Levelized Cost of Energy (LCOE) |  |  |  |

The levelized cost of energy (LCOE) represents the value that a project must receive for each unit of electricity that it sells to cover capital and recurring costs over the project life. In Solar Advisor, commercial and residential projects sell electricity through a net metering agreement with or without time-of-use pricing. Utility and commercial third-party ownership projects sell electricity through a power purchase agreement at a fixed price with an optional annual escalation rate. For a description iof the available financing options, see Overview of Financing Options.

The LCOE is useful for comparing and ranking technology options because it accounts for the installation, financing, tax, and operating costs of a project over its life. The LCOE makes it possible to compare alternatives with different project lifetimes and performance characteristics. Analysts can use the LCOE to compare the option of installing a residential or commercial project to purchasing electricity from an electric service provider, or compare utility and third-party ownership projects with investments in energy efficiency, other renewable projects, or conventional fossil fuel projects. The LCOE captures the trade-off between typically higher-capital-cost, lower-operating-cost renewable energy projects, and lower-capital-cost, higher-operating-cost fossil-fuel based projects.

Solar Advisor calculates the LCOE for residential and commercial projects differently than it does for utility and commercial third-party ownership projects. For residential and commercial projects, the system is assumed to be on the electric consumer's side of a utility meter, and the project sells electricity to an electric service provider through a net metering agreement. For residential and commercial systems, the LCOE represents the cost of installing and operating the system per unit of energy it produces over the project life. Utility and commercial third-party projects are assumed to earn revenues through a power purchase agreement, and the LCOE represents the total project revenue per unit of energy the system produces over the project life.

The project's financing type (residential, commercial, utility) is defined in the Technology and Market window. The financing type is also displayed on the main window in the toolbar directly below the case tabs in the main window.

Note. The LCOE for the systems in the sample files includes the effects of incentives. To see what the LCOE would be with no incentives, set sliders for all incentives to zero, and read the LCOE value in Metrics table. See Working with Sliders for more information.

For more information about the levelized cost of energy and other economic metrics for renewable energy projects, see Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies. (Short 1995) http://www.nrel.gov/docs/legosti/old/5173.pdf.

LCOE for Residential and Commercial Projects

For a project using one of the Residential Market or Commercial Market (except Third-Party Ownership) financing options defined in the Technology and Market window, the LCOE is the cost of installing and operating a system per unit of electricity it produces. Residential and commercial projects are assumed to be distributed energy projects on the retail customer side of the meter at the site of either a residential or commercial property, which means that a project's LCOE can be compared to the electricity rate that the residence or business would pay to an electric service provider if the project were not installed.

Solar Advisor uses the real discount rate and inflation rate on the Financing page in the LCOE calculation. The discount rate accounts for the time value of money, and is used to calculate the present worth of future costs. The inflation rate accounts for expected price increases over the project life, and is used to calculate future operating costs based on first year cost inputs on the system costs page.

Solar Advisor's LCOE calculation for residential and commercial projects assumes that the LCOE is the the cost per unit of energy, that, when multiplied by the total energy produced and discounted to a base analysis year, is equivalent to the present value of the total life-cycle cost of the project.

Solar Advisor reports both a real LCOE and a nominal LCOE value in the Metrics table. The form of the discount rate used in the denominator's total energy output term determines the form of the LCOE.

The choice of real or nominal LCOE depends on the analysis. Most long-term analyses are conducted in real (constant) dollars to adjust for many years of inflation, whereas most short term analyses use nominal (current) dollars. Regardless of the metric chosen, real or nominal LCOE, the lowest cost alternative will not change as long as all options are evaluated using the same form of the metric.

For the real LCOE, the real discount rate appears in the denominator's total energy output term:

Similarly, for the nominal LCOE, the nominal discount rate appears in the denominator's total energy output term:

Where,

Q n (kWh) | Electricity generated by the project in year n, calculated by the performance model based on weather data and system performance parameters. The first year output is reported in the Metrics table and in the year one column of the project cash flow. Year two and subsequent output is the first year output reduced by the amount specified for the degradation rate on the Annual Performance page.
N | Project life in years as defined on the Financing page.
C n ($) | Project net cost in year n, shown in Solar Advisor as the after tax cash flow in the cash flow tables.
d real | The real discount rate defined on the Financing page.
d nominal | The nominal discount rate, calculated as described below.

