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

This paper explores the use of levelised cost in planning for infrastructure networks. Levelisedcost provides a useful measure comparing supply or conservation options on varying scaleson an equivalent basis. Comparison is made to annualised cost, a metric often used as ameans of comparing different supply side options. Urban water supply is used as the primaryexample, however levelised cost is equally applicable to other infrastructure networks, such aselectricity or gas. The levelised cost is calculated as the ratio of the present value of projectedcapital and operating cost of an option to the present value of the projected annual demandsupplied or saved by the option. The paper demonstrates that levelised cost is the constantunit cost of supply, provided by an option at present value. It is also the average incrementalcost of the option at the point of implementation.When translated to a unit cost, annualised cost does not account for unutilised capacity inlarge scale schemes, systematically under representing actual costs. By using levelised costthis inherent bias is removed. Use of levelised cost would facilitate the inclusion of smallerscale and more incremental supply options into infrastructure networks providing botheconomic and environmental benefits.