A Probabilistic Approach to the Computation of the Levelized Cost of Electricity

Abstract

This paper sets forth a novel approach to calculate the levelized cost of electricity (LCOE) using a probabilistic model that accounts for endogenous input parameters. The approach is applied to the example of a nuclear and gas power project. Monte Carlo simulation results show that a correlation between input parameters has a significant effect on the model outcome. By controlling for endogeneity, a statistically significant difference in the mean LCOE estimate and a change in the order of input leverages is observed. Moreover, the paper discusses the role of discounting options and external costs in detail. In contrast to the gas power project, the economic viability of the nuclear project is considerably weaker.

Keywords: Levelized Costs of Electricity, Nuclear and Gas Power, Monte Carlo Simulation, Investment Analysis, Uncertainty

JEL Classification: C02, C15, C63, L94