The levelised cost of electricity (LCOE) is the average cost of a kWh of electricity produced over the working life of an energy generating. To calculate it, the total cost of the system (upfront and total running costs) is divided by the estimated total amount of electricity which the system will produce over its working life.
The costs of a solar system can be categorised as follows:
- Upfront costs, which include the initial capital cost of all the system’s components, including the costs of planning, shipping, installation, testing and commissioning. If the system is grid-connected, then upfront costs will also include equipment, services and fees associated with connecting the system to the electricity grid, as well as for arranging an electricity purchase agreement with a buyer and/or agreements with government agencies.
- Total running costs, which include annual maintenance costs and incidentals.
- Periodic costs, which must also be included because certain system components will reach the end of their working lives before the PV modules will. Inverters, for example, will need to be replaced at least twice as often as PV modules. In off-grid systems, batteries may need to be replaced several times.
How to calculate the levelised cost of electricity (LCOE) produced by a solar electric system. Interest payments and capital repayment on loads should be included in running costs.
The working life of system will depend on the system type. However, PV modules usually have 20 to 25 year warranties that guarantee that at the end of that period the PV modules will still be producing 80% of their original rated peak power output (Wp).
LCOE calculations also need to take into account the method of financing and the associated cost of capital. A certain rate of system depreciation must also be included in the calculation because as system components age over time, losses within the system increase, and its productivity decreases.
LCOE is also useful in comparing the cost of energy delivered from different generation plants with different technologies, such as those using fossil fuel, nuclear or renewables, with different cost structures and performance characteristics. For example, PV is characterized by high capital costs and low operating expenses. The LCOE indicator takes these differences into account and enables a direct comparison with fossil fuel power plants.