LCOE, or levelized cost of energy is a term which describes the cost of the power produced by solar over a period of time, typically the warranted life of the system. By purchasing solar you are essentially creating a hedge against rising utility costs by fixing the per kWh rate at a known cost.
Please note: This simple calculation does not take into account NPV (net present value) which is a critical component in calculating true LCOE. To dig into the details in greater detail, read this fantastic article from SolarPowerWorld.
Another term used to describe LCOE is the kWh price over the life the system. Here's another great article on about LCOE from NREL.
A simple way to look at LCOE is that it is a measure of the cost of power. Essentially, you're just breaking down the cost of solar into the same terms that you pay on electric bill every month. i.e. cost per kWh.
Calculating LCOE requires knowing two key variables:
- All-in cost for the system. This should include financing costs and deduct any incentives received, such as tax credits and deprecation.
- How much power will the solar array produce over the period you wish to calculate LCOE? (We suggest using the warranted period, 25 years)
Here's an example of how to calculate simple LCOE:
First, figure out your COSTS:
Total System Cost: $125,000 (50 kW solar system)
Less Tax Benefits: -$75,000
NET COST: $50,000
Next, figure out the system production over the period you wish to calculate LCOE for. We'll use the 25 year warranty period:
kWh Produced Annually less degraded production over 25 Years (NOTE: All of the estimates we create include degradation over the warranted period)
62,500 kWh / Year
62,500 * 25 = 1,562,500 kWh / 25 Years = TOTAL kWh Produced Over 25 Years:
Next, figure LCOE by dividing the NET SYSTEM COST by the TOTAL kWh PRODUCED OVER 25 YEARS
Net Cost: $50,000 / 1,562,500 = .032 kWh
Not too shabby. 3.2 cents per kWh! That looks pretty good compared to one of the largest utilities in Iowa's rate of 14.5 cents / kWh!