The summation in the numerator term starts at n = 0 to include project's capital costs incurred in year zero of the cash flow and shown as the Total Installed Cost on the system costs pages. The summation in the denominator term begins at n = 1, which is the first year that the project produces energy.

The nominal discount rate can be calculated based on the values of the real discount rate and the inflation rate on the Financing page:

d nominal = (1 + d real)(1 + e) - 1

Where,

d nominal | Nominal discount rate expressed as a fraction.
d real | Real discount rate defined on the Financing page expressed as a fraction.
e | Inflation rate defined on the Financing page expressed as a fraction.

Note. You can verify the LCOE calculation in the cash flow table by exporting the table to Excel and using the NPV formula to calculate the present values in the numerator (NPV of After Tax Cashflow) and denominator (NPV of Electric Output. Be sure to use the correct forms of the discount rate in the Excel formulas. The value in Excel will be slightly different than the value reported by Solar Advisor because the model uses more significant digits than are displayed in the cash flow table.

LCOE for Commercial Third Party and Independent Power Producer Projects

For a project using either the Utility and IPP or Commercial Market - Third-Party Ownership financing option in the Technology and Market window, the LCOE is the value that the project must receive for each unit of electricity it sells to meet financial returns targets defined on the Financing page. Utility and Third-party ownership projects are assumed to be power generation projects that recover project costs through electricity sales to a customer through a power purchase agreement with a fixed annual electricity sales price and optional annual escalation rate.

Solar Advisor uses the real discount rate and inflation rate on the Financing page in the LCOE calculation. The discount rate accounts for the time value of money and the relative degree of risk for alternative investments, and is used to calculate the present worth of future costs. The inflation rate accounts for expected price increases over the project life, and is used to calculate future operating costs based on first year cost inputs on the system costs page.

Solar Advisor's LCOE calculation for utility and third-party ownership projects assumes that the LCOE is the the revenue per unit of energy, that, when multiplied by the total energy produced and discounted to a base analysis year, would be equivalent to the present value of the total life-cycle cost of the project.

Solar Advisor reports both a real LCOE and a nominal LCOE value in the Metrics table. The form of the discount rate used in the denominator's total energy output term determines the form of the LCOE.

The choice of real or nominal LCOE depends on the analysis. Most long-term analyses are conducted in real (constant) dollars to adjust for many years of inflation, whereas most short term analyses use nominal (current) dollars. The form of the LCOE should be chosen to be consistent with cost per unit of energy values used for alternative to the project.

For the real LCOE, the real discount rate appears in the total energy output term:

Similarly, for the nominal LCOE, the nominal discount rate appears in the total energy output term:

Where,

Q n (kWh) | Electricity generated by the project in year n, calculated by the performance model based on weather data and system performance parameters. The first year output is reported in the Metrics table and in the year one column of the project cash flow. Year two and subsequent output is the first year output reduced by the amount specified for the degradation rate on the Annual Performance page.
N | Project life in years as defined on the Financing page.
R n | Project revenue from electricity sales in year n , equal to the annual electric output multiplied by the annual electricity sales price. The required revenue in year one is equal to the first year PPA price reported in the results. The required revenue in subsequent years is equal to the first year PPA price escalated by the PPA Escalation Rate shown on the Metrics table.
d real | Discount rate defined on the Financing page.
d nominal | Nominal discount rate, calculated as described below.

The summation in the numerator and denominator both start at n = 1, the first year that the project generates electricity and earns revenue.

The nominal discount rate can be calculated based on the values of the real discount rate and the inflation rate on the Financing page:

d nominal = (1 + d real)(1 + e) - 1

Where,

d nominal | Nominal discount rate expressed as a fraction.
d real | Real discount rate defined on the Financing page expressed as a fraction.
e | Inflation rate defined on the Financing page expressed as a fraction.