The use of levelised cost in comparing supply and demand side options

Abstract

This paper explores the use of levelised cost in planning for infrastructure networks. Levelised cost provides a useful measure comparing supply or conservation options on varying scales on an equivalent basis. Comparison is made to annualised cost, a metric often used as a means of comparing different supply side options. Urban water supply is used as the primary example, however levelised cost is equally applicable to other infrastructure networks, such as electricity or gas. The levelised cost is calculated as the ratio of the present value of projected capital and operating cost of an option to the present value of the projected annual demand supplied or saved by the option. The paper demonstrates that levelised cost is the constant unit cost of supply, provided by an option at present value. It is also the average incremental cost of the option at the point of implementation. When translated to a unit cost, annualised cost does not account for unutilised capacity in large scale schemes, systematically under representing actual costs. By using levelised cost this inherent bias is removed. Use of levelised cost would facilitate the inclusion of smaller scale and more incremental supply options into infrastructure networks providing both economic and environmental benefits.