Coal-fired power plant near Düsseldorf, Germany. Credit: Bruno & Lígia Rodrigues.The cost of electricity refers to the dollar cost of the productive resources required to generate a kilowatt-hour (kwh) of electric power.  Different types of cost can be assessed. Operating cost refers to the variable costs associated with the day-to-day running of a power plant, such as fuel costs and operation and maintenance costs.

Levelized costs represent the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation from an assumed duty cycle. The key factors contributing to levelized costs include the cost of constructing the plant, the time required to construct the plant, the non-fuel costs of operating the plant, the fuel costs, the cost of financing, and the utilization of the plant.

The metric of cost chosen to compare one form of electricity to another is very important.  For example, nuclear power has lower operating costs—about 1.8 cents per kilowatt-hour—than fossil fuel power plants in the U.S.  Day-to-day marginal costs are primarily fuel costs. A large share of nuclear power operating costs come from operations and maintenance costs that do not vary much with output. Because nuclear power’s marginal costs are lower than coal’s marginal costs, nuclear power plants tend to use their full output capacity before coal plants. This gives nuclear power an advantage in base load operations and results in a higher capacity factor (close to 90%) compared to coal (about 70-75%%).  Nuclear power’s low and predictable operating costs have (1)  encouraged nuclear plant owners to seek operating license extensions for many reactors, and (2) increased requests for power “uprates”: the maximum power level at which a commercial nuclear power plant may operate.  However, nuclear power has higher levelized costs than coal and combined cycle gas power plants in the U.S., due in part to its very high initial capital cost. This is a principal reason why no new nuclear plants have been ordered in the U.S. since the mid-1970s.

Cost of electricity in the U.S.

The table below shows the cost of new electricity generation in the U.S. as estimated the Energy Information Administration (EIA) of the Department of Energy. Shown are the estimated cost of electrcity from new facilties that enter service in 2016.

Note that levelized cost accounts for differences in the capacity factor: the ratio of the electrical energy produced by a generating unit for the period of time considered to the electrical energy that could have been produced at continuous full power operation during the same period. Baseload plants are facilities that operate almost continuously, generally at annual utilization rates (capacity factors) of 70 percent or higher. Intermediate load plants are facilities that operate less frequently than baseload plants, generally at annual utilization rates between 25 and 70 percent. Peaking plants are facilities that only run when the demand for electricity is very high, generally at annual utilization rates less than 25 percent.

Levelized cost also takes into account transmission investment, which is the cost required to connect any new capacity added to the grid.

The EIA estimates suggest that coal and gas-fired thermal power plants generate the cheapest electricity, followed by biomass, geothermal, hydropower and nuclear. Wind has very low operating costs because the fuel (wind) is free, but is hampered by relatively high initial capital costs, a low capacity factor due to the intermittency of wind, and relatively high grid connection costs.  Solar generated electricity remains prohibitively expensive in the near term.

Note, however, that this order changes if the the cost of carbon capture and storage (CCS) is added to the fossil fuel generation technologies. CCS is being considered as a means to reduce the carbon dioxide emissions that contribute to climate change. CCS is an untested technology on a large scale, but the EIA data suggest that the cost of electricity from many renewable sources and nuclear plants is in the same range as fossil fuel facilities with CCS technology.

External costs

An external cost, also known as an externality, arises when the social or economic activities of one group of persons have an impact on another group and when that impact is not fully accounted, or compensated for, by the first group. Thus, a power station that generates emissions of SO₂, causing damage to building materials or human health, imposes an external cost. This is because the impact on the owners of the buildings or on those who suffer damage to their health is not taken into account by the generator of the electricity when deciding on the activities causing the damage. In this example, the environmental costs are "external" because, although they are real costs to these members of society, the owner of the power station is not taking them into account when making decisions.

External costs may be related to many factors, including impacts on public health, environmental damage  (to fauna, flora, land, building materials, structures, or objects of cultural value), degradation of quality of  life (noise, eyesores or visual disturbance, disagreeable odors, traffic), degradation of agricultural land,  climate changes, and depletion of natural resources. These costs are incurred at various stages of the life  cycle of an energy technology. The effects may be local, regional, or global.

The table below shows estimates of the external costs of electricity generation in Germany. Note that fossil fuel systems have very large external costs compared to nuclear and renewable energy systems due in large part to the to the significant atmospheric emissions from fuel combustion.