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LCOE, Levelized Cost Of Electricity Also Know As LEC, Levelized Energy Cost
Mar 17, 2019

What is LCOE or LEC


When it comes to energy production, different sources of energy call for different financial models. Even within the same category-PV solar, for example, ROI varies widely among system architectures, types of equipment, and locations. Analyzing the economics of a project is fundamental, and fortunately there's a calculation that can help: LCOE(levelized cost of energy).


LCOE, or levelized cost of electricity, also known as Levelized Energy Cost (LEC), is the net present value of the unit-cost of electricity over the lifetime of a generating asset. It is often taken as a proxy for the average price that the generating asset must receive in a market to break even over its lifetime.


LCOE formula 600


LCOE analysis considers costs distributed over the project lifetime, providing a highly accurate financial picture that system operators prefer over the simple cost per watt calculation often used in the industry. LCOE calculates the true cost, measured in usd/kWh of energy produced. While it may seem difficult to weigh upfront investments against benefits down the road, the payback could be substantial.


Many variables design decisions determine LCOE. At the equipment level, they can be grouped into three key categories: performance, system costs, and ongoing operations and maintenance. Inverter efficiency, reliability, and performance directly impact energy output. Some inverters reduce or eliminate costly wiring and BOS equipment-reducing initial equipment costs. Likewise, ensuring the inverters and all PV site equipment remain operation through first-rate operation and maintenance affects the amount of energy produced and the long term return on your capital investment. In short, the inverter equipment and service partner you choose could mean the difference between an economically viable project and one that's not.


How to calculate LCOE


In LCOE calculation the period of time of the power produced by solar PV power plant, typically is the warranted life of the system. By purchasing solar you are essentially creating a hedge against rising utility costs by fixing the per kWh rate at a known cost.


Please note: This simple calculation does not take into account NPV (net present value) which is a critical component in calculating true LCOE.


A simple way to look at LCOE is that it is a measure of the cost of power. Essentially, you're just breaking down the cost of solar into the same terms that you pay on electric bill every month. i.e. cost per kWh.


Calculating LCOE requires knowing two key variables:

1.    All-in cost for the system. This should include financing costs and deduct any incentives received, such as tax credits and deprecation. 

2.    How much power will the solar array produce over the period you wish to calculate LCOE? (We suggest using the warranted period, 25 years)


Here's an example of how to calculate simple LCOE:


First, figure out your COSTS:
Total System Cost: $125,000 (50 kW solar system)
Less Tax Benefits: -$75,000
NET COST: $50,000


Next, figure out the system production over the period you wish to calculate LCOE for. We'll use the 25 year warranty period:
kWh Produced Annually less degraded production over 25 Years (NOTE: All of the estimates we create include degradation over the warranted period)
62,500 kWh / Year
62,500 * 25 = 1,562,500 kWh / 25 Years = TOTAL kWh Produced Over 25 Years: 


Next, figure LCOE by dividing the NET SYSTEM COST by the TOTAL kWh PRODUCED OVER 25 YEARS

LCOE = $50,000 / 1,562,500 kWh = .032 $/kWh


Aother example with Solar PV Systems


Assume a rooftop solar PV system will be installed on a commercial facility, and the characteristics of the project are the following:

Project capacity = 100 kilowatts

Initial investment = $300,000

Maintenance costs = $3,000/year (1% of initial investment)

Estimated yearly production = 182,500 kWh

Project life = 25 years

Over its lifetime, the total kWh production of this PV system will be:

Lifetime output = 182,500 kWh/year x 25 years = 4,562,500 kWh

The total cost of ownership, considering the initial investment and maintenance costs, will be:

Total Cost of Ownership = $300,000 + $3,000/year x 25 years = $375,000

Therefore, this project will have the following LCOE:

LCOE = $375,000 / 4,562,500 kWh = 0.0822 $/ kWh


Factors related to LCOE


The following are factors that might raise the LCOE of a project:

Financing - Interest paid to the financial institution providing the loan increases ownership costs.

Inadequate maintenance - The system performance can degrade over time, reducing the total kWh output.

Leasing the system instead of owning it - LCOE is higher because a third party is making a profit from the lease.

Batteries - The extra initial investment, eventual replacements and increased maintenance needs drastically raise the cost of ownership when there are batteries. However, if hourly electric rates are applied by the electric utility, and batteries are used to manage demand, the cost might be offset by the additional savings (charging batteries during hours with low energy rates, using them during peak rate hours). 

On the other hand, the LCOE can be reduced by:

Incentives such as tax exemptions or tax credits.

System positioning - optimized for maximum energy output.

In short,

Anything that increases production or reduces cost lowers the LCOE.

Anything that decreases production or raises the cost increases the LCOE.



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