A new report prepared for WaterPower Canada argues that one of the electricity sector’s most widely used cost metrics is distorting investment decisions and undervaluing long-lived hydropower assets. The study, Evaluating the True Value of Hydropower, says that the Levelized Cost of Energy (LCOE), which is commonly used to compare generation technologies, does not adequately capture system reliability, asset lifespan, or long-term replacement costs. As a result, it can make capital-intensive hydropower projects appear less competitive than they are over the long term.

The accompanying media primer states that LCOE “does not reflect how electricity systems actually operate over time,” and fails to account for whether electricity is available during peak demand, how long assets last, and how often infrastructure must be rebuilt.

The report identifies “capacity value” – a resource’s ability to deliver electricity during peak demand – as a major omission in standard LCOE analysis.

Hydropower typically has high capacity value because it can provide firm supply during peak hours. In contrast, wind and solar often have low or zero capacity value during peak periods, depending on jurisdiction and season.

Using Ontario as an example, the report cites Independent Electricity System Operator data showing hydropower capacity values of roughly 70–78% of installed capacity during peak periods, compared to significantly lower values for wind and solar.

When a capacity cost is applied to account for backup requirements, the relative economics shift. In one illustrative example in the report, a winter-peaking jurisdiction applying a long-term capacity cost significantly increases the adjusted LCOE of solar and wind compared to hydropower

The report also highlights asset lifespan as a structural issue in cost comparisons. Hydropower facilities commonly operate for 80 to 100 years or more. Wind and solar facilities typically operate for 20 to 30 years. Over a 100-year period, hydropower infrastructure is built once, while wind and solar installations may need to be rebuilt three to four times.

Standard LCOE calculations often assume 20- to 30-year recovery periods and do not include the cost of full replacement cycles. Nor do they incorporate the residual value of long-lived civil infrastructure that continues operating well beyond the modelled period.

According to the report, this “replacement chain” effect can materially alter long-term system costs.

The study outlines several methodological adjustments to address LCOE limitations, including:

  • Incorporating capacity value costs.
  • Recognizing residual asset value beyond typical modelling horizons.
  • Converting nominal LCOE into real long-term values
  • Accounting for full replacement cycles over extended system lifespans

Stakeholder interviews conducted for the report indicate broad agreement that LCOE is useful as an initial screening tool, particularly when comparing similar technologies. However, stakeholders cautioned that it does not provide a system-wide cost assessment and may not reflect long-term infrastructure realities.

LCOE and implications for clean energy expansion

The findings come as many countries accelerate electrification and expand clean generation to meet climate targets.

The media primer states that relying on simplified project-level cost metrics can lead to higher total system costs, increased need for backup capacity, repeated capital investment, and higher costs for ratepayers over time.

The report concludes that when capacity value and asset lifespan are incorporated into long-term system planning, hydropower can emerge as one of the most cost-effective non-emitting resources — not because it is inexpensive to build, but because it is durable, reliable, and long-lived.

WaterPower Canada says the objective is not to replace LCOE, but to update planning frameworks so that infrastructure decisions reflect full system costs over multiple decades.

For international markets facing rising peak demand, grid stability challenges, and large-scale decarbonization, the report argues that better valuation tools will be essential to ensure reliable and affordable clean energy transitions.