (ELCC) values from grid operators to calculate the additional firm-capacity equivalent needed. Result: onshore wind LCOE may rise markedly in CAISO when firming is included, narrowing or eliminating the apparent advantage over gas combined-cycle. This adjustment is technically correct and increasingly used in policy analysis.
Is LCOE useful for comparing nuclear with other technologies?
Nuclear LCOE is dominated by capital cost, with very long operating lives and high capacity factors. The Lazard estimate based on Vogtle’s capital cost yields LCOEs significantly higher than gas or renewables, but that calculation is sensitive to overruns specific to first-of-a-kind builds. Earlier nuclear builds in South Korea or France, and emerging SMR designs, suggest substantially lower LCOEs are achievable. The high-leverage role of cost of capital makes nuclear LCOE particularly sensitive to financing structures, which is why government loans (US DOE LPO) and capacity contracts can dramatically alter the headline figure.
Last updated — 6 October 2026
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