PV LCOE Calculation

I made a residential analysis for a PV project in Alexandria. In LCOE calculation, i found that when decreasing the debt fraction the LCOE value increases. But according to the definition of the debt fraction in Help the LCOE value should be decreased also as there is less money will be paid. What is the reason for that?

Dear Mohammed Said,

The relationship between the debt fraction and LCOE depends on several factors, so there is not a rule that says the LCOE will always increase or decrease with the debt fraction.

For the residential financial model, SAM models two kinds of loans on the Financial Parameters page. "Standard loan" assumes that loan interest payments are not tax deductible, while "mortgage" assumes that they are. For a mortgage, increasing the debt fraction has the effect of increasing annual tax deductions, which can cause the LCOE to decrease as you increase the debt fraction.

The relative values of the loan interest rate and nominal discount rate will also affect the relationship between debt fraction and LCOE. For example, in my analysis, for a standard loan, when the loan interest rate is greater than the nominal discount rate, I found that the LCOE decreases with the debt fraction, but for a mortgage with the same assumptions, the opposite is true.

Best regards,
Paul.