| Summary: | A levelized cost of energy (<i>LCOE</i>) is a methodology for comparing power generation costs in the transition to renewable energy (<i>RE</i>). However, the major limitation of evaluating <i>RE</i> based on the <i>LCOE</i> is that it does not consider indirect costs, such as the environmental and curtailment effect. This paper proposes the real <i>LCOE</i> (<i>rLCOE</i>) approach that accounts for indirect and direct generation costs. The mathematical approach to estimating indirect costs is derived from economic theory. The indirect effects, which quantify all benefits generated due to RE, is related to the variability of the share <i>RE</i> in the energy generation mix. The <i>rLCOE</i> enhances the accuracy of the economic comparison of power generation costs and the derivation of the optimal quantities of <i>RE</i> because external effects are incorporated into the <i>LCOE</i> principles. This approach has taken into account electricity demand, fuel prices, and environmental costs for each energy source to adequately compare generation costs. Simulations have been performed to demonstrate the application of the <i>rLCOE</i> approach in the Korean power market. Here, the unit variation of costs with the <i>RE</i> share were analyzed. The results show that indirect cost savings of an additional unit of <i>RE</i> begin to fall in scenario 3 in contrast to the result of <i>LCOE</i> approach indicating higher generation costs with <i>RE</i> share, especially, the proportion of <i>RE</i> in the generation mix is higher than 20%. Thus, the optimal power generation can be evaluated using the <i>rLCOE</i> approach.
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