The cost of electricity associated with various production technologies is a key factor in defining the best energy strategy for decision-makers and is of significant interest in scenario analyses and investor choices.

The International Energy Agency (IEA), together with the Nuclear Energy Agency (NEA) and the Organisation for Economic Co-operation and Development (OECD), maintains and updates the publication Projected Costs of Generating Electricity every five years.

For data collection, the IEA, NEA, and OECD rely on an international working group of experts. RSE represented Italy in preparing the latest edition, which was published on December 9, 2020.

Overall, the IEA report presents data from 243 plants across 24 countries. The cost of electricity, expressed as Levelized Cost of Electricity (LCOE), is calculated as the average production cost over the plant’s lifetime using a discounted cash flow (DCF) method, with a discount rate of 7% and a carbon price of 30 USD/tCO₂.

The analysis revealed that the cost of electricity from intermittent renewable sources is now competitive with fossil fuel generation in almost all countries. Onshore wind is the most economical generation method. Among dispatchable low-carbon technologies, nuclear power is the most cost-effective, with costs comparable to large hydropower. Conversely, coal- or gas-fired power plants with carbon capture and storage (CCUS) remain less competitive and will only become viable with significantly higher carbon prices (50-60 USD/tCO₂ for coal and 100 USD/tCO₂ for gas).

In addition to LCOE assessments, which are valued for their simplicity and intuitiveness, the latest IEA report includes a chapter on a new metric introduced by the IEA in 2018, the Value-Adjusted Levelized Cost of Electricity (VALCOE). This metric integrates production costs with the value of the services the plant provides to the system, including energy, flexibility, and capacity.

Using VALCOE, the comparison between different generation technologies can yield significantly different results compared to a simple LCOE comparison.

The IEA report is not the only effort to produce a simple metric that combines costs and value for a generation technology. The second part of this report provides a brief overview of alternative metrics proposed in the literature: sLCOE, LACE, and VALCOE.