LCOE Calculation

How are the levelized cost of energy (LCOE) computed? Also we noticed the 'real' and 'nominal' costs are different, what would cause this?

For an explanation of SAM's LCOE calcalation, see the following help topic:

Levelized Cost of Energy (LCOE)

Another good reference for details about SAM's financial metrics is the following manual:

Short, W., Packey, D., Holt, T. (1995) A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies. National Renewable Energy Laboratory. NREL/TP-462-5173. ( PDF 6.6 MB )

Best regards,
Paul.

I've reviewed the documentation referred to in the previous post, and am struggling conceptually with one aspect of this calculation. Why is the energy generation, IE, the denominator of (Total Cost) / (Total generation) equation, subject to a discount rate? Clearly, figures in dollar units in the numerator need to be discounted, and that is discussed nicely in pages 5-9 of the 1995 manual. However, generated kWh are not subject to inflation, and cannot be invested elsewhere. If the energy isn't harvested, it has a zero return. One of the tenets of science is that energy is constant... a kWh today is the same as one tomorrow. It is only when dollars get involved, and value is assigned to the energy, that time value comes into play. This is captured in the numerator.

Am I missing something?

Hello,
The apparent discounting of the energy term is discussed in the Help topic on LCOE, under "LCOE Definition:"
SAM Help -- Levelized Cost of Energy (LCOE)
The discounting term ends up on the energy side of the equation when you solve the TLCC equation for LCOE.
It's also helpful to think about what the equation would look like without the discounting term in the denoninator. Without it, the denominator would be too large and you would end up with an LCOE that is too small.
You can experiment with the equations using the Excel workbooks under "LCOE and NPV Calculations Using Excel Formulas" on the SAM website:
SAM Website -- Financial Model Documentation
Best regards,

Paul.

Thanks for the response. Some more time with the documentation has definitely helped clear up some of my confusion. I had been aware of the spreadsheet prior to my post, and I think the cells labeled "Discounted Energy" probably contributed to some of my misunderstanding, since as the documentation explains, energy is not really being discounted. Although it is algebraically correct, I'd like to respectfully suggest that the concepts driving the calculations might be better supported with slightly different spreadsheet construction and labeling.

SAM is an incredible tool and I really appreciate its content and accessibility. With residential solar applications, it might be nice if the summary results could include a few more components that are more straightforward conceptually. NPV is great, but spelling out "this is the present value of what you would spend on energy over the analysis period without solar" and "this is the present value of what you would spend on energy over the analysis period with solar" would make the results even clearer. LCOE is a comparative term that seems more useful to generators (who want to cost-effectively maximize output), than to consumers. More explicit present value summaries may also show more clearly the impact of simply reducing energy consumption, which is not well communicated by LCOE, but is often the most cost-effective way to reduce energy expenses.

I understand this may not be the intended use of SAM and these ideas may have been considered and discarded for other reasons. The modeling aspect of the software is so powerful, it is hard to resist extending it beyond the stated audience. Thank you.

I've figured out how to get at some of the other metrics I was looking for. Thank you again for making this tool available.