Levelized Cost of Energy (LCOE) |

| Overview
The levelized cost of energy (LCOE) in cents per kilowatt-hour accounts for a project's installation, financing, tax, and operating costs and the quantity of electricity it produces 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 to compare utility and third-party ownership projects with investments in energy efficiency, other renewable energy 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 as described below. You can specify the project's financing type (residential, commercial, commercial third-party, and utility) in the Technology and Market window. Solar Advisor displays the financing type on the main window in the toolbar directly below the case tabs in the main window. For all projects, Solar Advisor calculates both a real and nominal LCOE value. The real LCOE accounts for the effect of inflation over the life of the project. The nominal LCOE excludes inflation from the calculation. Notes. You can verify the Solar Advisor's LCOE calculation by exporting the cash flow table on the Results page to Excel and using the formulas described for each form of the LCOE below. You can also explore the LCOE methodology by downloading the spreadsheets on the Support page of the Solar Advisor website. Each of the five spreadsheets duplicates Solar Advisor's cash flow equations using Excel formulas. The LCOE values for the cases in the sample files include 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 over the project's life. Solar Advisor assumes that projects with residential or commercial financing are distributed energy projects installed on a residential or commercial property, and that power generation equipment operates on the retail customer side of the electric meter. For these projects, you can compare a project's LCOE to the electricity rate that the residence or commercial entity 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 to calculate the present worth of future costs. The discount rate accounts for the time value of money and the relative degree of risk for alternative investments. Solar Advisor uses the inflation rate to calculate Year 2 and later costs in the cash flow based on the cost input values that you specify on the system costs page. The inflation rate accounts for expected price increases over the project life for future operating costs. 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: 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.
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. This is the discount rate without inflation.
d nominal | The nominal discount rate, calculated as described below. This is the discount rate with inflation.
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.
| LCOE for Utility IPP and Commercial Third Party 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 amount that the project must receive for each unit of electricity it sells to meet financial returns targets defined on the Financing page. This makes the LCOE for these projects very sensitive to the values that you specify for the minimum IRR, minimum DSCR, and positive cash flow. In some cases, you can specify constraints that make the project capital investment a relatively insignificant factor in the LCOE calculation. Solar Advisor assumes that utility IPP (independent power producer) and commercial third-party ownership projects are power generation projects installed on the utility side of consumer power meters. These projects recover capital, operating, and financing costs through electricity sales to a utility customer or other off-taker through a power purchase agreement with a fixed annual electricity sales price and optional annual escalation rate. For these projects, the LCOE is effectively a levelized price of electricity because it is based on the present worth of the project's revenue stream (which you can see in the project cash flow). The electricity sales price reported in the cash flow for year one is equivalent to the first year power purchase price, which Solar Advisor reports as 1st Year PPA Price in the metrics table. Solar Advisor uses the real discount rate and inflation rate on the Financing page to calculate the present worth of future costs. The discount rate accounts for the time value of money and the relative degree of risk for alternative investments. Solar Advisor uses the inflation rate to calculate Year 2 and later costs in the cash flow based on the cost input values that you specify on the system costs page. The inflation rate accounts for expected price increases over the project life for future operating costs. 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 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 product of the first year PPA price and Annual Energy values 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 | The real discount rate defined on the Financing page. This is the discount rate without inflation.
d nominal | The nominal discount rate, calculated as described below. This is the discount rate with inflation.
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.
| Real and Nominal LCOE
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 of the equations described above determines the form of the LCOE. The real LCOE is a constant dollar value that is adjusted for inflation and is always greater than its nominal LCOE. Because the nominal discount rate used to compute the nominal LCOE includes inflation, inflation is effectively factored out of the nominal LCOE. The nominal LCOE is a current dollar value. Note that if you set the inflation rate on the Financing page to zero, the real and nominal LCOE will be equal. The choice of real or nominal LCOE depends on the analysis. Most long-term analyses are conducted in real (constant) dollars to account for many years of inflation over the project life, whereas most short term analyses use nominal (current) dollars. Some industries prefer to use one form over the other. For example, when discussing LCOE for parabolic trough projects, analysts tend to use the nominal LCOE, while the U.S. Department of Energy uses the real LCOE in its comparative analysis of photovoltaic project costs. Be sure to use the same form of the LCOE when comparing costs for different alternatives: Never compare a real LCOE of one alternative with a nominal LCOE of another. 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.
| Replicating LCOE Calculations in Excel
If you would like to better understand Solar Advisor's LCOE calculations, you can follow the procedures described below to replicate the calculations using a spreadsheet program. Note for Mac users. Solar Advisor can not exchange data with Microsoft Excel on Mac computers. This means that the Excel Exchange feature is disabled on Mac versions of the software, and that Solar Advisor cannot directly export data to Excel workbooks. To use the Solar Advisor data in Excel or another spreadsheet program, you can export the data to a comma-separated text file (CSV), and then import the CSV file to the spreadsheet program. To replicate the residential or commercial LCOE calculation in Excel:
1. | Export the cash flow table to an Excel worksheet.
2. | Type the project's discount rate and inflation rates as percentages into two blank cells in the worksheet. You can find these values on Solar Advisor's Financing page.
3. | Type the following formula into a third empty cell to calculate the nominal discount rate:
=(1+[inflation rate])*(1+[real discount rate])-1 Replace the words in brackets with cell references to the appropriate values in the worksheet.
4. | Type the following formula into a blank cell to calculate the real LCOE:
=-[year zero cost flow]-NPV([nominal discount rate],[after tax cost])/NPV([real discount rate],[electric output]) The year zero cost flow is the value in the zero column in the after tax cost row toward the bottom of the table. The after tax cost and electric output are series of values from year 1 to the final year in the analysis period.
5. | Use the following formula to calculate the nominal LCOE:
=-[year zero cost flow]-NPV([nominal discount rate],[after tax cost])/NPV([nominal discount rate],[electric output] To replicate the utility or commercial third party LCOE calculation in Excel:
1. | Export the cash flow table to an Excel worksheet.
2. | Type the project's discount rate and inflation rates as percentages into two blank cells in the worksheet. You can find these values on Solar Advisor's Financing page.
3. | Type the following formula into a third empty cell to calculate the nominal discount rate:
=(1+[inflation rate])*(1+[real discount rate])-1 Replace the words in brackets with cell references to the appropriate values in the worksheet.
4. | Type the following formula into a blank cell to calculate the real LCOE:
=NPV([nominal discount rate],[revenues])/NPV([real discount rate],[electric output]) The revenues and electric output are series of values from year 1 to the final year in the analysis period.
5. | Use the following formula to calculate the nominal LCOE:
=NPV([nominal discount rate],[revenues])/NPV([nominal discount rate],[electric output] Note. You can also replicate the calculations in Excel using the summations shown in the equations above in place of the NPV formulas.