Which statement about Levelized Cost of Energy (LCOE) and financing terms is true?

• A. Higher discount rate increases LCOE.
• B. Financing costs do not affect LCOE.
• C. Lower discount rate reduces LCOE.
• D. Shorter debt terms always increase LCOE.

Answer: (C)

When evaluating LCOE, the discount rate is the tool that translates future costs and future energy into today’s dollars. LCOE is the present-value of all costs divided by the present-value of all energy produced. A lower discount rate lowers the capital recovery needed each year (the capital cost is spread back over time using a smaller factor), so the annualized cost in the numerator drops. With the same energy production, a smaller numerator means a lower LCOE. Financing costs are part of those costs, so changing the discount rate directly affects LCOE. Higher discount rates push up LCOE, while lower rates pull it down. Statements about shorter debt terms aren’t universally true in all cases, whereas the fundamental effect of a lower discount rate consistently reducing LCOE explains why this option is best.