What Energy Costs: LCOE, System Costs and Tax Credits

Ask which power source is cheapest and you will usually get a number in dollars per megawatt-hour. That number is almost always a levelized cost of energy, or LCOE. It is useful. It is also the most misused figure in energy debates. Once you can build one yourself, you will know exactly what it hides.

What LCOE is

LCOE asks: what constant price per MWh, charged over a plant's whole life, would exactly pay back everything it cost, including a fair return to the people who financed it? Put simply:

LCOE = (annualized capital cost + yearly fixed O&M) / yearly MWh
       + variable O&M per MWh + fuel per MWh

The "annualized capital cost" comes from a capital recovery factor (CRF), which turns a lump sum into equal annual payments, the same math as a mortgage.

CRF = r x (1 + r)^n / ((1 + r)^n - 1)

r = discount rate (the cost of capital), n = years
At 7% over 30 years: CRF = 0.0806

Worked example: build an LCOE

Capital cost:        $150 million ($1,500 per kW)
Fixed O&M:           $2 million per year
Fuel:                $0
Capacity factor:     25%
Life and rate:       30 years at 7%

Step 1, annual capital charge:  $150,000,000 x 0.0806 = $12,090,000
Step 2, total annual cost:      $12,090,000 + $2,000,000 = $14,090,000
Step 3, annual output:          100 MW x 8,760 h x 0.25 = 219,000 MWh
Step 4, LCOE:                   $14,090,000 / 219,000 = $64.3 per MWh

500 MW, $700 million capital, $7.5 million fixed O&M, 60% capacity factor
Heat rate 6,500 Btu/kWh = 6.5 MMBtu per MWh, gas at $3.48/MMBtu
(EIA's October 2026 forecast of the 2026 Henry Hub average)
Variable O&M $3/MWh

Annual capital charge: $700,000,000 x 0.0806 = $56,420,000
Fixed costs per MWh:   ($56.42M + $7.5M) / (500 x 8,760 x 0.60 = 2,628,000 MWh) = $24.3
Fuel per MWh:          6.5 x $3.48 = $22.6
Total LCOE:            $24.3 + $22.6 + $3.0 = about $49.9 per MWh

Same plant run at 30%: fixed costs double per MWh, LCOE = about $74.3

The 2026 estimates

Lazard, 2026 LCOE+ (version 19.0), unsubsidized, $ per MWh

Lazard assumed 60 percent debt at 8 percent and 40 percent equity at 12 percent, gas at $3.45/MMBtu, and capacity factors of 20 to 30 percent for utility solar and 30 to 55 percent for onshore wind (an after-tax WACC of about 7.7 percent). It said renewables remained the lowest-cost new-build generation but that wind and solar costs rose again, and that gas combined cycle costs hit a 15-year high with turbine supply constrained. With the production tax credit, the low end of Lazard's range drops to about $16 for utility solar and $11 for onshore wind.

EIA, Annual Energy Outlook 2026, plants entering service in 2031, 2025 dollars per MWh

EIA used a 30-year recovery period and a 7.27 percent after-tax cost of capital, and included only laws in effect as of December 2025. Because EIA's 2031 wind and solar plants miss the new credit deadlines, they get no credit in its table. Note EIA's 40 percent capacity factor for the gas plant: EIA's baseline models the EPA's April 2024 Section 111 rule, which caps new combined-cycle plants without carbon capture at about 40 percent. In EIA's Alternative Electricity case, which assumes that rule is repealed, the plant runs at 87 percent and its LCOE falls to $55.51.

What LCOE leaves out

LCOE treats every MWh as equal. The grid does not.

• Timing: A MWh at 7 p.m. in August can be worth ten times a MWh at noon in April. Solar's output is concentrated in hours whose price falls as more solar is built.
• Firming and reliability: A variable plant needs backup capacity for its low-output hours. Lazard's 2026 firming analysis added roughly $8 to $36 per MWh for wind and for wind and solar storage hybrids across the six grid operators it studied, highest in ERCOT, with standalone solar higher still in some markets. Gas plants have their own reliability costs (fuel supply, pipeline limits, winter outages) that Lazard says it did not model.
• Transmission and interconnection: EIA includes a levelized transmission charge of only a few dollars per MWh; remote wind can need hundreds of miles of new lines.
• Curtailment: If 10 percent of output gets curtailed, the effective cost of the energy actually used rises about 11 percent.
• Emissions and health costs: Not included unless a carbon price is modeled. In Lazard's carbon price sensitivity, the gas combined cycle range moves from $51 to $129 up to $59 to $152.

EIA's answer is to compare LCOE with LACE, the levelized avoided cost, an estimate of what the plant's output is worth in its region and hours. If LACE is higher than LCOE, the plant pays for itself. EIA says this value-cost ratio is more useful than either number alone. In EIA's 2026 regional data, standalone solar in one region showed an LCOE of $78.59 and a LACE of $63.49, a sign it would not pay there without other support.

Subsidies and the 2025 tax law

Every energy source has had federal help: depletion allowances and drilling expense deductions for oil and gas, loan guarantees and liability caps for nuclear, and tax credits for wind and solar. The Inflation Reduction Act of 2022 created technology-neutral credits, section 45Y (per MWh) and 48E (share of investment). The 2025 tax law, Public Law 119-21, often called the One Big Beautiful Bill Act, rewrote them:

"Begin construction" is its own fight. IRS Notice 2025-42 (August 15, 2025) eliminated the 5 percent cost safe harbor for most wind and solar, leaving a "physical work" test. On June 6, 2026, the U.S. District Court for the District of Columbia vacated that notice in Oregon Environmental Council v. IRS, finding it arbitrary and capricious, which restored older guidance for now. Tax practitioners expected an appeal. If you are following a local project's credit status after July 2026, ask which guidance its developer relied on and get the current status of that case.

Supporters of the cuts argued the credits cost far more than originally scored and subsidized mature technologies. Opponents argued they would raise power prices and slow new supply just as demand from data centers climbs. Both claims are testable; watch EIA's planned capacity data and utility rate cases over the next few years.