Levelized production cost: An alternative form of discounted cash flow analysis

• Published in: Cost engineering (Morgantown, W. Va.) Vol. 36; no. 8; p. 13
• Main Author: Brown, Daryl R
• Format: Journal Article
• Language: English
• Published: Morgantown American Association of Cost Engineers 01.08.1994
• Subjects: 296000 > Energy Planning & Policy > Electric Power; Budgets; CALCULATION METHODS; Capital budgeting; Capital expenditures; Cash flow forecasting; Consumption; COST; Cost engineering; Discount rates; Discounted cash flow; ECONOMICS; ELECTRIC UTILITIES; ELECTRICITY; ENERGY PLANNING, POLICY AND ECONOMY; Expected values; Guidelines; Income taxes; Internal rate of return; INVESTMENT; Methods; Net present value; Payback method; PRODUCTION; Production costs; PROFITS; PUBLIC UTILITIES 290201 > Energy Planning & Policy > Economics > (1992-); United States > US
• ISSN: 0274-9696

Levelized production cost (LPC) is an alternative form of discounted cash flow analysis that expresses the annual cost of an investment per unit of production. The LPC defines the price that would have to be charged per unit of production to achieve a net present value of zero for an investment. The procedure is most commonly employed in the electric utility industry to calculate the unit cost of electricity for alternative generating technologies, but can be usefully employed in any situation where understanding the cost per unit of service is important. The mechanics of LPC analysis are presented to aid implementation of the technique. The basic equations for calculating LPC are presented, the use of the equations are illustrated with an example, and the fundamental concepts, assumptions, and limitations of the procedure are described.