The Role of Social Costs in Enhancing the Levelized Cost of Energy

Abstract

[Abstract] The global share of renewable energy exceeds 30 % as of 2023, marking a milestone in the energy transition. In response, many governments have adopted more ambitious targets for renewable energy generation to limit global warming below 1.5 °C or, at most, 2 °C, as outlined in the Paris Agreement. To accelerate the deployment of renewable technologies, investors, developers, and policymakers rely on tools to evaluate the economic competitiveness of different technological alternatives. The most commonly used metric is the Levelized Cost of Energy (LCOE), primarily due to its simplicity. However, LCOE falls short in the current context, as it excludes costs associated with high renewable penetration, as well as environmental and social impacts. Alternative metrics such as LACE, COVE, sLCOE and SCOE attempt to address these shortcomings. Nevertheless, they are not as widely adopted and do not yet serve as fully viable replacements for LCOE. Our aim is to define a path toward a metric that addresses LCOE's limitations by incorporating the Sustainable Development Goals (SDGs), particularly SDG 7 (affordable and clean energy) and SDG 13 (climate action), while preserving the simplicity that enables widespread use. We conclude that, although emerging metrics partially resolve LCOE's limitations to varying degrees of complexity, they do not offer a comprehensive solution within the current regulatory framework. This highlights the need to integrate existing approaches and develop a decision-making tool that explicitly includes social costs.