While system operators generally schedule the generation of electricity to

meet forecast the demand based on power plant operational costs,

these costs are just one of several that go into paying for a power plant.

The main cost components for a power plant are its capital costs,

fixed operation costs, variable operation costs and fuel costs.

The capital costs are the cost to build or buy a power plant.

The fixed costs are the cost to simply keep the plant

operational regardless of whether it's generating a lot of electricity,

a little electricity or none at all.

The variable costs on the other hand,

scale with the plant's power output and so range from zero when

the plant is not running to a maximum when the plant is running at capacity.

And the fuel costs are a type of variable costs that apply

only to those power plants that require a fuel such as coal,

natural gas, and nuclear plants.

These particular types of plants however

require so much fuel to run and the fuel costs can be so

large that these costs are often separated out as a category unto themselves.

Renewable power plants such as wind and solar

receive their input energy for free and so have zero fuel costs.

It is difficult to compare

the overall cost of different power plants using absolute values

for the various plant cost components because power plants vary widely in terms of type,

capacity, vintage, and make.

However, one can compare overall plant costs by recasting the absolute costs for

a plant in terms of what is known as the plant's levelized cost of energy or LCOE.

The LCOE is the plant's cost to generate a single unit of electricity over

the lifetime of the plant and it's generally given in terms

of dollars per megawatt hour ($/MWh) or cents per kilowatt hour (c/kWh).

The LCOE for a plant is calculated using the following equation.

While the equation may look a little confusing it's

best understood if broken down into its component parts.

The first component is the capital cost of

the plant amortized over the lifetime of the plant.

This component is in fact made up of two subcomponents.

The first subcomponent expresses the purchase price of the plant in

terms of what the plant would cost if bought new a plant lifetime from now.

So if the plant is expected to have a 20 year lifetime,

then this first subcomponent to the cost is the price of the plant in

future dollars 20 years from now based on an assumed interest rate.

This interest rate also known as the discount rate may be

the rate that a bank would charge on a loan for the purchase price of the plant,

or investors would expect as a return on equity

provided to purchase the plant or some combination of the two.

The second subcomponent to the first term in

the LCOE equation subdivides this future cost into a series

of equal annual payments over the lifetime of the plant in

the same way that is done to arrive at a mortgage payment on a home.

These two subcomponents then turn

the capital cost of the plant into a series of annual payments that

account for interest on the purchase of the plant such that

the first term has units of dollars per megawatt per year.

The next component in the LCOE equation is

the annual fixed costs to run this particular type of plant.

Like the adjusted capital cost,

it too has units of dollars per megawatt per year.

The sum of these two costs is converted into dollars per

megawatt hour which are the units for LCOE by dividing

by the capacity factor for the plant times the number of

hours in a year which is 8,670 hours.

So at this point in the calculation we have the capital and

fixed costs expressed in dollars per megawatt hour.

The variable costs scale with the energy output of the plant

and so also have units of dollars per megawatt hour.

That leaves the fuel costs if there are any.

The typical unit for these vary depending on what type of fuel the plant draws.

Regardless, all fuel costs can be converted into

cost per unit of energy content or dollars per MMBtu ($/MMBtu).

This is in fact a common unit for natural gas costs in the US.

So to make things simple,

assume that we are solving the LCOE of a natural gas plant.

The natural gas fuel costs must be changed from dollars

per MMBtu into dollars per megawatt hour.

This is done using the plant's heat rate which is the measure of

the plant efficiency and has units of MMBtu per megawatt hour (MMBtu/MWh).

So multiplying the natural gas cost times the plant's heat rate,

we convert the plant's fuel cost per unit of energy input into a fuel cost per unit of

energy output from the plant that has

the same units as the other terms in the LCOE equation.

Adding all these terms together then;

the amortized capital cost,

the fixed cost per unit of expected electricity output,

the variable costs and the heat rate adjusted fuel cost,

gives the total LCOE for the plant which

can then be compared to the LCOE for other plants.