Towards a Standardized LCOE Calculation for Informed Decision-Making in Energy Policy and Investment: Application to the Colombian Context

Abstract

The Levelized cost of electricity - LCOE represents a constant cost per unit of generated electrical energy, resulting from the analysis of the total costs throughout the life cycle of a generation plant. Its widespread use, thanks to its simplicity of calculation and potential of standardization, has made it one of the primary criteria for comparing electricity generation technologies. However, in the pursuit of simplification and generalization, certain aspects associated with the socioeconomic context of the region, as well as accounting and financial concepts, are excluded due to externalities or incentives related to regulatory and fiscal policies. These exclusions affect the accuracy of LCOE and introduce uncertainty when using it as a criterion for investment decision-making or allocation of public resources for the development of renewable sources. This article proposes a clear and standardized methodology for calculating LCOE, which allows for a fair and precise comparison of renewable energy generation options in rural areas. It contributes to informed and transparent decision-making in the fields of energy policy and public investment for expanding electricity service coverage. The proposed methodology is based on the financial cash flow matrix to address variability sources in the calculation, considering the local context of the generation project.