The levelized cost of energy (LCoE) stands for average cost of the energy produced throughout the life of various energy-generating assets. In terms of power plants, LCoE meaning is tied to how much it costs to generate a single unit of electricity over the lifetime of the plant, and is often marked as dollars per megawatt hour ($/MWh).

LCoE is used to evaluate methods of energy production and can be considered as an average electricity price for a specific generation method in order to break even. Levelized cost of solar PV could potentially predict whether the project would, at bare minimum, cover its own expenses, or if the park doesn’t hold up against alternative choices.

LCoE calculation

The calculations involved in the LCoE need to account both for the present values and the values that will come into effect in the future. Simply put, LCoE’s calculations evaluate the initial cost of the project, including financing, the annual expenses and site irradiance characteristics. Other important aspects include maintenance costs or even loans associated with the project. Underperformance of any of the elements affects solar LCoE, which in turn can influence the project. For example, if the initial investment is quite large, but the overall yield of the project is low (due to poorly selected location) and requires a lot of maintenance, such a plant would likely be rejected as it would be deemed loss-making.

Example of LCoE calculations

Formula breakdown:
It = Investment and expenditures for the year (t)
Mt = Operational and maintenance expenditures for the year (t)
Et = Electricity production for the year (t)
r = Discount rate that could be earned in alternative investments
n = Lifetime of the system

Importance of solar LCoE

Investment-gain ratio is a fundamental part of any power plant. And LCoE of utility scale PV is one of the essential assessments to determine if the project is viable and worth getting into; if the park can barely break even according to initial LCoE calculations, it might be better to move on to a project that shows more potential. LCoE is primarily used by policymakers for long-term planning.

The comparison can be done between similar systems as well: the formula to calculate the LCoE relies on a variety of factors which can be detrimental in the long run. Looking at the marginal costs to utilise coal or solar energy, LCoE costs would have to include the price of coal as a material, while solar doesn’t have such expenses. However, it should be noted that these comparisons are often regarded as a guideline, not a hard proof that the project is viable. Higher or lower LCoE is purely a theoretical prediction, but it is one of the main elements that can influence investor’s interest, as it’s considered a proof of financial viability of solar PV power plants. LCoE calculations can even include tax benefits, such as depreciation of the installation.

How can PVcase help?

With PVcase you are able to assess site feasibility early on by getting a clear breakdown of your cabling and ground grading costs. You can also optimise your design by evaluating potential shading challenges and easily transfer your project to PVsyst by exporting it in a bespoke format, co-designed with PVsyst.

Request a demo today and see how PVcase can help you and your team to design your next PV system.